UK immigration policy and the economics of migration

Since the introduction of the Nationality, Immigration and Asylum Act (NIA) in 2003, the Office for National Statistics (ONS) figures reveal that net migration from outside the European Economic Area (EEA) is on a decline (see fig 2 and 3).  

The NIA required all non-EEA nationals to have obtained entry clearance overseas for stays longer than six months.

During the 2010 U.K. general election, the campaign rhetoric promised to continue to “bring down net migration to levels observed in the 1990s, while ensuring that only economic migrants who bring the most value to the economy would be admitted.”

The concern is that immigrants put downward pressures on wages and may even displace natives particularly in low skill jobs. A possibly even larger concern is that immigrants may not contribute their fair share to the tax and welfare systems. New research suggests that immigrants are younger, more educated and less likely to claim benefits than U.K. natives.

U.K. immigration features both a group subject to immigration control (non-EEA) and unrestricted1 EEA migration. Since 2000, EEA migrants made a positive fiscal contribution while the fiscal contribution of non-EEA immigrants was negative (Dustmann and Frattini, 2014).

Why? Are there observable differences in the characteristics of EEA and non-EEA immigrants other than the country of origin and the conditions of their stay in the U.K.?

How has the skill composition of these immigrant groups2 changed after nearly a decade of legislative reforms? Is U.K. immigration policy achieving the desired outcomes?  See figure 1 and 2

A striking feature of international labor flows is that more educated workers are those most likely to migrate. Migrants are generally positively selected in terms of schooling attainments, in that they are more educated than their non-migrant counterpart (Grogger and Hanson, 2011). 

On one hand, quality selective immigration policies can be successful at increasing migrant quality by raising the entry costs such that only high productivity individuals still find it rewarding to immigrate. On the other hand, being too selective may lead to unintended consequences:

  • Lesson (1) A. If migrants are positively selected in terms of schooling and unobservable characteristics that are also correlated with wages, then too much selectivity can reduce migrant quality. So long as the scale of migration is preserved, the quality selective policies only raise the migration cost for the low skilled while simultaneously lowering the cost for the highly skilled. Migrant quality can decrease if the beneficial effect of the policy change is thwarted by an opposite negative effect due to the induced reduction in the average wage for the educated migrants, implying an optimal level of selectivity in immigration policies (Bertoli, Dequiedt and Zenou, 2014). B. Migrant networks can reduce migrant quality. The role of migrant networks on the quality of immigrants also depends on the degree of selectivity of immigration policies (Bertoli and Rapoport, 2014).

     

  • Lesson (2) Migrant restricted access to the labor market can lead to an “illegal” supply of labor. An increase in migration costs can also cause the expected gains from illegal migration to increase relative to the legal pathway for the restricted group. Individuals who find themselves cut off from opportunities for legal immigration may resort to illegal pathways. This switch may therefore increase attempts at illegal immigration and consequently illegal labor supply. For current immigrants, tighter restrictions in destination economies reduce the likelihood of future migration opportunities and by doing so, increase the likelihood that they choose to remain beyond the allowed duration of stay.

Although non-EEA immigrants are more likely to be university degree educated than EEA immigrants, it is EEA immigrants who are more likely to be in the labor force. Comparing across cohorts reveals that the schooling gap between these groups also increased. These newly arrived more educated non-EEA immigrants are more likely to be students despite a mean arrival age of 26 years.

They are also more likely to be inactive (neither in work nor looking for work). Even when controlling for inactive students, the inactivity rate has increased for non-EEA immigrants while it decreased for EEA immigrants: a plausible explanation for the negative fiscal contribution of non-EEA immigrants. 

Formal study has become the most cited reason for immigration (see figure 3). This is consistent with stringent requirements and caps in work related visa categories that have lowered the relative price of the student visa when compared to alternative entry routes.

Up until recently, the student visa entry route allowed students to remain in the U.K. while applying to switch into a post-study work category after completing their formal studies. In 2012, the increased demand for student visas was met with amendments to the Tier 4 category restricting the labor supply of student visa holders. During that same year, the post-study work visa route was also closed.

Finally, among labor force participants, non-EEA immigrants earn higher wages. The wages of EEA migrants are below those of natives by about 16 percent in 2011 (Dustmann and Frattini, 2014). New non-EEA immigrants are less likely to be in elementary occupations than new EEA immigrants.

This paints a much different picture from the previous wave of EEA immigrants who were more likely to be employed in high skill jobs.

Flows from outside the European Economic Area have decreased and new non-EEA immigrants are better educated than previous cohorts yet less likely to participate in the labor market. The opposite is true for new EEA immigrants.

This is consistent with theoretical predictions: Restricting immigrant access to labor market opportunities causes the cost of migration to increase relative to the benefit for the marginal foreign national.

As a result, the flow of new immigrants decreases such that only the more productive migrate – those for whom the expected benefit from migration still outweighs the expected cost of access to the foreign labor market. 

To gain access to the labor market, new non-EEA immigrants face a roadblock: U.K. visas and immigration. The Home Office now provides detailed immigration statistics3 about the number of new visas granted and rejected in each tier of the visa system and the reasons why.

In 2014, while there was a 10 percent increase in the number of work visas granted, the number of new student visas had increased by 13 percent. So long as the growth rate of new work visas is less than the growth rate of new working age immigrants admitted in other categories of the visa system, the inactivity rate of new non-EEA immigrants continues to increase.

 

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Orphe Divounguy

Orphe Divounguy is a Macro-Economist trained at the University of Southampton (England) under the tutelage of Professor John A. Knowles. Orphe's expertise is dynamic modelling applied to international migration, labor and demographic economics.
In the past, he was a Research Fellow at the University of Southampton where he worked on a book chapter related to Egypt Temporary Migration. He has also been a lecturer of economic theory at the University of Portsmouth. Orphe was also involved with organizing the private sector participation at the Third High Level Dialogue on Financing for Development in 2007. Orphe received his PhD in Economics from the University of Southampton in England.
 

Orphe Divounguy
Portsmouth Business School
Department of Economics and Finance
Portland Street
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T: +44 750 018 8956
E: Orphe.divounguy@port.ac.uk
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