What might lower migration mean for workers, employers and government policy?

Immigration was one of the most important issues in the recent EU referendum, with some polls even putting it as people’s biggest concern. There has been much debate about whether widespread migration has squeezed the pay of British workers. This often gets pulled towards two extremes; some argue that migration has no effect on people’s wages, while others say it’s played a key role in the huge pay squeeze workers have experienced over the last decade or so. As with so many debates, the reality is far more nuanced.

Given that the government has reaffirmed its commitment to reducing migration, it’s worth exploring where some of the biggest effects of lower migration could be felt.

Workers

New Resolution Foundation analysis shows that while it’s true that migration has had no effect on native wages overall, it is wrong to argue that it has had no effect on the wages and employment prospects of British workers. Migration has reduced pay for some lower-paid occupations and groups such as skilled trades occupations. However, the effect is small compared to broader economic forces such as the squeeze on pay caused by the financial crisis. Looking forward it would also be dwarfed by the economic fallout of the vote to leave the EU if forecasts are remotely right. Anyone expecting a post-Brexit pay boost is going to be disappointed. So both those saying migration has no effect or those saying it explains all our pay problems are wrong.

But while lower immigration will not produce overnight earnings benefits for British-born workers, it will pose big challenges for many British-based businesses and Britain’s bureaucracy.

While the wages of British workers are not likely to rise much as a result of a fall in migration, the biggest winners are likely to be those migrants who are already in the UK, particularly people from the countries that joined the EU in 2004.[1] After 2004 average earnings for workers from Eastern Europe fell significantly. This is due largely to the changing composition of the EU Accession workforce in Britain as many more economic migrants from these countries arrived in the UK to work, often in relatively low-paid roles. Over time the steady flow of relatively cheap labour depressed the wages of recently arrived immigrants (as the chart above shows). Basic economic theory says that a fall in the ‘supply’ of new migrant workers will increase the ‘price’ (wages) for those migrants already here.

Employers

What is good news for foreign-born workers is likely to be far more challenging for many British industries, particularly those sectors that are heavily-reliant on migrant labour (as the chart below shows).

Over a quarter of workers in food manufacturing, hotels and the domestic personnel sector are migrants. As a result we will need to grant current workers ongoing residency and the right to work for economic reasons as much as for moral arguments, or indeed because we want reciprocal rights for UK workers living elsewhere in the EU.

But even if that happens many of the sectors above could face serious challenges hiring new staff in the relatively near-future. Firms in these sectors face a number of choices. Many may look to hire more British workers. However, British born workers typically earn £2.76 an hour more than workers from EU accession countries.  With employment already at a record high, that pay gap is going to have to fall significantly if firms are going to attract British people already in work or even those outside the labour market.

One way that wages may rise as firms respond to less availability of cheap labour is by increased investment in both skills and technology. This is perhaps the greatest opportunity that reduced immigration offers. Businesses may be forced to rethink their business models – manual car washing may be replaced by machines, some crops may no longer be picked and processed by hand. The introduction and increase in the National Living Wage will add impetus to the challenge of raising productivity in low paying sectors. The result could be fewer, better-paid jobs.

Government

However, many firms in these sectors will not be able to attract natives or automate and their survival will be threatened. History and the experience of other countries tells us that it is likely that the government will create a temporary worker scheme of some kind. Such a scheme will be a challenge to implement. At present, spread across HMRC, the Gangmasters Licensing and Labour Abuse Authority (GLAA) and the Employment Standards Agency Inspectorate (ESAI) there are around 350 staff enforcing labour market rules, particularly payment of the national minimum wage. This is equivalent to one enforcement officer for every 20,000 working age migrants. These agencies could be given responsibility for enforcing and policing any temporary workers schemes, but to do so they are likely to require significant investment. Just as the UK government is busy hiring trade negotiators, they may need to get in the market for labour enforcement personnel too.

Up to now, much of the debate around migration – should a target level be set, what impacts ‘controls’ might have on workers and business, what can government actually do to enforce this – hasn’t got off the starting blocks because we have had freedom of movement within the EU anyway. With that possibly about to change, the migration debate is going to get far more important – and it needs to be based on clear evidence, however frustratingly nuanced the facts are for some.

[1] ‘Accession’ countries cover those that joined in 2004 (Poland, Latvia, Lithuania, Czech Republic, Slovenia, Slovakia, Hungary and Estonia) and 2007 (Bulgaria and Romania).