BRITISH IMMIGRATION POLICY AND WORK David Metcalf December 2009 Chair, Migration Advisory Committee and London School of Economics

CONTENT 1. Context immigration stock immigration flows 2. Labour market impact labour market impact of immigration how recession alters labour market impact 3. Points Based System points based system why skilled workers? 4. Migration Advisory Committee MAC tier 1: supply-side tier 2: RLMT, ICT, shortage; demand-side accession countries: method and policy 5. Discussion

Stock: share of immigrants (foreign-born) in the UK working-age population, 1979 – 2008 Note: Rate describes working-age population. Immigrants are defined as foreign born individuals. The per cent is calculated by dividing the foreign born working-age population by the total UK working-age population. The data are the average of the four quarters for each year. Source: Labour Force Survey % of working age population born outside the UK; corresponding figure for OECD is 12%, world is 3% 68% of stock of immigrants born outside EEA employment rate of UK born is 74% compared to 68% for non-UK born.

Flows of long-term migrants to and from the UK Flows of long-term migrants to and from the UK, Note: long-term migration is defined in the survey as those intending to change their place of residence for a year or more. This definition includes all nationalities and countries of birth, including the UK. Source: International Passenger Survey, , published by ONS. Balance by country of birth, Sept Sept 2008

Flows 2008 Inflows, outflows, net (all nationalities) Inflow by nationality Total thousands Work related thousands Inflow Outflow Net Thousands% British Foreign Total

Flows 2008 (continued) Inflow by reason (all nationalities) NB: Work-related only 2-in-5 NiNos NI numbers issued to non-UK nationals year ending March change Mar 08 – Mar % Workers Registration Scheme (A8) year ending June change June 08 – June % Thousands% Work-related Study Dependants Other/no reason Total

Balance of non-EU nationals by reason for migration, 1991 – 2007 Note: The figures describe the balance of non-EU nationals intending to change their place of residence for a year or more. For 1995, those looking for work were not recorded separately from Other reasons. Source: International Passenger Survey , published by Office for National Statistics

Labour market impact of immigration a.Introduction Most adjustments focus on employment and pay (i.e. factor prices) of natives; but there are 2 other adjustment mechanisms: composition of output, e.g. ethnic restaurants, A8 gardeners production technology, e.g. labour intensive flower picking. The studies have to deal with the no counterfactual problem they study pay change or employment change before/after immigration but really should compare such changes with what would have happened with no immigration the missing counterfactual is dealt with by identification assumptions e.g. slice LM into areas which do/do not experience immigration but immigrants choose where to go, e.g. to region with higher growth in pay then get spurious positive association: immigration causes pay growth overcome this problem using instruments OR might slice by occupation/skill/age

b. Employment and unemployment Lump of labour fallacy: aggregate number of jobs is not fixed so there is no one-for-one displacement e.g. consider baby boom cohorts if number of jobs fixed, when they entered LM unemployment would rise. Did not happen. Instead employment rose. Unemployment Portes and Lemos, A8 influx, inflow > districts (study builds on two similar previous studies) no association between immigrant inflow and rise in claimant unemployment this holds even for possibly vulnerable groups, such as younger workers or the lower skilled Employment Gilpin % point increase in share of migrants in working population (approx ) would cut employment of people of working age already in UK by Tiny impact. But need also to analyse specific occupations e.g. IT, possibly indirect displacement via intra-company transfers

c. Pay Real wage level, average impact Dustman (up to 2005) small positive, e.g. because of: - immigration surplus -immigrants paid less than MP and surplus captured by natives IPPR (up to 2007) small negative: A8 non-complementarity? specific occupation, e.g. impact of intra-company transfers on IT sector pay Wadsworth: biggest impact possibly on previous immigrants

Distribution of pay Dustman: gains at top of distribution, losses at bottom Nickell: clear tradeoff between immigration and pay in less skilled occupations, e.g. care homes Portes: A8, , > mainly less skilled jobs – no wage effect because less skilled protected by NMW PBS emphasises skilled immigration. This presumably lowers skilled relative pay cf what would otherwise have been if supply of capital not perfectly elastic some of the immigration surplus will go to capital, impacting on distribution between pay and profits Wage inflation Bank of England (up to 2007) immigration reduces the NAIRU due to adjustments in labour and product markets and fear of displacement

d. Skills Short term – composition effect e.g. A8 relatively well educated but substantial occupation downgrading Longer term – complementarities and incentives much more complicated to model and assess e. Population ONS projections state 4 million plus increase to 65.6 million over ten year period up to 2018 Over two thirds of this is due to net immigration and higher fertility rates of immigrants But ONS use 2008 net immigration figure of peculiar – true figure is so projections much too high f. Conclusion little impact on natives pay/jobs in short run Plausible that LR impact good, e.g. skill complementarities, dynamic benefits, but hard to get firm evidence

