A brave new world: how reduced migration could affect earnings, employment and the labour market

In the wake of the vote in the United Kingdom on the 23 June 2016 to leave the European Union it seems likely that the UK will adopt a new immigration regime, moving away from the current free movement of people within the EU and possibly extending the current points-based-system that applies to those outside the European Union. Given the government’s promise to bring net migration down it is fair to assume that the new regime will place greater restrictions on immigration.

The numbers of migrants entering the country grew significantly over the last decade. As this coincided with stagnant and then falling earnings it is fair to assess how far migration contributed to this.

This note finds that while it is wrong to say that migration had no effect in reducing earnings, specifically for those in low-paying occupations, the effects are small and reducing migration will not reverse the earnings squeeze.

However, reduced migration will throw up a number of significant new challenges for the labour market. In the short-term the government will need to ensure that the right to work of existing migrants is guaranteed to avoid serious harm being done to some sectors heavily reliant on such labour. In the medium-term it’s much heralded new industrial strategy will need to focus on helping these industries adjust to lower migrant availability, for example by investing in labour saving technology. Finally, with a likely rise in temporary workers and a greater risk of illegal migration the government will need to rethink the UK’s current light touch approach to labour market enforcement.

Key findings:

+ Net migration has been above 200,000 since the enlargement of the EU in 2004. This has taken the share of migrants in the population from 10% in 2004 to just below 16% in 2016.
+ While the growth in the share of migrants in the population did not affect the earnings of native workers overall, it is wrong to say they had no effect. Increased migration did drag on earnings in some sectors (by between 0.5-2.0%), but these small effects do not explain and were in fact dwarfed by the general pay squeeze experienced during the same period (4.7-9.7%). In the next few years a fall in migration will do little to ameliorate the squeeze on wages for native workers.
+ Reducing the numbers of migrants allowed to enter the UK will pose a serious challenge in some low-paying sectors such as food manufacturing and domestic personnel, where over 30% of workers are migrants. Such sectors will need to adjust their business models with greater investment in skills and technology, have access to temporary workers, or shrink.
+ Adjusting to a world without free movement, but probably with high temporary worker migration, will require the government to invest in labour market enforcement. At present the three existing labour enforcement units, HMRC, the Gangmasters Licensing and Labour Abuse Authority (GLAA) and the Employment Standards Agency Inspectorate (ESAI), have a combined staff of less than 350. This is equivalent to one enforcement officer for every 20,000 working age migrants.

ESO: In Focus: Brexit - The United Kingdom and the European Union http://www.europeansources.info/record/brexit-the-united-kingdom-and-the-european-union/

ESO: Background information: How reliant is Britain on EU migrant workers? http://www.europeansources.info/record/how-reliant-is-britain-on-eu-migrant-workers/

The Guardian, 16.08.16: Brexit damage to economy will outweigh modest wage gains, says study https://www.theguardian.com/uk-news/2016/aug/15/brexit-damage-to-uk-economy-will-outweigh-wage-gains-study-finds

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