Taking Jobs or Creating Jobs? The Impact of Brexit on Wages

Taking Jobs or Creating Jobs? The Impact of Brexit on Wages

Jonathan Portes analyses Boris Johnson’s claim that curbing immigration should lead to a “high productivity, high wage” economy

“Many of the big questions in the social sciences deal with cause and effect. How does immigration affect pay and employment levels?” asked the committee awarding this year’s Nobel Prize in economics.

One of this year’s winners, David Card, overturned conventional wisdom thirty years ago, when he found that even a very large influx of relatively low skilled migrants (to Miami, in 1980, because of the so-called “Mariel Boatlift”) had almost no impact on the wages or job prospects of Miami residents.

Many non-economists – and even some economists – simply assert as an article of faith that such effects must exist – usually suggesting that it’s a matter of “supply and demand.” But this is a misunderstanding of basic economics. It’s true that immigrants add to the labour supply. Indeed, it’s even true, at some level, to say that immigrants “take our jobs.” I work and live in London, and no doubt I, like many UK-born economists, have at some point failed to get a job because my prospective employer preferred to hire an immigrant. 

Overall, Brexit reduced, rather than increased, real wage growth between the referendum and the pandemic. 

But immigrants (directly or indirectly) add to labour demand as well as labour supply; they earn money and spend it. So immigrants create jobs as well as taking them.  Ignoring this is the “lump of labour fallacy” – the idea that there are only a certain number of jobs to go around, so that if an immigrant to the UK (or an old person or a woman) takes one, then a Briton (or a young person or a man) must lose out. 

But while an immigrant may “take” one job from a Brit directly, they may also “create” one job indirectly for a Brit. Similarly, wages for British workers might rise or fall. In particular, while changes to migration might well change relative wages – raising or lowering wages in some sectors – it’s unlikely to have much direct impact overall.

So the only way to find out what immigration does to jobs and wages is to look at the data. And since Card’s original paper, there have been hundreds of studies doing just that. There is now a clear consensus that Card’s result holds good across most advanced economies, including the UK, where research has generally failed to find any significant association between migration flows and changes in employment or unemployment for natives.  

---

Brexit Soaring Pay?

Before the pandemic, the continued buoyant performance of the UK labour market further reinforced this consensus. Despite the high immigration of the last twenty years, unemployment fell to the lowest levels since the 1970s, while employment rates for British-born workers were at the highest levels in recorded economic history. Nor is there any evidence that immigration has impacted the employment prospects of specific groups such as the young or unskilled. Crudely, immigrants are not taking our jobs.

While the evidence on wage impacts is less conclusive, there was a similar consensus – that recent migration has had little or no impact overall, but possibly some, small, negative impact on low-skilled workers. The most widely cited study, by researchers at the Bank of England, found that a 10 percentage point rise in the immigrant share – that is, roughly that seen over the 15 years leading up to the pandemic – leads to approximately a 1.5% reduction in wages for native workers in the semi/unskilled service sector; an impact the author himself described as “infinitesimal”. 

This would mean that immigration would have depressed annual pay increases by about a penny an hour. Impacts in other sectors were estimated to be even smaller. The conclusion is that while migration may have had some small negative impact on wages for the low paid, other factors, positive and negative (technological change, policies on tax credits, the National Minimum Wage) were far more important.

Based on this and other evidence, most economists argued that the ending of free movement after Brexit would be unlikely to do much to boost wages for low-paid British workers. And yet for the last few months, we’ve had a deluge of claims that the end of free movement, and the consequent reduction in migration from Europe, have led to soaring pay. Were we wrong? 

Not yet. It’s been conveniently forgotten that in 2017 and 2018, there were widespread reports that a post-Brexit reduction in EU migration was leading to staff shortages and wage increases. “This is precisely why a lot of people voted for Brexit,” said Fraser Nelson, editor of the Spectator. Paul Embery gloated: 

“Reduction in workers from the EU is forcing British firms to pay more. Yet more evidence that an over-supply of labour caused depression of wages. Those in the labour movement who spent years denying this reality would do well to admit they got it wrong.”

Except that it was Embery who got it wrong; in fact wages in the sectors most dependent on relatively low-paid service workers, particularly those from the EU, rose about 2.5% a year in 2017 and 2018 – mediocre by historical standards (and even those rises were in large part driven not by changes in migration but by rises in the national minimum wage). Overall, Brexit reduced, rather than increased, real wage growth between the referendum and the pandemic. 

And indeed, so far, despite the headlines, there’s little evidence yet of big wage rises across large sectors. While pay for HGV drivers certainly has responded, despite widespread reports of shortages, that for workers in hotels and restaurants has not. Instead, what we’ve seen is a post-pandemic bounceback in wages; but with nominal wage increases now being eroded by a sharp rise in inflation.  

