Unskilled Immigration and its Relation to Wages, Employment in the United Kingdom
This article will display the academic and economic evidence that low- and semi-skilled immigration into the United Kingdom depresses wages and employment in those industries, which are under current threat by automation.
The fact is there is a large amount of articles, data, government reports, E.U. reports, think tank reports, and so on that provide as many pro- and against- immigration points of view as possible. I have therefore tried to stay within government and published academic sources and journals when possible, whose methodology will be critiqued far more. I have focused on the U.K. primarily, but I believe that the theory holds generally (works with China, but there is an interesting exception regarding the U.S.). It is perhaps one of the most popular discussion topics in politics, and worthy of consideration.
I have also striven to keep the word count low; I could have made this a monster, but no one reads long articles. Therefore, I have not included the benefits of allowing the wealthy to enter your country with their capital, nor the other benefits of immigration of the wealthy and educated. The advantages of capital in your country and its benefits for technological innovation are in this article.
I have also taken from previous articles I’ve written, but if you’d like to know more in detail, I have previously written about this before for the United Kingdom in far greater detail and the United States.
Disclosure: I am an immigrant to China. My wife is an immigrant to the United Kingdom. I hardly dislike immigration as a principle.
The Preferred Economic Working Immigrant
So let’s examine the profile of a ‘preferred working class immigrant’. The best immigrant to the U.K. seems to be a young, rich employee from the E.U. An immigrant making £50,000 per year will pay £20,000 in taxes more than they take from public services (Financial Times, 2019).
An immigrant from the first 13 E.U. countries will provide the U.K. with £3,740 more than the average U.K. citizen; from the rest of the E.U., £1,040 more (Financial Times, 2019). It is worth noting that the young and energetic workers who come to the U.K. are among the best of their countries; whereas the ‘average U.K. citizen’ includes everyone, from pensioners, to criminals, to scroungers. We examine this in far more detail here.
The immigrants who do not contribute overwhelmingly to the U.K. public are non-E.U./EEA immigrants, who are usually very uneducated, more unlikely to be economically active, and more likely to be unemployed. This has been known in economic journals for a while (Dustmann et. al., 2005). However, the Bank of England did not find a difference in their impact on wages whether they were E.U. nationals or not (Nickell and Saleheen, 2015).
As expected, E.U. immigrants pay more into the public purse than they take out from public services. Non-EEA immigrants take more from the public purse than they put in (Financial Times, 2019).
A study by the Bank of England, however, found that the difference in supply shock was less than 2% on the composition of EU to non-E.U. natives; that immigration is immigration, and the types of immigrants applying for these jobs matters little (Nickell and Saleheen, 2015).
Competitive Advantages of Populations and Effects on Wages
Let’s now consider what the literature says on immigration, and why we examine (here) the educational levels of immigrants. Dustmann et. al. (2005) explains that an immigrant population that differs from the local population has a greater effect on the labour force; I’ll provide an example to explain why.
A country who is primarily educated at a university level will have a shortage of unskilled labour for its size. As such, the unskilled labour would enjoy bargaining power due to this shortage, and be able to enjoy better wages and benefits. As the unskilled labour would also be in greater demand, and the wages therefore higher, there would be no shortage of employment.
However, introduce an unskilled immigrant supply, and while they would have no effect on the wealthy and educated (the data from the Migration Advisory Committee finds it actually boosts their wages! More on that later), they would likely to be willing to work for less money. Companies will naturally flock to these workers, and the bargaining power of the native unskilled labour is weakened.
Similarly, educated people in poorer countries do a great amount of good for the economy, as unskilled labour does not create massive amounts of jobs or innovation.
Therefore, in this article, we shall be examining what we (comparatively) do not have: unskilled and semi-skilled labour. This is born out in the actual numbers; Indians, Pakistanis, and Polish overwhelmingly either very lowly educated, or simply finished High School (more on that here). They naturally move into the low-wage work that their education is suited for, and compete there. More on that later.
Wages of Natives:
The need to suppress wages via migration is well-known; it’s a policy recommendation by many central banks to prevent inflation, lower costs of production, and generally keep the economy chugging. The Central Bank of Ireland (Byrne and McIndoe-Calder, 2019) state that a scarce labour supply to demand naturally increases wages (and prices). It also asks if immigration to Ireland to be increased to prevent this, and keeps the costs of production low.
How? As labour becomes scarce, workers have more bargaining power, and therefore can ask for higher wages as they cannot be replaced. But as wages rise, prices must rise to keep profits, and so the inflationary spiral begins.
Not just the Central Bank of Ireland; the Bank of England found that a larger immigrant to native ratio lead to a negative impact on wages (Nickell and Saleheen, 2015). Gianmarco et. al., (2012) found that there was an ‘imperfect substitution between the natives and the immigrants’, that you could not perfectly substitute these two labour pools.
