Large-scale immigration: the costs and benefits

workersImmigration can be a divisive but also a sensitive issue. Arguments surrounding last year’s referendum here in the UK on EU membership could not avoid it. Media hysteria, particularly from the right, has focused mainly on the negative impacts, and rational debate has been drowned out. The right seemed to shout loudest, and the left often ended up talking to itself.

This post aims to make a small contribution to rational debate, drawing mainly on an interesting little book by Cambridge Professor Robert Rowthorn, published in 2015 by the think tank Civitas.

The overall findings of the study suggest that, at least in the UK, the overall net economic and fiscal (tax and public spending) outcomes from large-scale immigration are small when compared with the effects of more rapid population growth. Rowthorn argues that considerations of the latter should play a more important role when deciding future government policy.

Immigrants are mostly seeking a better life for themselves. One source is the flow of refugees from regions experiencing conflict. Another is the seeking of better wages and conditions of work in the destination country than can be found at home.

To those who see large-scale immigration as a problem, one longer term solution might be to encourage development in the poorer nations concerned so that the gap in living standards is narrowed. This requires the kind of enlightened self-interest among the richest nations on foreign aid that is often sorely lacking.

It also requires the establishment of politics and institutions in poor countries conducive to improved economic performance. The history of development suggests that it can be difficult for the poorest countries to catch up with the rich ones, but it is not impossible.

Migration is also part of development to some extent. The populations of the poorest and most deprived countries are less likely to have access to the minimum physical and human capital which makes emigration to richer countries possible. More rapid economic growth may therefore not halt emigration entirely.

Large-scale immigration, such as the UK has experienced in recent years, has consequences for the economy, for the labour market, for fiscal matters, and for demography, as well as for non-economic factors such as culture and social cohesion.

The economic impact

For the economy as a whole, economic theory suggests that an increased supply of labour from higher net immigration will put downward pressure on wages in the short run, but that this should lead to higher profits, encouraging investment over the medium to long run. This will raise economic growth and labour demand, so that wages will eventually rise to some new equilibrium level. However, this does tend to assume uniform skill levels, which clearly does not hold in reality.

The evidence on the longer term impact on the economy of positive net immigration shows that GDP will tend to be higher than otherwise, but that GDP per capita will barely change. The latter figure is a more important measure of material well-being. A bigger economy in itself is not helpful if it is entirely accounted for by a larger population rather than higher productivity and income per head. The foreign-born workers may gain as individuals, but the outcome for the economy as a whole may be more difficult to discern.

Having said that, higher GDP per capita is merely an average, and says nothing about the distribution of the increased income. A period of growth may see all the gains in income accruing to the already wealthy, preventing broad-based improvements in the standard of living.

The labour market

Labour market outcomes of immigration are influenced by the degree to which the additional foreign-born workers are complements or substitutes for native workers. Complements, such as entrepreneurs, will augment native workers and potentially improve their productivity and wages, while substitutes will displace natives, reducing their employment and wages, with an additional fiscal cost to the government.

The labour market impact of immigration also depends to some extent on the skill profile of the individuals concerned. There is some evidence that low-skilled native workers’ wages can be depressed by the increased supply in their segment of the labour market and that employment of foreign-born workers sometimes displaces that of natives.

However, these impacts depend to a great extent on the overall tightness of the labour market. If the economy is buoyant and labour demand is strong, they will tend to be muted. If economic growth is sluggish or recessionary, a higher labour supply will tend to put downward pressures on wages and employment. Such factors will clearly vary greatly with the dynamism of the overall economy and its constituent sectors over time, and are likely to be complex enough to stimulate continuing study and debate.

According to the study, the aggregate fiscal impact of large-scale immigration is likely to generate a small surplus of tax revenue over public spending, but Rowthorn argues that this must be set against the higher population pressures, which I will discuss below.

Population and ageing

The effect of immigration on population and ageing is more significant than the labour market impact, to the extent that they can be separated. Faster growth in the working-age population as a result of higher immigration will slow population ageing, as the so-called dependency ratio of retirees to workers grows more slowly. But it will not stop or reverse population ageing unless immigration continues to rise, since settled immigrants will eventually retire. It may therefore be desirable to reduce net immigration in order to slow population growth, at the cost of slightly faster population ageing.

Much of the cost of immigration comes back to its effects on population growth. If this is sufficiently high, it will put pressure on the environment, infrastructure and amenities, including public services.

One might argue that it is up to government at all levels to respond to faster population growth through appropriate levels of spending on public goods and services and to encourage a faster growth in the supply of housing. This is necessary to prevent any negative impact on these aspects of the standard of living. If net immigration is great enough, this may be difficult to achieve, at least in the short run, unless governments show sufficient foresight on policy. Such issues remain important and have a political as well as an economic dimension.

There are other non-economic impacts from immigration, such as the impact on culture, ideas, parochialism, social cohesion, national identity, democracy and governance. These might be positive or negative, depending on the individuals and groups affected, and the time frame considered. They should be subject to debate, but I will not discuss them further here.

This post has focused on the impacts on the destination country of immigrants, but the country of origin should not be neglected. To the extent that emigrants are highly skilled, this can be a brain drain for often poorer countries, representing a transfer of investment in ‘human capital’ from the poor to the rich country. This could undermine development in the former if it takes place on a large enough scale. It should not be overlooked in any compassionate analysis of international migration and development policy.

On the other hand, emigrants may gain useful skills and knowledge abroad, send remittances home, and then return themselves, more able to contribute to the economy and society of their country of origin.

All in all, the costs and benefits of large-scale immigration vary depending on the time scale and the adaptability of the countries considered. The latter is strongly influenced by government policy, the state of the economy and the level of development.

While it is important to show compassion to refugees and others seeking a better life, the longer term impact of more rapid population growth is important to consider, as are factors less obviously economic. These are likely to interact in complex and historically specific ways. In today’s often unsettling world, debates on these matters will persist. It would be nice if they were associated with a little less hysteria. After all it is likely that, somewhere along the way, our ancestors were themselves immigrants.

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