So as yet there’s little reason to change our views about migration and wages, or the impact of Brexit-induced reductions in the number of EU workers here. Unless migration affects productivity, reductions in migration simply can’t have much of an impact on the overall level of wages – rises in wages in some sectors will simply feed through into rises in prices, and hence reductions in real wages for workers in other sectors.

The main impact will likely be through lower overall employment and output; there will be no significant increase in employment for the UK-born, and there will be some, but probably rather small, increase in relative real wages for workers in the most affected sectors (offset by an even smaller fall in relative real wages for other workers who consume the outputs of those sectors).  

---

Productivity and Wages

If accurate, these predictions are far from the overheated rhetoric of some commentators – both those who think ending free movement will be an economic disaster and those who think it will transform the prospects of British workers.

As Alan Manning, the former chair of the independent Migration Advisory Committee, put it “neither a very restrictive approach to immigrants nor a very free approach had a significant impact on Britain’s GDP per capita.” Alan’s argument, based on the analysis above, is that since migration doesn’t affect wages of existing residents much in either direction, migration simply doesn’t matter very much (unless you’re a migrant, in which case it matters a lot). 

So, if immigration doesn’t matter that much, is Boris Johnson “economically illiterate”, when he points directly at immigration as the cause of the fundamental structural problems of the UK economy? 

“We’re not going back to the same old broken model with low wages, low growth, low skills and low productivity, all of it enabled and assisted by uncontrolled immigration.”

Perhaps not. On the question of principle, I think Boris Johnson is right, and Alan Manning and many other economists are wrong. Immigration can, and probably does, have much bigger impacts than economists (at least labour economists) tend to think. To see why, think about trade. 

The economic impacts of trade aren’t only about reduced prices for imported food or cheap consumer goods – they also include increased competition, technology transfer, the development of multinational supply chains, and so on. That’s why economists argue that the costs of Brexit are likely to be much broader than just somewhat higher prices for some goods.

Similarly for immigration. Boris Johnson may very well be right that the economic impacts of immigration go beyond relatively small direct short-term impacts on the jobs and wages of natives but have broader, larger and more longer-term impacts on skills, investment and ultimately productivity and GDP per capita. 

But that doesn’t mean that he’s right that the effects of immigration are negative. It’s true that migration could reduce the incentive to invest in productivity-enhancing machinery, or for employers to train native workers. But there are other forces at work. 

As with trade, increased competition from migrants may give residents an incentive to work harder or train more. A deeper and more flexible labour market for employers to recruit may lead to the growth of high-productivity clusters in some sectors (it’s not hard to think of examples, particularly in London). A more diverse workforce, with different skills, backgrounds, attitudes and culture may be more (or less) productive overall. 

---

Back to Reality

So again, it’s an empirical question. And comparing countries, it does look like countries with higher levels of immigration do, other things being equal, see faster growth as a result. For example, IMF by researchers at the International Monetary Fund found that a 1% increase in the migrant share of the adult population results in an increase in GDP per capita and productivity of approximately 2%. 

What does the UK evidence say? In 2018, the Migration Advisory Committee commissioned not one but three papers to look at this question. They all found that higher levels of migration were associated with higher, not lower productivity.  

The striking element of all of these results – found by different papers using different methodologies and different data – is not just that immigration appears to have a positive impact on productivity growth, but that this impact is large; indeed, as the MAC said in their analysis, arguably “implausibly large”.  For good measure, two of the papers also looked at training, finding no evidence that migration reduced the amount of training for native workers. 

So what does this mean for Johnson’s vision of a “high productivity, high wage” economy? Johnson isn’t wrong to point to the long-running and deep-rooted structural problems of the UK economy, which have indeed led to persistently low productivity growth and low-paid and insecure work for many.  But his critics are right to argue that reducing immigration will in itself do little or nothing to address those issues, and may indeed make things worse. 

Indeed, a liberal and flexible migration policy – for a small open economy like the UK, highly dependent on high-productivity service sectors – is likely to be an essential ingredient in any credible strategy to boost productivity.

Here, fortunately, the Government’s rhetoric doesn’t necessarily match with its policies.  The new migration system represents a considerable liberalisation of immigration policy towards those coming from outside Europe. And as I wrote previously in Byline Times, migration from Hong Kong could give the UK economy a real boost.

But the broader question is whether the Prime Minister’s rhetoric was just an easy way to justify current disruption; or whether he really means it about transforming the UK’s economic model, and will put his policies – and our money – where his mouth is. On that, the jury is still out.