Wednesday, 4 June 2014

How immigration affects the UK economy

It's very difficult to write anything mentioning immigration in the UK without getting accused of all sorts of demonic acts. And that's really all about closing down the debate, which I find a deeply disturbing development and distinctly authoritarian in attitude.

4th June has always been a good day to stand up to authoritarians, so off we go.

At the moment the UK is a member of the EU, which means we have unlimited border entry for anybody within the EU, and a normal visa application process for anybody outside the EU. The rational debate is whether the unlimited border entry is justifiable, or whether everybody outside the UK should have to go through a visa process.

Here is a chart published today of the estimated number of work hours demanded in the UK:

The total amount is fairly stable until 2004, which is when the new member states of the EU were allowed unlimited access to the UK jobs market. What you see then is the total amount of hours desired going up, along with the amount of hours worked, but the gap between the two tends to widen.

This is the effect of unlimited immigration. And the way it works is something like this:

Business puts out an advert for jobs. Any that are matched with the available workforce will disappear near immediately. That means that the 'total vacancies' number released every month by the ONS are jobs for which there is no current match, much as the outstanding bids and offers on the stock market are for shares where there is no current buyer or seller at that price.

Business then has a choice:
  1. Invest in training somebody that is available up to the standard required.
  2. Invest in plant and machinery to make the job redundant.
  3. Don't bother filling the job and let the competition steal a march on you by doing 1 or 2. 
(We'll assume for the sake of brevity that the bidding of people from competitors has already got to the futility point where alternative strategies have come to the fore).

All of those cost money, and business doesn't like spending money. So it lobbies for a further option - nick somebody suitable from somewhere else in the world. 

If government relents and gives business this option, then a new person comes in, the match is made, production happens, trade happens and the expansion of the economy creates further work opportunities. 

And that is the standard pitch - let the multiplier take effect and prosperity will ensue. 

But of course from the graph we can see that isn't really happening. And the reason is straightforward. For immigration to have a positive effect it needs to be of high value. That helps to ensure that the multiplier is large, and that the new jobs created by the cascade have a chance of being of a low enough level to soak up the remaining people on the unemployment queue. 

However if you allow an unskilled migrant to come in, then the chances of creating a job that will match somebody else decrease significantly. The multiplier doesn't have as strong an effect. More likely you will just recreate nearly the same job you just filled. 

And that is what we see. Over time the number of people goes up, the number of hours demanded goes up, but the rate of under engagement stays about the same. If the total goes up and the rate stays roughly the same then the number of people unemployed, underemployed and inactive continues to go up - each one of those cases being a personal disaster for the individual involved. 

So allowing unskilled migrants into the country is great for the business involved and great for GDP, but it offloads costs onto the existing unemployed (who don't get trained) and society at large (which struggles to maintain an infrastructure that can cope, and suffers lower productivity and wage growth ). Again business gets to socialise their costs to increase private profit, and we see the impact in terms of lower productivity and lower business investment across the economy and a degree of social unrest.

A rational immigration policy is one that concentrates on high value individuals and one that makes those visas very expensive for the businesses involved. That way business is more likely to choose to improve the capital stock of the nation rather than going straight for the 'nick somebody else from abroad' option.

Yes we need the release valve of immigration to get around persistent shortages on the supply side in high value services, but business should never profit if they use that option. The value should really accrue to the state to offset the additional social costs of maintaining a higher population.

Full employment is when you have more vacancies than people to fill them. In other words you can walk out of a job and into another one. Business should always be short of people and forced to innovate to get around that restriction. That's how we progress. That's how we avoid a persistent chase to the bottom.

All the old immigrant countries (USA, Canada, Australia, New Zealand, etc.) now have rational immigration policies that restrict the types and number of people entering into the country. There is nothing unreasonable about suggesting the UK should adopt the same approach.