Kathleen Henehan is Senior Research and Policy Analyst at the Resolution Foundation. She is the author of Under New Management: How immigration policy change will, and won’t, affect the UK’s path to becoming a high-wage, high-productivity economy.
One of the main benefits often cited of leaving the European Union was that the UK regained control of its borders, with the Prime Minister arguing that bringing in a more controlled migration regime would be key to enabling the UK to become a high wage economy. Others fear that the shift to a new, more restrictive, migration regime could render the UK economy less innovative and productive in the longer term, alongside damaging the public finances.
Both sides are right to recognise that migration has an important role to play in the economy. Before the pandemic, migrants comprised nearly one-in-five people in the labour force; and they contributed to more than three-quarters of all labour force growth between 1995 and 2019.
And both sides are also right to want a high wage economy. To get there, however, we need an economic strategy: how much will a new migration regime give us that strategy? That depends on how much the new regime affects the number, and type, of migrants coming to the UK.
Most EU citizens wanting to come to the UK for work will now, like their non-EU counterparts, require a skilled worker visa (SWV), limited to mainly mid- and higher-skilled roles, with wage criteria that varies by occupation but at a minimum of £25,600 (unless specific conditions apply). So we’d expect the number of EU citizens moving to the UK to fall.
For non-EU citizens however, the new work visa is more liberal than the last. And with new visa routes, including those for some Hong Kong residents, being introduced, it’s likely their numbers will rise. On balance, we’d expect to see immigration levels be lower, and the educational composition of migrants be higher, than they were before the EU referendum.
And this has acute short-term implications for some firms and sectors, especially those with high staff turnover and reliant on lower-paid EU migrants, such as food manufacturing, driving and hospitality. These pressures are already becoming apparent, with sectors such as food and accommodation (who rely on EU-workers in SWV-ineligible roles for 10 per cent of their workforce) having seen vacancies double as the economy reopened post-pandemic.
Over the longer-term, the impact of migration policy changes on the UK economy is more nuanced, and uncertain. In the past, the UK’s ability to freely hire migrants from the EU has enabled the workforce to respond quickly to meet shifting economic needs. EU migrants are more likely than UK-born workers to move across the country, sectors and occupations, and this is especially true for those working in SWV-ineligible roles. With fewer mobile workers, the economy will be somewhat slower to adjust to change.
Building up the UK’s economic resilience under the new regime – which will be necessary to successfully respond to the wider challenges posed by Brexit, the Covid recovery and the UK’s transition to net zero – will therefore require sustained improvements in UK workers’ job mobility.
And despite claims from both sides of the debate that the new regime will either improve or exacerbate the UK’s lower-wage, low productivity growth challenges, it’s unlikely to have a big impact in either direction.
For example, critics of the new regime suggest that reducing immigration will have a large negative impact for the public finances, as there will be fewer migrants to contribute to the state via taxation. Getting a clear handle on what would happen is difficult, because it depends how policy changes really do affect the number, and composition of migrants moving to the UK.
Evidence from Office for Budget Responsibility found that the new migration regime could result in £2 billion savings to the public finances by 2024-25 – a positive amount, but one that’s small in comparison to big ticket public expenditure. (For example, it’s equivalent to the Government’s planned spend on its Cycling and Walking Strategy.)
And although past evidence has shown that migrant workers can boost individual firms’ productivity, there is no strong evidence across advanced economies that having an increased share of migrants in your workforce leads to overall productivity growth. Furthermore, there is little research to suggest that shifting to a system with lower levels of migration, but more highly qualified migrants, will turn the dial on productivity – either for the better or worse.
It’s also unlikely that the new migration regime will drive up wages in the longer-term. Having more highly-qualified, higher-paid migrant workers in the economy would drive up wages on average – but not necessarily for individuals.
Moreover, the pay rises recently seen off the back of labour shortages in migrant-reliant sectors aren’t certain to last over the longer term. Labour shortages in these sectors will indeed put pressure on firms to increase pay. But the evidence suggests that where firms can replace labour with technology they will do so – pushing up productivity and raising pay for the few remaining workers, but with the number of workers in those sectors falling by design.
And where automation isn’t possible, for example in some agricultural picking, firms can raise wages to attract labour, but ultimately prices will have to rise pushing down the real value of wages for everyone else. In the end, people will buy less of the product on offer – meaning production, and thereby employment will fall.
Stepping back, if policy makers want to to get to a high-wage, high-productivity economy, they will need to take tough decisions on industrial policy, understanding which sectors can drive economic growth and get them to where they want to go. They’ll also need to have a clear trade strategy, knowing which goods are better produced at home and imported from abroad.
And of course, they’ll need to think hard about underpinning domestic policy: how to build the country’s human capital, boost innovation and encourage job mobility.
Migration policy can complement an economic strategy, but it can’t stand in for one.