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The EU referendum and migration

Winding country road

The long and winding road

Immigration…the very word can stir strong emotions, and it is a topic riding high in the public consciousness due to the debate surrounding EU membership. The aim of this article is to ignore these emotions and take a dispassionate look at some of the facts behind the movement of labour. We need to consider migration from an economic viewpoint; what is the scale of movement of labour to and from the UK? What about movement of labour within the EU? Why is it happening? What is the economic rationale behind immigration from a national macroeconomic viewpoint?

In the run up to the EU Referendum on 23rd June, it is interesting to look at some of the data on migration. Migration into the UK has been particularly marked post 1992; this coincides with one of the longest and biggest booms in recent UK economic history with real GDP growth averaging around 2.8% per annum. Such GDP growth often attracts labour from overseas and in this case the UK is no exception. However, there are two distinct phases during this period.

According to the Migration Observatory1

“Average annual net migration to the UK during 2004-2014 was 245,000, which represents about three to four times the annual average of 65,000 during the period 1991-1999.”

What happened during this period? Most migrants cite work and study as reasons for coming to the UK. Let’s look at the data since ’97;

EU net migration

Source: ONS, UK Labour Market Statistical Bulletin May 2016

According to the ONS article mentioned above;

..between Q1 1997 and Q1 2016, number of non-UK nationals working in the UK increased from 928,000 to 3.34 million, ie from 3.5% to 10.6%...”

So, there was a clear lift in migration from 2004, when 10 countries (Cyprus, Czech Republic, Estonia,Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia) joined the EU. Bulgaria and Romania also joined in 2007. Why has net migration been running at a higher rate? In economics it is often relative prices that influence behaviour, not absolute prices. If we look at relative incomes in the EU;

Relative incomes in Eu countries

Source: Eurostat, http://ec.europa.eu/eurostat

For newly admitted countries there appears to be a real disparity between incomes; an average earner in the UK earns almost eight times more than a comparable average worker in Romania or Bulgaria, and almost three times more than someone in Portugal. The situation is very similar for married couples.

Consequently, the economic benefits of moving to the UK for work look very clear indeed and would explain at least some of the migration to the UK.

But, what about the relative costs of living? A very good question, but not particularly easy to answer.

If we look at GDP per head adjusted for differences in price levels between countries, a slightly different pattern emerges. We can see then Bulgaria and Romania are approximately half as well off as the UK. It’s not quite comparing apples with apples but it is illustrative. In addition, we should analyse the distribution of income too. If one country is twice as wealthy as another then GDP figures per head may mask that difference, but if the wealth is unevenly distributed, then the per capita disparity in income may be more than enough of an incentive to emigrate.

We can also use more every day indicators2. Using ‘on the ground data’ i.e., prices as paid, there is evidence that in Romania and Bulgaria consumer prices are around half that of the UK with even more disparity between other common costs costs e.g. rent is at about 25%.

These are clearly estimates and the GDP figures above are reliant on the PPS calculation. However, the point stands that there are substantial differences in earning power even in real terms. Given the proximity of mainland Europe to the UK and the relative differences in real living costs, it is likely the UK will continue to attract labour via migration.

There is however, a further complication; the GDP figures above are typically based on official data. In most economies there is a (varying) level of economic activity which is unrecorded sometimes referred to the ‘hidden’ or ‘underground’ economy. This is difficult to estimate but we can look at one example;

GDP averages in EU nations

Source: Prof C Williams, LSE, Europp, May 2015

Some of the estimates are substantial and would clearly make a difference to the GDP per head computation if they could be accurately measured and included.

So, overall, it is not quite as simple as comparing net incomes; we need to examine relative price levels between countries and look at the level of undeclared income.

Sources

  1. Long-Term International Migration Flows to and from the UK, Migration Observatory, University of Oxford, June 2015
  2. http://www.numbeo.com/cost-of-living

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Roy Daintith, Senior Consultant of Macroeconomics, Leadership and Professional Development at Kaplan, believes that economics is fundamentally relevant to business performance and is passionate that decision makers should understand the bigger forces shaping and driving their industry.

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