Immigration and the UK Labour Market

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INTRODUCTION

International migrant flows have increased in recent years and have been boosted by people seeking asylum from oppressive regimes around the world. The issue has been highlighted by the attention given to illegal immigration, with media focus on the Channel Tunnel and the Sangatte reception centre near Calais.

Immigration is a complex and potentially emotive issue with many different faces; economic as well as human, social and political. Economic analysis is valuable because it allows us to identify those aspects of immigration that can be treated in a rational way, and isolate the areas where value judgements have to be made. There are numerous economic aspects of immigration, but this article concentrates on how we can use economics to examine the widely held propositions that immigration will (1) depress domestic wage rates and (2) increase unemployment.

In the 19th century, when Britain was losing labour to the new colonies, the classical economist John Stuart Mill recognised that emigration would help to lift the appallingly low wage rates by making labour scarce relative to capital. By reversing the-same classical thinking it follows that immigration at the present time ought to lower domestic wage rates by making labour more plentiful relative to capital. We can demonstrate this reasoning using the tools of demand and supply analysis, developed in the late 19th century by the neoclassical economist Alfred Marshall.

Figure 1 shows the market for labour in a particular occupation. Wages, determined by demand and supply, are initially at level W 1. An influx of migrants will cause labour supply to shift from S1 to S2 and, other things remaining equal (that very important phrase used by careful economists who are well aware that other factors are very likely to change), wages rates will be depressed to W2. This fall in wages, if it occurs, will lower the living standards of workers who are already resident in the country (OA). How this affects particular occupations will depend upon the skill and education levels of new migrants. If migrants are skilled then skilled wages will tend to fall. If migrants are unskilled then the wages of unskilled workers will tend to fall.

However, whether these effects occur in practice depends upon a number of factors. Firstly, if the demand for labour is elastic (and the demand curve is horizontal at W1) then employment will expand to OC and absorb the additional labour. Secondly, if wages are sticky and stay at the level W1 then the demand for labour will remain at OA but labour supply will increase to OC. The difference AC will be unemployment. So, in this sticky wage case, migration will cause unemployment to rise. If wages are only partly resistant to falling then we could, in theory, have a fall in wages and a rise in unemployment. Either way it seems evident from basic demand and supply analysis that domestic workers are likely to lose from the influx. But is this analysis valid?

Demand and supply analysis is a partial-equilibrium analysis. It is only applicable, as used above, to analysing changes in one sector of the economy (i.e. one occupation) at a time. But immigration tends to have economy-wide effects. As well as raising the supply of labour and aggregate supply in the economy as a whole, it also brings about a rise in aggregate demand. The extra demand arises from migrants spending from the income they earn, from the savings they transfer to the country and, for those temporarily out of work, from the benefits they receive. It also arises due to immigrants helping to raise overall productivity levels (see later). When we allow for immigration increasing aggregate demand, we can see from Figure 2 that it is quite possible that wages could remain at WI and employment rise to OC. In which case immigration will neither reduce wages nor increase unemployment. In the end, the question will be settled by empirical evidence but, before we examine the evidence, there are some further theoretical details to consider. …