How labour market impact alters with recession a.Employment and unemployment Does immigration help to smooth the economic cycle? - amplitude of immigrant unemployment was greater than native unemployment, but not return migration? - Migration Policy Institute states A8 inflow employment motivated no visa (can return later) no family ties network important – no jobs to report back Adverse impacts: displacement Is lump of labour fallacy less of a fallacy? - EU, no controls, less skilled, some displacement? - RoW – skilled, probably less displacement (but ICTs?) Types of labour shortage - cyclical, e.g. civil engineers, quantity surveyors - structural: insufficient training, e.g. some medical consultancies - publicly funded, e.g. senior care workers, NHS pharmacists - global excellence, e.g. ballet dancers

b. Wage pressures and levels Migration previously reduced NAIRU due to adjustment of product/labour market and fear of displacement (BoE). But not so important in recession. If capital not perfectly elastic, possible negative impact on native pay c. Externalities Productivity, little change, no reason to tighten Congestion lower, no reason to tighten d. PBS Automatic stabiliser rather than continued recalibration

UK policy on labour immigration Points Based System (PBS) Tier 1 Highly skilled individuals to contribute to growth and productivity (supply-side) Tier 2 Skilled workers with a job offer to fill gaps in the UK labour force (demand-side) Tier 3 Low skilled workers to fill specific temporary labour shortages (suspended) Tier 4 Students Tier 5 Youth and temporary: people coming to UK to satisfy primarily non- economic objectives. Note: PBS involves: (i) numbers or scale; (ii) selection or composition; (iii) rights, e.g. extensions, ILR Re (i): Tiers 1 (highly skilled) and 2 (skilled) have no cap/quota; Tier 3 set at zero Re (ii): focus on skilled workers Re (iii): migrant initially admitted temporarily Important to consider (i) inflow and (ii) duration of stay. These two factors determine stock of immigrants.

Why Skilled Workers? What are the economic objectives of labour market immigration policy? maximise gain to natives minimise adverse distributional impact on lower paid Greater complementarity with capital, e.g. skill-biased technical change other labour therefore larger potential immigration surplus [efficiency] Dynamic effect: over time productivity up raise other workers productivity (externality) innovation (spill over) Stronger net fiscal contribution less likely to be unemployed than unskilled pay more in taxes Larger supply of skilled/qualified workers leads to more equal pay distribution [equity]

Migration Advisory Committee (MAC) Independent Committee: 5 economists, small secretariat Examined Tier 1: supply side Tier 2: demand side EU: Rumania and Bulgaria, A8 registration Method evidence based – both top-down and bottom-up strong interaction with stakeholders transparent flexible: government determines work programme Philosophy selective immigration (e.g. via PBS) vital but only positive narrative if: no undercutting no displacement no disincentive to upskill Not social issues, e.g. health, education, crime (MIF?)

Tier 1 Highly Skilled, no job offer required, i.e. supply-side, human capital emphasised October 2009 report General (i.e. from out of country), e.g.: weighting of points: qualification, age, pay professional qualifications higher pay threshold for those with only bachelors degree salary multipliers visa 2 years + 3, instead of 3 years + 2 Post study which colleges/subjects? why 2 years? UK graduate unemployment cross-subsidy to UK students displacement of less skilled retrospection Regarding both the above: what jobs do they do?

Tier 1 (continued) Investors/Entrepreneurs process by which they bring in their money enforcement e.g. net cf gross job creation Keep Tier 1 (cf EU blue card) Numbers Sept 2008 to August 2009 Total of which General 58% PSWR 42% Investors & entrep. <1%

Tier 2 Basics Demand-side, employer-led, occupation-based Skilled, job offer required, 3 year visa plus 2 year extension Sponsor Certificate of sponsorship (old Work Permit) Job title skilled to NQF 3+ (i.e. NVQ 3+) Pay to be reasonable – is no undercutting Prior entry clearance Routes: need 70+ points i. Mandatory competence in English (level A1) 10 pts maintenance requirement (£800) 10 pts ii. Routes shortage occupation 50 pts RLMT (35) + pay/qualifications (15) 50 pts ICT (30) + pay/qualifications (20) 50 pts

