IBOURNE Ryanmmigration and border controls are going to be a key issue going into next Spring’s EU Parliament elections and any subsequent EU referendum. Ipsos-Mori has found, for example, that “Race Relations/Immigration” is regarded as the third most important issue facing Britain, behind the economy and unemployment. This view will likely be exacerbated in January 2014 with the free movement of Romanians and Bulgarians.

After years of suppression of discussion of the subject, debate in this area – particularly with regard to the economic impacts of migration – is welcome, but often heated. In truth, it is an area which can expose divisions within the conservative movement itself, with the classical liberal wing more likely to be relaxed about immigration per se than the socially conservative wing.

This column is about jobs and pay. The views of many on this theme tend to be entrenched: either “they’ve taken the jobs” on the one hand or “immigrants boost the economy” on the other – with little public analysis of the nuanced impact, more difficult to explain, that is the reality. But it’s worth setting aside all the social, public service and fiscal concerns to hone in on the question of how immigration in the UK has affected native employment and wages.

Between the first quarter of 1997 and the second quarter of 2013, the number of people employed in the UK rose by 3.4 million. Of this total, an additional 988,000 people born in the UK were employed, compared to 2.4 million more foreign-born individuals (just over a million from the EU and the rest born outside). Over that period then, the proportion of people in total UK employment born outside the UK increased from 7.3 per cent in 1997 to 14.8 per cent by 2013 Q2 (shown below).

Screen shot 2013-10-31 at 16.05.04It is extremely intuitive yet wrong, however, to think that the number of jobs created over this period would be the same if there had been no immigration and that, as such, the increase of employment of foreign born workers came at the expense of UK workers. This is known as “the lump of labour fallacy”. In fact, by increasing the supply of labour, which can fill gaps, complement existing skills, or create new markets for other or new products through the demands of the immigrants, immigration could actually increase employment of native workers. Whether it does or not is therefore purely an empirical question, albeit a very difficult one to examine accurately. The result will depend on:

1)  The complementarity/substitutability of immigrants to native workers – often dependent on skills. If migrants are complementary, filling job gaps for example, they can actually increase productivity and wages. But if substitutes, they bid down wages and can cause unemployment if native workers are unwilling to accept lower wages.

2)  Whether the economy is booming or in recession – i.e. what the overall demand for labour looks like.

3)   Whether immigration has significant long-run effects on productivity levels and thus general prosperity.

But that’s just the aggregate impacts. Which groups are affected by immigration likewise depends on the skill levels of immigrants, their location decisions and their willingness or otherwise to take jobs “below” their skill range. This all means results tend to be time and place specific, and cannot always be extrapolated to “predict” – which many people want to do today.

Due to all of these factors pulling in different directions, then, attempting empirically to measure the impact of immigration is quite problematic. Some studies divide the UK into regions to examine the effects, but simple correlation analysis between immigrant numbers and native jobs in regions as a means of highlighting a relationship can be distorted as a general result if migrants move to areas where demand for labour is particularly strong.

Likewise, some studies assume that migrants compete with people of similar skill levels to them. Yet we know that many immigrant workers do not compete with similarly skilled people, but instead work “below” their levels of skills.

Nevertheless, the trends in much of the literature which seeks to deal with these problems are clear. Most studies suggest that immigration has had no statistically significant effect on the overall employment or claimant count rate outcomes of UK natives. In many cases the models predict a small negative association, but this is not statistically different from zero. Some, like Cambridge’s Bob Rowthorn, have suggested that this is simply because of noise in the data, and that there is indeed displacement – but the breadth of studies which obtain this broad result is overwhelming.

An aggregate impact doesn’t mean a uniform impact, however. In fact, there is evidence that immigration can damage the job prospects of the lowest skilled; that immigration from outside the EU in particular has hit job prospects for natives, and that immigration leads to more displacement of native workers when the economy is below potential.

Dustmann, Fabbri and Preston (2005), for example, found that immigration between 1983-2000 harmed the employment prospects of those with O-level qualifications, but boosted those with A-level qualifications or higher. A detailed Migration Advisory Committee report from 2012 found that although overall immigration of working age migrants had no real effect on native employment between 1975 and 2010, non-EU migration in a sub-sample for 1995-2010 did. Their results suggested 100 additional non-EU migrants in that period was associated with a reduction in employment of 23 native workers (although migrants from the EU were found to have no significant impact).  This study also found that when the economy was operating below potential, each 100 additional working-age non-EU migrants was associated with 30 fewer native jobs.

Screen shot 2013-10-31 at 16.06.49On wage,s the story is similar. On aggregate most studies suggest little overall effect – some showing a slight average uplift as a result of immigration, some a slight fall. However, the effects along the income distribution can be very different. The chart below, taken from this study, looking at the UK between 1997 and 2005, can explain some of this phenomenon.

Screen shot 2013-10-31 at 16.07.40The predicted line shows where you’d expect immigrants to be in the income distribution, compared to the non-immigrant population, if just judged by their skill levels (immigrants are on average better educated than natives). But the researchers found that many immigrants, probably due to language barriers and the incentives relative to home, were bunched near the bottom of the wage distribution – lower than where their skills suggested they should be.

In other words, highly skilled migrants often compete with lower skilled Brits, keeping wages lower than they otherwise would be for that group. This means that while immigration has depressed wages below the 20th percentile, it contributes to wage growth above the 40th percentile. Thus, immigration has boosted average wages by a small amount, but squeezed them slightly for those near the bottom.

The results overall, therefore, throw up some inconvenient evidence for those who think immigration has had profound consequences for British jobs and pay.  On the jobs front, the evidence suggests little overall effect on unemployment or pay, with negative effects constrained to the particularly low skilled, from non-EU migrants and particularly in times when the economy is struggling.

These effects on the low-skilled are not unimportant of course, but the magnitudes of and the circumstance in which the effects arise are nowhere near large enough to suggest restricting immigration would lead to full domestic employment. In reality, skills, welfare reform, and business regulations are likely to be more significant supply-side factors to try to solve. Whether my CPS colleague Fraser Nelson is right that relatively open borders make politicians less likely to address these real underlying issues is a question for another day.

There are two final points to consider.

First, caution should be used in using existing evidence to inform us of the likely effects of Romanian and Bulgarian immigration, because skill levels and incentives are likely to be different from the immigration we’ve already faced.

Second, the immigration issue is clearly not just about employment and pay – but also about social cohesion, identity, the effects on public services and many other factors. This column has merely sought to cast light om direct labour market impacts, where, as conservatives who support markets, we must be more enlightened than assuming a static economy with a fixed number of jobs.