Gianmarco et. al. (2012) found that immigration has a long-run positive relationship with native wages (+0.6%) as the economic growth across ALL of society compensates; but Bratsberg and Raaum (2015) found that immigration had a 0.06 elasticity with native wages within the industry that the immigrants enter; for every additional 10% of immigrants employed, native wages dropped by -0.6%/ applied to real numbers, for every 1% of immigrants in the employment pool shared, natives could expect a 0.8% drop in their wages.
In other words, it’s good for the people who do not compete for jobs with the immigrants; bad for those who do.
Wages of Previous Immigrants
When we say native population, we also include other immigrants who have settled here long-run, and become to all intents and purposes, British. Their skill set remains the same, however, and therefore, they are competing with the newer fresher immigrants. Gianmarco et. al. (2012) has an extremely negative long-run relationship with the wages of previous immigrants (-6.7%).
Dustmann et. al. (2005) found that initially, there was little affect on wages by immigrants in the U.K., but as immigrants assimilated into the local population, the downward pressure on wages was felt as the labour pool expanded. The Bank of England found that immigration would affect the wages of semi-skilled and low-skilled labour; often previous immigrants would be affected (Nickell and Saleheen, 2015). This was also established in Bratsberg and Raaum (2012) where, due to the interchangeability of skills (making the population substitutable), there was a downward pressure on the wages of previous immigrants by new immigrants.
So immigrants who have already settled here? They face perhaps the greatest reduction in wages from immigration.
Wages of the Poorest
The reason we have considered the education level of immigrants to the United Kingdom is that, in low- and medium- educational fields and industries, immigrant and native labour is nearly perfectly substitutable (Bratsberg and Raaum, 2012). Borgas (2003) found that as immigration into an area increased, weekly wages decreased over time.
Data from the Migration Advisory Committee over 15 years found that wages in the U.K. from the bottom 10% of society were depressed by around 5%, the bottom 25% by about 3% (Financial Times, 2019). The Bank of England found that the primary effect of immigration on wages was primarily on the unskilled and semi-skilled industries (Nickell and Saleheen, 2015).
To prove the opposite scenario, the National Union of Farmers states that during times where they lack workers in the United Kingdom, there is a 9% increase in wages over 3 years (Reality Check Team, 2019). Reports from the Migration Advisory Committee suggest that the benefit in rising low wages was due to minimum wage increases, but it still suffered from a negative impact from immigration (Reality Check Team, 2019).
Bratsberg and Raaum (2012) found that in Norway (a country similar to the U.K.), immigration was linked to low wages in industries that immigrants entered into, and did so even when you removed general wage trends at the time. Not only that, but one-third of workers who lost their job due to immigration would be unable to find new work and go onto public welfare.
I have also written further into the effects on wages, employment, and poverty in regards to immigration to the working class here.
It must be said; the evidence that the poorest 25% of the United Kingdom and the United States (more on that later, (some of it here) are negatively affected by immigration is very established; in the United Kingdom, the bottom 10% of society are exceedingly affected (in the U.S., for some reason, it is less so).
Wages of the Richest
The Migration Advisory Committee over 15 years found that the effects on wages for those the 50th percentile in income rose by 2%, for the 75th percentile by 3%, but for the top 10% of the country, by 3.5% (Financial Times, 2019).
Why? Because immigrants who consume provide demand for further goods, thus raising the prices of goods, which raises the prices of the owners (Bratsberg and Raaum, 2012).
Not only that, but immigrants with education levels similar to the wealthy do not appear enough to impact their wages (Brasberg and Raaum, 2012).
Additionally, when the wages of the poor workers are decreased, the cost of labour decreases, allowing owners to produce products cheaper. This not only produces greater profits for the companies, which flows to the stockholders and the board of directors, but it also reduces the costs of production, and therefore, reduces some of the price of the goods, which increases the purchasing power of the general population. The rich especially benefits from immigration (Bratsberg and Raaum, 2012). Maybe that is why they overwhelmingly support it (Molloy, 2017). Maybe that’s why the poor do not.
We cannot cover it in a lot of depth here, but immigration is useful for long-term growth. Byrne and McIndoe (2019) also point out that as an economy reaches full employment, companies are unable to expand their operations due to a lack of workers.
For example, China has been suffering to connect work to workers; due to their hukou system limiting worker movement, it is difficult to find the correct workers to expand operations (Wong, 2019). We also worry about problems of brain drain. As this article is primarily about wages and employment, we shall move on.
The Lump of Labour Fallacy
A common argument against this theory is that immigrants will, in turn, consume and spend, thus feeling the local economy. That there is no ‘lump of labour’ that gets smaller as more people come.
