Impact Of Immigration On Native Wages Employment Uk Economics Essay

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The impact of immigration on the UK labour market has become a debatable issue in public and political disputes, with some proposing that immigration reduces wages or employment for the UK born population. Such argument became especially popular since the entry of large number of Central and Eastern European migrants after the expansion of EU in 2004. The effects of migration in both the short and the long run can easily be explained by basic economic theory, however, it is difficult to make exact and accurate predictions about its impacts on employment and wages. The best previous evidence provided by the Institute for Public Policy Research suggests that the overall effects of migration are not significantly different from zero. Therefore, by referring to economic theory and recent empirical evidence I shall try to answer the question of immigration impact as well as critically assess the implications for future UK immigration policy.

When we look at how immigration can affect labour market variables, the outcome is pretty straightforward. In any macroeconomic analysis we consider both the short and the long run, and this case is no exception. In the short term the outcome is unambiguous. However, it does depend on our assumptions - in production we can treat immigrants and natives as either perfect substitutes or complements. In the first case immigrants and natives have the same types of skills and are competing for the same types of jobs (Borjas 2007) under the assumption that the capital is fixed. As Figure 1 shows, once the immigrants enter the labour market, the supply curve shifts out, this consequently increases employment from N0 to E1 and lowers the wages from w0 to w1. Since we treat immigrants as substitutes in labour market participation, the jobs are actually taken away from the natives by lowering the wage and making it unworthy to work (i.e. movement from N0 to N1).

FIGURE 1. The Short-Run Impact of Immigration When Immigrants and Natives Are Perfect Substitutes. (Borjas 2007)

On the other hand, if the two groups are treated as complements in production, an increase in the number of immigrants raises the marginal product of natives, shifting up the demand curve for native-born workers. (Borjas 2007) In Figure 2 we can see that the increased productivity raises the native wage from w0 to w1, thus leading to additional incentives to enter the labour market (rise from N0 to N1).

FIGURE 2. The Short-Run Impact of Immigration When Immigrants and Natives Are Complements (Borjas 2007)

The implications for the long-run labour market impact of immigration are a bit more complex. Immigration lowers the wage initially, however, over time capital stock is not fixed and it increases as employers make use of cheaper labour power. Therefore, after long run adjustments the economy is back to where it was - with the same return to capital and the same wage rate. Graphically this looks quite simple. In Figure 3 the short-run effect is a rightward shift of supply curve bringing the wage down to w1, but in the long run demand curve also shifts and the wage is back at its initial level w0. The level of native employment did not change either - we just add the immigrant influx.

FIGURE 3. The Long-Run Impact of Immigration When Immigrants and Natives Are Perfect Substitutes (Borjas 2007)

As most of the macroeconomic models, those mentioned above have certain limitations. As we shall find out later, the empirical evidence is inconsistent with the simple supply-demand equilibrium model outcomes. The problem is that it ignores other responses that might occur in the labour market. (Borjas 2007) A very good example was presented by Borjas (2007) that explains a possible response of the natives to immigrant influx. In Figure 4 we have the labour market in two different locations. What happens is that natives from LA move to Pittsburgh as the wage in LA lowered after the immigrant influx.

FIGURE 4. The Native Labour Market's Response to Immigration. (Borjas 2007)

Initially, the two local markets are in equilibrium at wage w0. The entry of immigrants into Los Angeles shifts the supply curve from S0 to S1 and lowers the wage to wLA. The lower wage induces some LA natives to move to Pittsburgh, shifting the supply curve back from S1 to S2 and shifting the supply curve in Pittsburgh to S3. The markets re-establish equilibrium at wage w*. All natives earn less as a result of immigration, regardless of where they live.

Consequently, all natives are now worse off in both cities, and this exactly the sort of limitation we encounter when we want to measure the labour market impact of immigration by comparing the economic opportunities of native workers in different cities. In conclusion, theoretical outcomes can be ambiguous, however, we shall see to what extent they apply in the real life in the UK.

An empirical investigation by Dustmann, Fabbri and Preston (2005) shows results obtained from the Labour Force Surveys from 1983 to 2000. A simple OLS (Ordinary Least Squares) and a FD (First Difference) method were used to determine the effects of immigration on unemployment, participation and wages. The table (Figure 5) suggests optimistic effect of immigration on the various economic outcomes. Eliminating the fixed effect problem by estimating differences changes the sign of the relationship for both unemployment and participation, suggesting a positive association between immigration and unemployment and a negative association between immigration and participation. Coefficients are however not significantly different from zero but the relationship between wages and immigration remains positive. On the other hand, the most recent findings by Reed and Latorre (2009) suggest that a 1 percentage point increase in the share of migrants in the UK working-age population (for example, from 10 percent to 11 per cent of the population) would reduce wages by around 0.3 per cent. This effect is extremely small.

FIGURE 5. Effect of Immigration on Unemployment, Participation and Wages LFS 1983-2000. (Dustmann, Fabbri and Preston 2005)

Dustmann et al (2005) alleges that if there is evidence of negative effects on employment in any group, then it is for those with intermediate education levels, but this is offset in the aggregate by positive effects on employment among the better qualified. Estimated wage effects, based on a shorter run of data, are if anything positive but statistically poorly determined. The main result of most emiprical investigations is that there is no strong ground to believe that immigration has large adverse effects on employment or wages of natives workers. One of the conclusions drawn by Dustmann et al (2005) is that insofar as there is evidence of any effect on wages, it suggests that immigration enhances wage growth.

From initial theoretical analysis above it seems that immigration may depress wages and employment of natives. It is not, however, easy to support that by evidence. The key problem in empirical analysis is to compare the economic outcomes of certain groups of the resident population in particular cells after immigration with the counterfactual outcomes that would be observed had migration not taken place. Moreover, theoretical considerations like those discussed assume that the labour market is in equilibrium before and after immigration. However, migrations are often a consequence of disequilibrium situations. Therefore, we have to be cautious before we draw any conclusions about immigartion impacts from empirical evidence obtained.

After taking both theory and practice into consideration, what are the implications for UK immigration policy? Recent proposals about the immigration policy in the UK made by Gordon Brown imply much stricter laws and restrictions on immigration flow. However, an increase in population can be highly beneficial to the UK economy as a larger consumer market means a greater opportunity to sell products and services. The UK needs an immigration policy that ensures that the UK population growth increases in response to demographic changes. There is an ageing population in the UK and in the next 10 years 50% of the UK population will be of retirement age or over. The fastest growing age group in the UK is the over eighties who will soon make up 25% of the UK's population. (Office for National Statistics 2009) The UK government needs to give careful consideration to not restricting British businesses from being able to attract the best talent from abroad. Even though we cannot rely entirely on historical data, there are still strong indications that the UK has benefited from immigration. It is not sensible to jump into extremes but population growth is essential for the UK especially after having undergone a recession.

In conclusion, the view that immigrants 'take our jobs' and 'cut our pay' is misleading. Outcomes in macroeconomic theory can be ambiguous but despite all the limitations the empirical evidence does, in fact, suggest that there is no major negative impact of immigration on native wages and employment. Further conclusions are difficult to draw as it is risky to rely on the limited labour market data used in most investigations so far. It is vital that the UK Government develops larger labour market datasets, or adapts the existing data to focus on individual local labour markets in more detail. This way, implications for UK immigration policy could be argued and supported by having a much more reliable empirical background.