The long term economic impacts of reducing migration

Katerina Lisenkova, 10 January 2014

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The large influx of immigrants following the accession of eastern European countries to the EU in 2004 brought migration policy to the forefront of the public agenda and political debate. Large net migration flows are a relatively recent phenomenon in the UK; consistent positive net migration numbers have only been observed since the 1990s. During the 2010 election campaign, the senior partner of the current UK coalition government (the Conservative Party) set their migration policy target to reduce the level of net migration from “hundreds of thousands to tens of thousands”. The tightening of migration rules for non-EU immigrants since then – combined with the economic downturn – has resulted in a fall from recent peaks. According to the most recent estimates, net migration during 2012 was 177,000 – the lowest level since 2008, although still well above the "tens of thousands" target.

Economic effects of migration

It is important to understand what economic effects a significant reduction in net migration will have. There are a number of contributions that shed light on the various mechanisms through which immigration affects the UK's economy. While many of them focus on the labour market effects,1 there is also a growing literature on the net fiscal impact of immigration (Sriskandarajah et al. 2005, Gott and Johnson 2002, Dustmann et al. 2010, Dustmann and Frattini 2013). The former strand of literature generally fails to find negative labour market effects of recent immigration in the UK. The latter confirms that younger immigrants tend to have positive net fiscal contribution.

The natural next step should combine labour market, fiscal, and other macroeconomic effects within a single framework. General equilibrium models allow this, while permitting the addition of a dynamic perspective. In a new paper, my colleagues from the National Institute of Economic and Social Research (NIESR), University of Ottawa, and I provide a quantitative assessment of the long-term impact of migration on the UK economy (Lisenkova et al. 2013). As an experiment, we chose the migration target of the Conservative Party to reduce the level of net migration from “hundreds of thousands to tens of thousands”.

General equilibrium model with detailed treatment of migrants

The analysis is carried out in a dynamic overlapping generations computable general equilibrium model (OLG-CGE) developed at NIESR - the National Institute General Equilibrium Model of Ageing (NiAGE). This approach is widely acknowledged as the best tool for modelling issues associated with demographic change. Among the advantages of an OLG-CGE framework is its age-disaggregated nature, which makes it possible to study age-specific behaviour and the impact of changes in the population age structure on the economy. This dynamic approach contrasts with previous static modelling of the fiscal impacts of migration, such as that recently undertaken by Dustmann and Frattini (2013).

In our model there are two types of individual: foreign-born and native-born. We attempt to differentiate the native-born and foreign-born population as much as possible. The two groups exhibit different employment and wage rates, different levels of educational qualifications, as well as different probabilities of receiving welfare benefits from the government. All these are estimated from the Labour Force Survey. Moreover, because migrants’ age structure differs considerably from that of natives, so does their consumption of public services. Such detailed differentiation allows us to capture the multidimensional effects of migration on the labour market, aggregate demand, and public finances. In doing this, we differ from the only previous attempt to model the long-term impact of migration on the economy and public finances – undertaken by the Office for Budget Responsibility (2013) - although interestingly our results are not dissimilar qualitatively or quantitatively.

We compare two scenarios: the baseline scenario, which is built in line with the 2010-based principal ONS population projection (long-term net migration of 200,000 per year), and a low migration scenario, which assumes the reduction of foreign net migration rates required to reduce overall net migration level by about 50% (just enough to achieve the “tens of thousands” target).

Significant reduction in net migration will have strong negative effects on the economy

Our results show that a significant reduction in net migration has strong negative effects on the economy. First, by 2060 in the low migration scenario, aggregate GDP decreases by 11% and GDP per person by 2.7% compared to the baseline scenario (Figure 1). Second, this policy has a significant negative impact on public finances, owing to the shift in the demographic structure after the shock. The total level of government spending expressed as a share of GDP increases by 1.4 percentage points by 2060. This effect requires an increase in the effective labour income tax rate for the government to balance its budget. By 2060 the required increase is 2.2 percentage points. Third, the effect of the higher labour income tax rate is felt at the household level, with average households' net income declining because of the higher income tax despite the initial increase in gross wages due to lower labour supply. By 2060, the net wage is 3.3% lower in the low migration scenario.

Figure 1 GDP and factors of production

The presented estimates are potentially the lower bound of the effects

As with any modelling exercise there are a number of caveats. From a purely technical point of view, our estimates arguably provide the lower bound of the potential effects. First, we chose the least strict interpretation of the migration target. “Tens of thousands” is not very precise, but we decided that a level just below 100,000 is sufficient to satisfy it. Second, the model does not take into account potential productivity spillovers from higher levels of immigration. Two potential positive productivity effects that have attracted attention recently are the potential effects on total factor productivity growth (Rolf et al. 2013) and the possible impact of imperfect substitution between natives and immigrants (Manacorda et al. 2013). Third, we use a closed economy model for these simulations, which in the case of the low migration scenario results in a lower capital-labour ratio and lower returns on capital. If we used an open economy with perfect capital mobility, downward pressure on interest rates would lead to a capital outflow and even stronger negative effects of reduced migration.

At the same time, while we take into account the direct impact of migration on population and hence public expenditure, including capital spending, we do not capture negative externalities resulting from congestion. Finally, these simulations necessarily do not take into account the potential social impacts of higher immigration. This is a hotly debated area that should be considered when formulating migration policy. Unfortunately, very often on this issue, opinions trump evidence.

References

Dustmann, C, A Glitz and T Frattini (2008), “The labour market impact of immigration,” Oxford Review of Economic Policy 24(3), pp.477–494

Dustmann, C, T Frattini and C Halls (2010), "Assessing the Fiscal Costs and Benefits of A8 Migration to the UK," Fiscal Studies 31(1), pp. 1-41

Dustmann, C and T. Frattini (2013), “The Fiscal Effects of Immigration to the UK”, VoxU.org, 13 November.

Gott, C and K Johnston (2002), The Migrant Population in the UK: Fiscal Effects, Home Office Research, Development and Statistics Directorate, Occasional Paper No. 77, Home Office, London.

Lemos, S and J Portes (2008), “New Labour? The Impact of Migration from Central and Eastern European Countries on the UK Labour Market”, IZA Discussion Paper No. 3756, Institute for the Study of Labor, Bonn.

Lisenkova, K, M Mérette and M Sanchez-Martinez (2013), “The Long Term Economic Impacts of Reducing Migration: the Case of UK Migration Policy”, NIESR DP No. 420, National Institute of Economic and Social Research, London

Manacorda, M, A Manning and J Wadsworth (2012), "The Impact of Immigration on the Structure of Wages: Theory and Evidence from Britain," Journal of the European Economic Association 10(1), pp. 120-151

Office for Budget Responsibility (2013), Fiscal sustainability report, Office for Budget Responsibility, London. Office for Budget Responsibility, 2013

Rolfe, H, C Rienzo and J Portes (2013), Migration and productivity: employers’ practices, public attitudes and statistical evidence, National Institute of Economic and Social Research, London

Sriskandarajah, D, L Cooley and H Reed (2005), Paying their way: The Fiscal contribution of immigrants in the UK, Institute for Public Policy Research, London.


1 Dustmann et al. (2008), Lemos and Portes (2008), Manacorda et al. (2012).

Topics: Europe's nations and regions, Labour markets, Migration
Tags: fiscal burden, immigration policy, UK

Senior Research Fellow, NIESR

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