Immigration's Impact on the UK Labour Market and Economy

Introduction

In recent years, migration has become a progressively more significant phenomenon across developed nations, including the United Kingdom. According to Wadsworth (2014), there are currently more than 6 million foreign-born adults working in the UK — a figure that doubled between 1995 and 2012, rising from 8 percent to 16 percent of the working-age population. The effects of migration on the United Kingdom are complex and wide-ranging, influencing social, economic, and cultural aspects of life. The increase in the number of immigrants does not only affect labour market outcomes such as wages and employment, but also has broader fiscal implications for the economy. Nonetheless, it has proven difficult to conclude definitively whether the increase in immigration is harmful or beneficial overall. The most reliable evidence suggests that the general impacts of migration on employment and wages are either negligibly different from zero or moderately positive. The body of evidence on immigration to the UK and its effect on employment, though comparatively limited, suggests that those impacts are not significantly different from zero (Reed, 2009).

Background

Interest in the impact of immigration on the UK job market and the economy in general has intensified in recent years, driven principally by an increasing proportion of foreign-born people among the working-age population over the past two decades. According to Duffy and Frere-Smith (2013), the significant rise in the number of immigrants within the labour force has been even more dramatic than general population changes over the same period. In approximately the past two decades, the number of foreign-born individuals of working age in the UK rose from 2.9 million to nearly 6 million. Moreover, the proportion of foreign-born people in total employment doubled from 7.2 percent to 14.4 percent during this period, and the share of foreign citizens in total employment rose from 3.5 percent to 9.2 percent over the same timespan.

From a theoretical perspective, the influence of migration on the labour market depends on several factors, including the skill composition of immigrant inflows relative to that of the native population, and the characteristics of the host nation — such as the flexibility of capital and labour and the capacity of the labour market to adjust in both the short run and the long run. The literature on the effect of migration on the labour market has been contentious and contested (Home Office Report, 2014). This paper examines the prevailing evidence on labour market displacement of UK natives owing to net migration, with the aim of providing a clearer understanding of the findings in this area.

Positive Impacts of Immigration

Impact of Immigration on Wages and Employment

Despite concerns about the negative aspects of immigration on the UK job market, substantial positive aspects also exist. Research has shown that immigration can have a positive impact on wages and employment overall. Dustmann, Frattini, and Preston (2008) conclude that immigration reduces wages at the lower end of the wage distribution; however, it simultaneously gives rise to modest wage increases at the upper end of the distribution. Their study indicated that, on average across the distribution of UK natives, immigration positively influences employment by raising average wages. Statistics indicate that a rise in the number of immigrants equivalent to 1 percent of the working-age population of UK natives produces an increase in average wages of 0.2 to 0.3 percent. Similarly, Manacorda, Manning, and Wadsworth (2012) conclude that the effect of immigration on employment and remuneration is very small. In particular, their study finds very little evidence of general negative impacts of immigration on employment and wages for UK natives.

Impact on Fiscal Contributions and the Economy

Much of the prevailing literature focuses on the potential impact of immigration on the wages and employment of natives. Nonetheless, an arguably even greater concern is whether immigrants contribute positively to the economy — particularly with regard to taxation and welfare systems. According to Dustmann and Frattini (2014), immigrants who entered the UK over nearly the past decade made a positive fiscal contribution to the economy, even during periods of budget deficit. This is largely because the foreign-born population contributed significantly more in taxes than they received in benefits. Moreover, by sharing the cost of fixed public expenditures, immigrants reduced the financial burden of public services for natives. The contributions made by the foreign-born population have placed the UK in a considerably better fiscal position compared to many other developed nations in Europe (Sriskandarajah, Cooley, & Reed, 2005).

Labour Supply

There are fiscal benefits associated with migration, particularly in increasing the supply of labour and filling gaps in the labour market where worker shortages exist. On average, immigrants tend to be more educated and skilled than their UK-born counterparts. In accordance with economic theory, an increase in immigration resulting from an inflow of labour is characterised as a net gain in national income accruing to natives. When work-related immigration alters the skills composition of the labour market, national income is projected to increase (Home Office Report, 2014). During periods of strong economic growth in the UK, migration played a fundamental role in filling labour market gaps, thereby facilitating an increase in the nation's gross domestic product (Wadsworth, 2014).