Reducing the level of net migration to the UK from ”hundreds of thousands to tens of thousands” would have a strong negative impact on the UK economy. That is the conclusion of research by Katerina Lisenkova, Marcel Mérette andMiguel Sanchez-Martinez, to be presented at the Royal Economic Society”s 2014 annual conference.
The researchers investigate the long-term impact of migration on the economy by comparing two potential scenarios: a baseline scenario, which assumes that net migration will remain at 200,000 per year over the next 50 years; and a low migration scenario, which assumes that the UK government succeeds in achieving the ”tens of thousands” target by reducing of net migration by about 50% (compared with the baseline scenario).
The results show that a significant reduction in net migration has strong negative effects on the economy:
· By 2060 in the low migration scenario, aggregate GDP decreases by 11% and GDP per person by 2.7% compared with the baseline scenario.
· The policy has a significant negative impact on public finances, owing to the shift in the demographic structure after the shock. The total level of government spending expressed as a share of GDP increases by 1.4% points by 2060. This effect requires an increase in the effective labour income tax rate for the government to balance its budget. By 2060, the required increase is 2.2% points.
· The effect of the higher labour income tax rate is felt at the household level, with average households” net income declining because of the higher income tax despite the initial increase in gross wages due to lower labour supply. By 2060, net wages are 3.3% lower in the low migration scenario.
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Is immigration an answer to the challenges of the ageing population in developed countries? Or, over the long term, do the burdens immigrants place on the welfare state and public services – not to mention the impact of labour market competition on native wages and employment levels – more than outweigh the positive effects on growth and the public finances?
This study, funded by the Economic and Social Research Council (ESRC), provides a quantitative assessment of the long-term impact of migration on the economy that may cast new light on this debate. As an experiment, the authors chose the migration target set by the senior partner of the current UK coalition government (the Conservative Party) to reduce the level of net migration from ”hundreds of thousands to tens of thousands”. They find that achieving this target will have a strong negative impact on the UK economy.
The analysis is carried out in a macroeconomic model developed at the National Institute of Economic and Social Research (NIESR): the National Institute General Equilibrium Model of Ageing (NiAGE). Among the advantages of this model is that it models individuals of different ages, which makes it possible to study age-specific behaviour and the impact of changes in the population age structure on the economy.
There are two types of individuals in the model: foreign-born and native-born. They are differentiated as much as possible: the two groups exhibit different employment and wage rates, different levels of educational qualifications, as well as different probabilities of receiving welfare benefits from the government. All these are estimated from the Labour Force Survey.
Moreover, because migrants” age structure differs considerably from that of natives, so does their consumption of public services. This detailed differentiation as well as behavioural responses within the model are the two biggest differences from the only previous attempt to model the long-term impact of migration on the economy and public finances undertaken by the Office for Budget Responsibility (OBR) in Fiscal Sustainability Report 2013. The results from this new study support the previous OBR findings.
The study compares two scenarios: the baseline scenario, which is built in line with the 2010-based principal ONS population projection and assumes that net migration will remain at 200,000 per year over the next 50 years; and a low migration scenario, which assumes that the UK government succeeds in achieving the ”tens of thousands” target by reducing of net migration by about 50% (compared with the baseline scenario).
The main results show that a significant reduction in net migration has strong negative effects on the economy:
· By 2060 in the low migration scenario, aggregate GDP decreases by 11% and GDP per person by 2.7% compared with the baseline scenario.
· The policy has a significant negative impact on public finances, owing to the shift in the demographic structure after the shock. The total level of government spending expressed as a share of GDP increases by 1.4 percentage points by 2060. This effect requires an increase in the effective labour income tax rate for the government to balance its budget . By 2060, the required increase is 2.2 percentage points.
· The effect of the higher labour income tax rate is felt at the household level, with average households” net income declining because of the higher income tax despite the initial increase in gross wages due to lower labour supply. By 2060, net wage is 3.3% lower in the low migration scenario.
”The long-term economic impacts of reducing migration” by Katerina Lisenkova, Miguel Sanchez-Martinez and Marcel Mérette
Katerina Lisenkova
07913 444808 | k.lisenkova@niesr.ac.uk