Firstly, for this to be true, we’d have to prove that immigrants consume at rates equal or greater than the natives. In the United Kingdom, we know that the native population has a household savings rate of just under 5% (Eurostat, 2019). For immigration, we must choose representative groups: 20 years ago, it was the Indians and Irish who made a third of all immigrants to the United Kingdom, but they remain one of the largest immigrating populations still (Wadsworth, 2010).
We also know that they overwhelmingly have low-paying work. Wadsworth (2010) presents the below:
As we can see, the majority of immigrants are taking the low mean-hourly wage work (Wadsworth, 2010). So how much do they save, which inversely asks, how much do they consume?
Polish, E.U., whose household saving rate is 1.9% (Eurostat, 2018).
Indians, non-EEA, whose household saving rate is 17.1% (Economic Times, 2019).
Ireland, E.U., whose household saving rate is 10.8% (Eurostat, 2018).
Pakistan, non-EEA, whose household saving rate is 7.7% (Rehmen et. al., 2010).
So what do we have? Except the Polish, immigrants to the United Kingdom are more likely to save, and less likely to consume, and so will have less of a positive impact to consumer demand than the native population. Immigrants do not consume at rates greater than the natives (except the Polish, god bless the Polish).
This applies in different developing stages: for example, in China, Wong (2019) explains that migrant workers in China consume less luxury goods, and are more likely to save half of their income for the future.
As an aside: I have a personal theory: this is why China has such a powerful purchasing power with their currency domestically; the massive class of workers who work so cheaply allow the middle and upper classes (and even some of the working classes) to consume goods that are labour-intensive extremely cheaply (such as food, delivery, labour-intensive products, haircuts, etc). If the wages of the average Chinese working class were to increase, we’d find the purchasing power of the individuals to decrease even as their wages increased, due to the increased cost of producing these goods due to paying the workers more money.
It’s not an unsupported theory; Bratsberg and Raaum (2012) found in Norway that industries where immigration kept wages low had correspondingly low price increases. In fact, they found that these price drops may compensate the lower wages.
By contrast, in the U.S., Hispanic immigrants actually consume more than the local white counterparts, but higher than the black population (Hispanic mean saving rate: 16%, white mean saving rate: 23.2%, black mean saving rate: 5%); this would explain why Hispanic and black immigration to the United States seems to have data to suggest it helps the economy in the short-run, as they have a lower rate of saving (Borgo, 2013).
Another concern is automation; large amounts of unskilled labour is easily replaced by automation. We can see that in the graph above from (Arntz, Gregory, and Zeirahn, 2016) that many countries across the world have high percentages of jobs likely to be lost within 20 years: the U.S. (8%) and the U.K. (11%).
However, when divided up by income, we find that the bottom 25% of income have 23% at risk of automation, and the bottom 10% at 32% of automation. Once again, the top 10% of society face 0% chance. The United States in the same data has an interesting note; those in the bottom 10% of income have a 19% chance; the bottom 25%, however, have a 31% chance of automation. Among those who have finished High School? The percentage share of jobs under automation ranges from 14% (U.K.) and 19% (U.S.). The McKinsey Global Institute (2019) found that people in the U.S. with a high school diploma or less are 4x more likely to be displaced by labour.
Not only that, but Frey and Osborne (2013) found that out of 702 occupations, 47% of U.S. are high risk for being automated within 20 years, with a further 19% likely as well.
When applied to the United Kingdom, 39% were at similar levels of high risk (and 49% for Japan). Why does this matter? Economists always answer that new jobs will be created by the new technologies that exist. But Frey found that only 0.5% of Americans are employed in new markets created by these technologies since 2000 (Economist, 2016).
Automation provides a new supply of labour (very, very cheap), and it too reduces wages and employment as it is applied to population. Acemoglu and Restrepo (2017) found that each robot per thousand workers reduced employment to population ratio by 0.18 to 0.34 percentage points, and wages by 0.25 to 0.5 percent.
Why bring all of this up? Because the jobs that will be taken, in their millions, will be the low education, low skilled jobs that immigrants to Britain are fighting for. We’ve proven that the wages in this industry are depressing due to immigration. We’ve proven that employment in these industries is depressing. We’ve proven that they don’t create the demand required to compensate for those losses. These jobs are under further threat from automation, who have the problems immigrants provide to the job market, but by a magnitude.
A Simple Graphical Theoretical Model
Borjas (2003) and Bratsberg and Raaum (2012) have established and reinforced that the supply curve for labour when dealing with immigration is downward sloping at around -0.3 to -0.4, meaning that when you had a 10% increase in population, you would suffer a 3%-4% decrease in wages. Naturally, the lower the education level, the higher the impact.
We can also assume that, as wages increase, so does supply of labour. So a basic model for labour price (wages) and quantity (supply of labour) will look something like this:
Now, let’s assume add immigration. Supply of labour increases. This moves the supply line right. So the values move from 1 to 2, for example, Price 1 (P1) to the new price (P2).
