What Economic Effect does Migration have on the UK Economy? To see more of our products visit our website at Maziar Homayounnejad

411,000 non-British immigrants came to the UK in the 12 months to the end of September At the same time 226,000 non-British immigrants left the UK. This left a net migration flow of 185,000 non-British residents. When all citizens including British are taken together, there was inward migration of 503,000, outward migration of 361,000 making a net inflow of 142,000 people. In the first quarter of 2010, million non-UK nationals were employed in the UK which was 7.8% of all people in employment. Of these, just over one million came from the EU, with 472,000 from Eastern Europe alone.

Inward migration directly adds to the workforce. As workers become cheaper to employ, some firms will substitute labour for capital. Many of the EU immigrants have gone into low paid jobs. This will mean more people competing for the same jobs, which will cause wage rates to fall, other things being equal. Evidence shows that this allowed one in five British businesses to fill vacancies with cheap and efficient labour without taking away jobs from UK workers. As a result British workers tended to ‘upskill’ and move into higher paid jobs.

Recent East European migration may have reduced wages slightly at the bottom end of the labour market, especially amongst some groups of vulnerable workers according to the Migration Policy Institute. This means UK residents in manual jobs who do not have the skills to upgrade have suffered lower incomes, although this is offset by the national minimum wage. Since this group has little occupational mobility their standard of living will have fallen. Where immigrants dominate a local labour force employers only tend to maintain low skill jobs. This causes a vicious circle of falling investment in the human capital of their workforce.

The UK uses a Points Based System to ensure that only those with the skills most needed gain entry into the UK. The higher skill levels an immigrant has the more chance they have of being given entry. This has helped the UK’s skills gap in areas such as medicine, dentistry, construction and building repairs and maintenance. Overall, immigration has not only brought cheap labour in one part, but also highly skilled labour in another.

As inward migration increases the quality and quantity of labour, productive capacity is boosted, and aggregate supply shifted to the right. As labour supply increases, there is downward pressure on wages. This helps to lower firms’ costs, and shifts the supply curve downwards. The rightward and downward shift of the AS curve, will cause economic growth. Immigration between 1998 and 2006 raised GDP by 3.1% according to a study by Riley and Weale. Migration also brings benefits to UK firms in terms of an exchange of ideas, experiences and working practices.

The shift of aggregate supply will lower inflation as the price level falls. With new migrants rapidly filling the skills gap, inflationary wage demands have been kept at bay. The lack of growth in nominal wages has kept interest rates low, which benefits British homeowners in terms of lower mortgage interest payments. The Monetary Policy Committee in 2006 said that higher immigration was a positive supply shock that helped keep a lid on inflation, as migrants sent a lot of their income back home and consumed relatively little in the UK. This means that they increased AS by more than AD. However, when migrants settle and have families, the MPC predicted that they would increase their spending rates and add to domestic demand growth.

As migration helps moderate inflation the UK becomes more price competitive which may lead to an increase in export earnings and a decrease in import expenditure. East European workers alone were reducing the UK’s trade deficit by £1 billion per year, according to the Ernst & Young Item Club in December When migrants take up low paid, low skilled jobs which were not appealing to UK residents this has not caused unemployment to any significant extent. Those migrants who were highly skilled have helped to plug the skills gap in industries such as construction and healthcare and again not contributed to unemployment.

Migrants contributed 10% to government revenues in but only drew on 9.1% of government spending, according to the Institute for Public Policy research. Eastern European migrants who had been in the UK for more than a year were 60% less likely to be receiving benefits or tax credits than UK-born residents, according to the Migration Policy Institute. However, the NHS has come under massive strain in some local areas where migrants have clustered. Education is also in difficulty from migrant clustering, with the government forecasting a 16% rise in pupil numbers by 2014 at a time of government cuts.

More immigration increases the demand for housing which in turn pushes up house prices and rents. This will be quite significant due to the supply of housing being largely price inelastic. Inward migration now accounts for 39% of all new household formations, amounting to 99,000 new households every year until 2026 just to accommodate migrants. The supply side of the housing market is unable to keep pace, with a shortfall of new homes by 2020 forecast at one million. Most controversy surrounds social housing. A large proportion of low paid immigrants will be eligible for social housing which raises the demand and puts pressure on waiting lists. With 1.8 million households now waiting for council accommodation, this has created a lot of social tension and disunity in certain geographical areas.

Net migration remains one of the most significant factors contributing to rising population levels in the UK, which impacts labour markets, the macroeconomy, the fiscal position and the availability of public services and housing. The impact on labour markets has generally been positive as low-skilled migrants have taken jobs that UK workers found unappealing, while skilled migrants have filled vacancies where there is a skills gap. Migration has also enhance UK economic growth, kept inflation low and the trade deficit lower that it otherwise would have been, whilst having no significant impact on unemployment levels.

Overall migrants pay more in taxes than they draw on government spending, making a net fiscal contribution to the UK exchequer. However, due to the concentration of migrants into a small number of local areas, public services such as schools and hospitals have come under increasing pressure. Inward migration has also boosted the demand for housing without a corresponding increase in supply. This has led to significant price rises in houses and rents in the private sector, and lengthening waiting lists for social housing.

Using a supply and demand diagram relating to the labour market, explain why British businesses benefit from inward migration. Evaluate the extent to which UK workers also benefit from inward migration. Using an aggregate supply and aggregate demand diagram, discuss the macroeconomic benefits of inward migration. Why are public services and the housing market struggling to cope with demand by immigrant communities? Evaluate possible ways to address these capacity constraints. In June 2010, Professor Gary Becker argued that governments should sell the right to migrate at a price which brings the desired number of migrants, or auction their immigrant visas. Referring to the functions of the price mechanism, evaluate Becker’s proposal as an alternative policy for solving the UK’s immigration problem.