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Why you're wrong if you think clamping down on immigration from Europe will help low-paid British workers

Our analysis suggests that the negative overall economic impact of reduced migration will far outweigh any modest wage gains for low-paid workers

Jonathan Portes
Tuesday 18 July 2017 14:28 BST
Any one who argues that fewer migrant workers will increase wages simply because of ‘supply and demand’ is ignoring basic economics
Any one who argues that fewer migrant workers will increase wages simply because of ‘supply and demand’ is ignoring basic economics (PA)

“This is precisely why a lot of people voted for Brexit,” said Fraser Nelson.

“The FT still doesn’t get it,” Tim Montgomerie added.

They were referring to a Financial Times story: “The owner of pizzeria chain Franco Manca warned that the Brexit vote had started to affect the availability of European restaurant staff in the UK, potentially pushing up wages for new hires.”

Of course, Brexit – in the sense of any legal or policy change to freedom of movement – hasn’t happened yet and won’t for some time, so what Nelson and Montgomerie are really celebrating is that Europeans feel that, after the Brexit vote, the UK is a less welcoming and more hostile country with fewer opportunities and where their prospects are worse.

But let’s leave that aside, and assume that they are making the simple supply-and-demand argument made by many on the Leave side of the referendum campaign, and more generally by those who want to reduce immigration, especially of low-skilled or low-paid workers. That is, that lower immigration of such workers will push up pay for lower-paid Brits.

So is Brexit good news for the low-paid? The early indications are mixed at best. Just a few days after the FT story appeared, The Times reported: “Bosses are calling for a freeze in the minimum wage amid the latest signs that Brexit fears are holding back investment by businesses ... increases in the national living wage ... could prevent firms from growing or lead to job losses, according to the British Chambers of Commerce.”

So, at the same time as Brexit is pushing up wages for low-paid pizza workers, business is saying that if their pay is not in effect cut, the result will be job losses. How to reconcile these two accounts?

Neither, of course, provides hard evidence.

The first is just an anecdote. As for the BCC view on the national minimum wage, well, they would, wouldn’t they?

But let’s assume for the moment that they both reflect reality, albeit imperfectly.

This is an excellent illustration of a fundamental point in economic analysis – the distinction between partial equilibrium, or what happens in one market (here the market for pizza workers) and general equilibrium, or what happens to the economy.

It is perfectly possible that reducing immigration will push up wages for pizza workers, while doing nothing – or indeed having the opposite effect – for wages overall, or even for wages for low-paid workers in general.

There is essentially no evidence that migration to the UK has increased unemployment for British workers. But this doesn’t mean that immigrants don’t “take our jobs” (indeed, as I’ve frequently said, I’m sure that I, like many UK-born economists, have at some point failed to get a job because the employer preferred to hire an immigrant).

The point is that immigrants (directly or indirectly) add to labour demand as well as labour supply; they earn money and spend it.

Ignoring this effect, as many do, is what economists call the “lump of labour fallacy” – the idea that there are only a certain number of jobs to go around, so that if an immigrant (or an old person, or a woman) takes one, then a Briton (or a young person, or a man) must lose out.

So while an immigrant may “take” one job from a British worker directly, she may also “create” one job – or indeed more than one job – for a British worker.

The overall impact is an empirical question, and the empirical evidence in the UK is pretty clear – these two effects more or less balance.

That doesn’t mean there won’t be distributional impacts – some Britons may find it easier to find jobs, others harder – just that the overall impact on the employment rate will be broadly neutral, certainly over anything other than the very short term.

Broadly, the same thing applies for wages.

Again, anyone who claims that reduced immigration will increase wages simply because of “supply and demand” is ignoring basic economics.

Reduced immigration may push up wages for pizza restaurants; but if it also reduces demand across the economy as a whole, then it will reduce labour demand too, and hence wages.

Again, this is an empirical question. And again, we have evidence.

A recent study by Steve Nickell and Jumana Saleheen – much cited during the referendum campaign – looked at the impact of immigration on wages. Iain Duncan Smith, for example, claimed that it showed that immigration had led to a 10 per cent fall in wages.

This was, of course, complete fiction – the actual impact is perhaps only one twenty-fifth as large.

Professor Nickell himself later described the actual impact on the wages of low-paid workers as “infinitesimally small”, and regretted that he wasn’t able to say so during the campaign.

Again, there will be distributional impacts – perhaps pizza workers will see some wage gains, while pizza eaters will lose, as higher wages feed through into prices.

But the net impact, even for low-paid workers, is likely to be very small.

However, even this analysis is still mostly a partial equilibrium one.

Studies like that by Nickell and Saleheen that look at the regional or sectoral impact of immigration on wages can’t necessarily pick up wider, or indirect, economic impacts – in particular, the impact of migration on productivity for the economy as a whole, and hence growth in earnings and GDP per capita.

As with trade, the evidence suggests that migration enhances productivity. This could be for a variety of reasons: by increasing competition – certainly true for us economists, who have to raise our game with so many well-qualified immigrants around; by facilitating the growth of high-productivity clusters; or because immigrants produce goods and services that are complementary to native workers.

Perhaps the availability of reasonably priced, high-quality pizza makes journalists such as Nelson and Montgomerie more productive? Maybe this is implausible, but research in Italy has shown that low-skilled immigration – by making childcare more affordable – makes it more likely that high-skilled Italian women will be in work.

So what’s the overall impact of Brexit likely to be? In my recent research with Giuseppe Forte, I looked at both the direct impact of possible Brexit-induced reductions in migration on the wages of low-paid workers, as estimated by Nickell and Saleheen, and the wider economic impacts, using the work of other researchers.

The numbers are highly uncertain but the conclusion is clear: our analysis suggest that the negative overall economic impact of reduced migration will far outweigh any modest wage gains for low-paid workers.

If low wages are the problem, ending free movement is not the solution.

Jonathan Portes is professor of economics and public policy at King's College London, and senior fellow in UK in a Changing Europe

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