As we can see, the price has dropped (wages have dropped), as the supply has increased. However, the price of goods (also reflected in price) has dropped, meaning that we have cheaper goods as well, so everyone benefits from cheaper goods, while those looking for these jobs have lower wages.
Because we know that the tax rate ranges between 0% (Personal Allowance) to 40% (Higher Rate), combined with the fact that most immigrants spend less money and save more money than the local British, and not even including remittances back to their home country, we cannot expect that the additional consumption will be such a great affect.
So, we see a general increase in the amount of labour, yes, and a small increase in the price of labour (wages). I suspect this will not be a large increase because, while an immigrant may be demanding more, the price of goods actually drops by between 0.4%-1.1% (Bratsberg and Raaum, 2012); one would expect that for demand would continue the consumption to prevent job loss, we would see a price increase, or at least a price match. Research says we don’t.
Now let’s add automation, which is decreasing the need for unskilled labour by up to 37% in the next 20 years; immigration adds 280,000 people to the U.K. each year. Automation is threatening 12 million jobs (37% of 32.5 million jobs), or 600,000 per year (Office of National Statistics, 2019). Therefore, the drop will be far larger than immigration on the demand for jobs. Why do I include this? Because immigration places pressure on the same jobs that automation does. As automation replaces jobs, we will see a decline of up to 37% of the demand for jobs in this realm within these 20 years. That should look something like this:
As we can see, the jobs disappear under the threat of automation, the wages of the individuals don’t return to the original level and would reduce wages massively, as well as reduce employment.
All of those jobs lost? That represents people leaving the market and going onto economic welfare, which will increase the amount we would need to spend one welfare, which in turn increases taxes, or decreases the amount each individual receives (and individuals recieve very little; it’s about 3%).
So we have a rapidly shrinking area of jobs, in an economy that is currently in recession, with a population that is already oversaturated to the point that local citizens who do not go to university have nearly double the rate of unemployment. Not only that, but if a family becomes working class, it is exceedingly difficult for their children to work their way up, which in turn creates generational poverty.
To be convinced otherwise, I would have to see evidence that working-class immigrants consume in numbers to drive up the demand to compensate for both their natural pressure on wages and employment, as well as the automation that is already driving down this market, and will finish doing so within 20 years. I can’t find that data. Again, research by Bratsberg and Raaum (2012) suggest that prices drop, meaning that the supply of goods is not being matched by demand.
In the first article I’ve published online, I used this definition for the purpose of government:
“The GOVERNMENT shall raise the general living standard of the PEOPLE, will not abuse its powers excessively, uphold internal peace, and prevent external invasion.”
I believe that this is a good standard to hold the government to. Immigration, especially of the working-class, low-educated, un- or semi-skilled variety, provide a downward pressure on the wages and employment of the people who are least able to find employment, or to themselves move abroad to seek it.
Not only that, but this group is already under massive pressure from the rise of automation that will soon rip their jobs out from under them.
Combine that with the evidence and research that shows that poverty is transferred by generations, that the working class do not tend to rise out of it, and are likely to remain in persistent poverty, and we have a real concern about raising the living standards of our population.
I cannot find the evidence that immigration provides the consumption required to compensate for their wage-depressing effects, nor their unemployment. I can, however, find the evidence that they are overwhelmingly entering a low-skill, low-educated job market that is already under assault and shrinking, and by allowing this group to immigrate, we will find in the future a larger pension base to fund that is already a massive issue. I am not concerned with ‘current welfare soaking’, as the amount of money we pay to jobseekers and child benefits pale in comparison to the state pension we’re funding; it’s simply not a concern now. But when they in turn need a pension, it will become catastrophic.
It is cruel to ‘send back’ those who have moved to the United Kingdom; they have lives, family, and friends in the United Kingdom, and those who have worked here and paid taxes deserve to stay; I would recommend perhaps an easier path to citizenship. But this means that we must be more careful to stop people who would enter this class of the United Kingdom, not less.
This article does not say there are no upsides to immigration; there certainly is. Cheaper goods, more people paying taxes, more consumption in general. This article has also not mentioned the benefits of allowing the wealthy and educated to the United Kingdom; this article is long enough, and it has been covered elsewhere.
This article does prove, I believe convincingly, that wages and employment among the working class in regards to low- and semi- skilled is definitely hurt by immigration, despite the current political rhetoric saying otherwise.
If you’ve enjoyed reading this, please consider following me on Twitter @LeonDeclis or on Apple News on the Idea Meritocracy channel. There is also a Facebook page at @IdeaMeritocracyEcon. Have a nice day!
In all articles, I provide as much information for sources as possible, including links. I encourage everyone reading this article to read deeper, and make their own conclusions. For students, links are here so they can read the original source themselves.
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