Tier 2 (continued) July 2009 Report approx in 2009, of which: - resident labour market test (RLMT) 30% - intra-company transfers (ICT) 60% - shortage occupation list 10% and India over 50% Points for qualifications and pay: required under RLMT and ICT route Masters degree points raised pay thresholds raised: £17K - £24K to £20K - £32K special arrangements for e.g. teachers, nurses RLMT retain advertise for four weeks (up from previous two weeks) investigate certification

Tier 2 (continued) ICTs retain not route to permanent residence duration with employer up from 6 months to 12 months discount allowances Compliance and Enforcement strengthen ex ante? Not in spirit of trust the sponsor check displacement/undercutting Fees raise (from £170) as complement to enforcement? Business visas – misused?

Tier 2 (continued) Shortage Occupation Lists Reports Sept 08, April 09, Sept 09 Top-Down Indicators Bottom-Up Evidence Skilled Occupational hierarchy Formal qualifications Earnings On-the-job training or experience Innate ability Shortage Employer surveys Rising earnings Vacancies Softer labour market intelligence Past/projected trends Sensible Alternatives to immigrants Skills acquisition Productivity & international competitiveness Production technology EEA labour supply Impact on efforts to seek alternatives – dependence on migrants

Tier 2 (continued) Shortage occupation lists (Results e.g. April 2009) Whole occupation Civil engineers Ships officers Both removed in September 2009 Subset of skilled occupation Some specialist medical posts Maths & science teachers Skilled ballet dancers Skilled subset of less skilled occupation Skilled sheep shearers Skilled chefs Skilled senior care workers Number of jobs covered by shortage occupation list: September September

Tier 2 (continued) 3 hurdles, occupations/jobs where MAC lobbied Fail on skill (NVQ 3+), e.g. chefs, except skilled sub-set care workers, except senior group Fail on shortage community pharmacists (0/9), no evidence of closure ships officer, civil engineer, quantity surveyor: previously on social workers for adults Fail on sensible genetic pathologists: training ceased land engineer: can get from construction ships officers: displacement plus disincentive to train UK officers future: chefs?

Accession countries: method Policy: principle and practice (including possible actions of other EU countries) Context: economy and immigration Past experience: A8 experience Theory: impact on flows, economic downturn Restrictions: Full or partial lifting Specific sectors: case for selective, limited, low-skilled immigration?

Policy for accession countries What was the UKs experience in 2004? –much larger number than predicted –lower skilled manual and elementary occupations –no negative employment impact (but impact on pay?) –will above hold under a recession? Recommend caution: retain restrictions for now A2: considered specific sectors (inc agriculture, food processing, social care)

Discussion Regulating scale of immigration and selecting migrant workers - presently no limit or target - could have hard quota (say Tier 1 or 2) or soft target (e.g. net work immigration) - could auction visas, e.g. Tier 2 certificate fee very low PBS and other migrant worker admission policies, e.g. does the lack of cap/quota (tiers 1 and 2) imply effects of immigration largely linear rather than diminishing returns/increasing costs? Managing low-skilled immigration, e.g. social care, agriculture, i.e. clear trade-off between raising wages or greater immigration Is it possible to distinguish in UK system between temporary and permanent migration? e.g. sector-based schemes (SAWS) and intra-company transfers

Annex: Recent studies of impact of immigration on pay AuthorYearsObservatio ns Results Dustman et al (2008) 1997 – 2005 (pre- accession) 17 regions 1% point increase in share of immigrants in population: Pay percentile % p per hour 5 th th th th Nickell and Salaheen (2008) digit SOC 11 regions 10% point increase in share of immigrants in population: Group Wage % Average -0.4 % Semi/unskilled services -5.2% Reed and Latore (2009) regions 16 1-digit SOC 1% point increase in share of immigrants in population associated with decrease in average wages of 0.3% Note: All studies: LFS; immigrant is non-UK born; hourly pay; controls include age, skill, time. Points: 1. Dustman and Nickell: 5 th percentile/care workers 5% point increase in immigrant share gives wage reduction of 18p hour or £7.20 for 40 hour week. 2. Reed (IPPR): note direction now negative. Authors describe it as small but 5% point x -0.3 x £10 x 40 hours = -£6.