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Economic Policy

Asked by Robot-Chicken-The-Third | Nov 11, 2007 | University Level > Economics > Coursework
Robot-Chicken-The-Third
Robot-Chicken-The-Third asks:

I'm wondering if you could please tell me what I would need to look at and do for this question:

"What are the mechanisms by which increased UK immigration can affect the
macroeconomy."

Thankyou for your help.

etutor answers:

Immigration has a higher profile because the number of migrants settling each year in the UK has more than doubled in less than a decade.

There are two major views about the effects of migration on the labour market. The substitution hypothesis argues that migrants offer skills similar to those possessed by native workers, and so, in competing directly with them, lower their returns from work. The complementarity hypothesis contends that migrants do not possess directly comparable skills. Rather, they bring unique skills, or else occupy niche areas of employment that native workers choose to avoid.

There is a widespread perception, particularly among employers, that the UK needs immigration, both to occupy low paid jobs that the native population (including the NEETS group of people between 16 and 25) declines to take, and to overcome mounting skill shortages. Many migrants have certainly entered low paid employment, especially in construction, catering and domestic services. An example is Starbucks – the company estimates that 80% of its London workforce comes from abroad. At least 20% of those working in the construction industry are now migrants.

According to the King’s Fund, the NHS in London is now ‘completely dependent on foreign workers’. In 2005, 47,000 work permits were issued to nurses from overseas – four times the number for 2002. Migrants also have an important role in the staffing of schools. A growing number of London education authorities, for example, are now recruiting directly from abroad. One teacher recruitment agency has recently claimed that ‘without overseas teachers, schools in London would be falling apart’. There is also a growing demand for specialist skills in IT and related fields. The University of Warwick suggests that the IT services industry alone will need to recruit more than 250,000 employees by 2009.

There is little current evidence to suggest that the effect of migration is to depress either the wages or the employment prospects of the native population, though this is becoming more contentious as the number of migrants from other EU countries continues to grow. Indeed, since the migration of workers into a particular sector allows that sector to expand, the wage and employment levels of the existing workforce tend to remain broadly unchanged. Labour Market economics suggests that it is efficient to have a dynamic labour market with the free movement of labour from nation to nation. The Government claims that there are around 600,000 gaps in the United Kingdom labour market that cannot be filled by home workers and therefore it is essential that we encourage a certain amount of skilled migration into the nation.

The Home Office studies highlight the fact that immigrants are generally self-selecting, coming here specifically to work. They are likely to be more resourceful, ambitious and entrepreneurial, and would therefore be expected to have a positive effect upon GDP growth. Self-employment among migrants is certainly almost twice as high as for native citizens. The migrant population is relatively young, with a much smaller proportion of over 65s and a significantly larger proportion in the group of working age. Most economists therefore appear to share the view that the free movement of labour is generally beneficial. However, this proposition is difficult to test empirically, though the Home Office believes that an increase in the size of the population of 1% resulting from migration is associated with an increase in GDP of between 1.25 and 1.5%. In October 2006, the National Institute Economic Review commented on migration and its economic effects. It concluded that immigrants who have arrived since 1998 have raised GDP by 3.1%.

The increase in GDP per capita might, however, be a great deal lower – The Economist, for example, suggests it is in the order of only 0.15%. Since imported goods and services are equivalent to over 30% of UK GDP, ‘this tempers the potential effect of immigration since imports, in effect, embody the work of foreigners who stay put’. The Migration Watch think tank disputes the government’s view on the economic benefits of migration. It maintained (2005) that the published figures take no account of the UK-born dependent children of migrants; adjustment for this leads them to conclude that migration accounts for 10% of the UK population, and produce exactly the same (10%) proportion of GDP. Migration Watch's most recent (September 2007) calculation suggests that migrants have added 3.8% to the population so the GDP per head figure is actually negative.

Gott and Johnson (2002) concluded that there is ‘a net economic benefit to the UK from filling the gaps through migration’. They go on to suggest that the outcome of migration is a reduction in inflationary pressures and an increase in the efficiency of firms. It may be no accident that since the end of the last recession in 1992 there have been nearly 60 consecutive quarters of non-inflationary growth. There are many reasons for this, but one is certainly the recruitment of migrants, particularly those from Eastern Europe. The Home Office study reports that migrants also make a positive net fiscal contribution of about £2.5B each year. In 2006, government provision for migrants (goods, services and benefits) amounted to £36B, while migrants contributed £38.5 in taxation. The suggestion that is often peddled that ‘most immigrants are living off social security’ is abject nonsense. A case in point is the 91,000 migrants from Eastern Europe who signed up for the Workers’ Registration Scheme in 2004. Only 500 made an application for out-of-work benefits, of whom 97% were rejected; moreover, only 5% arrived in the UK with dependents.

Critics of immigration often argue that the UK is over-populated, and point to the fact that net immigration is expected to account for at least 65% of the further increase in population that is projected over the next two decades. On this basis, it is suggested that any attempt to evaluate the net economic effect of immigration must also include estimates of a variety of other financial costs. Examples of these costs might be the greater consumption of non-renewable resources, the provision of new housing and accompanying destruction of much of the countryside, increased policing and security measures, and the treatment of tuberculosis, AIDS and drugs-related illnesses. Some would go still further, insisting that a price should be put on reduced social cohesion and increased racial tension.

Sir Andrew Green, the chairman of Migration Watch, states that immigration is actually a positive thing, both culturally and economically, but he argues that since 2004 it has been undertaken at an unsustainable rate. He is supported by Frank Field, the former Labour cabinet member, who believes that at such high levels in-migration is detrimentally affecting UK workers' employment prospects.
I hope this is helpful.

1 student responses

Robot-Chicken-The-Third
Robot-Chicken-The-Third

Thank you for help. It has been very useful.

responded Nov 21, 2007 2:24:13 AM GMT
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