The long-term economic impacts of reducing migration by Katerina Lisenkova, Senior Research Fellow, NIESR on 03-Jan-2014

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?

"In our recent paper, The Long Term Economic Impacts of Reducing Migration: the Case of the UK Migration Policy, we provide a quantitative assessment of the long-term impact of migration on the economy that may cast new light on this debate" says Katerina Lisenkova, Senior Research Fellow at the National Institute of Economic and Social Research. "As an experiment, we 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'. Our estimates show that the long-term impact of this policy will be to significantly reduce GDP per capita and worsen the public finances. While gross wages increase slightly, the resulting increase in taxes means after-tax wages also fall."

The principal net migration assumption in the 2010-based ONS population projections is that it will remain at 200,000 per year over the next 50 years. Thus, if the UK government succeeds in achieving the 'tens of thousands' target, then net migration has to be reduced by more than half relative to the ONS assumption. The study models and analyses the overall economic impact of this policy.

The recent large influx of immigrants after the accession of the Eastern European countries to the EU in 2004 (the so-called A8 countries) brought migration policy to the forefront of the public agenda and political debate. Large net migration flows are a relatively recent phenomenon in the UK; until the 1980s emigration outweighed immigration. Tightening of the migration rules for non-EU migrants, introduced by the current government, combined with the economic downturn, has resulted in a fall from recent peaks; according to the most recent estimates during 2012 net migration was 177,000 – the lowest level since 2008, although still well above the 'tens of thousands' target.

The analysis is carried out in a macroeconomic model developed at the NIESR: 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 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 a low migration scenario, which assumes the reduction of foreign net migration rates required to reduce overall net migration level by about 50%.

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 to 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% by 2060. This effect requires an increase in the effective labour income tax rate for the government to balance its budget in every period. By 2060 the required increase is 2.2%.
• 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.

"Our results show that a significant reduction in net migration has strong negative effects on the economy. " said Katerina. "First, by 2060 in the low migration scenario aggregate GDP decreases by 11% and GDP per person by 2.7% compared to the baseline scenario. Second, this 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% by 2060. This effect requires an increase in the effective labour income tax rate for the government to balance its budget in every period. By 2060 the required increase is 2.2%. Third, 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."

"Our simulations necessarily do not take into account the potential social impacts of higher immigration. This is a hotly debated area, which is beyond the scope of our study, but should be considered when formulating migration policy. Unfortunately, very often on this issue opinions trump evidence."

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