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The immigration impact of Brexit - has Britain lost its lustre?

EU passport

It cannot be denied that immigration, with all of its real and imagined consequences, was for many people a key element in the EU Referendum.

So how has the decision to leave been received by migrants who currently live in Britain?  One must be careful with anecdotal evidence, especially when expressed in the immediate aftermath of such an important decision.  Of key concern, though, is the impact across sectors that rely on overseas nationals to deliver the service levels we have come to expect.

For example, a substantial minority of NHS staff are from overseas and from the European Union. Fullfact states1:

EU migrants make up a significant proportion of NHS staff – over 10% in the case of doctors – but not as large a proportion as non-EU migrants.”

“Are we welcome here?”

The decision has already fed into how some medical professionals feel about the UK, with the following quotes coming AuntMinnieEurope.com2 - an online community for radiologists and professionals in the medical imaging industry:

"One comes to the U.K. for stability and also because it is part of the EU. If these two elements change now, then what binds us here when there are other countries in Europe that have the characteristics we first sought in the U.K.?" (Source: EU Nationals voice anxiety post Brexit; June 2016)

"I've never felt that my patients were concerned about my nationality or that they would prefer a British doctor, but we are in panic mode and Brexit begs the question: Are we welcome here?" (Auntminnieeurope.com op.cit.)

Similar feelings were expressed all over the web immediately after the vote and whilst they may temper as the vote recedes, they will almost certainly be present once Article 50 is enacted.

Do such emotions translate into behaviour? We cannot be 100% sure, but it seems perfectly possible. Another radiologist voices their concern;

We don't know exactly how it will impact us yet, but will it make me and others more likely to leave the U.K.? Yes. And will it make recruitment from Europe more difficult? Definitely." (Auntminnieeurope.com)

EU migration into the UK over time

Migration into the UK has been particularly marked post 1992, coinciding 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 1997. According to the ONS article mentioned above, between April to June 1997 and April to June 2016 the number of non-UK nationals working in the UK increased from 966,000 to 3.45 million, that is to say from 3.7% to 10.9% of UK-nationals.

Non-UK nationals working in the UK, not seasonally adjusted

Non-UK nationals working in the UK

Source: ONS, UK Labour Market Statistical Bulletin, August 2016

What are the characteristics of people coming into the UK?

As the Bank of England summarises3“...migrants into the UK from other EU15 countries and from outside the EU tend to have higher levels of qualifications than the domestic workforce...”

So, the UK attracts a range of migrants across all levels, but the greater proportion come with a degree and this effect is magnified when looking at non-EU migrants.

What is drawing such an amount of highly qualified people to the UK? There are a host of factors, but the economic returns are key.

In labour economics we would look at the decision to undertake tertiary education (i.e. getting a degree) as an element of human capital. Like all capital investment decisions we would imagine the returns to this investment would be reflected in higher lifetime earnings compared to those who have not made such investment in capital.

Measurement of this is potentially difficult but the UK’s national statistics agency, the Office for National Statistics (or ONS), has recently carried out some excellent work in this area looking at the UK as a whole.

What do we mean by human capital?

“the knowledge, skills, competencies and other attributes embodied in individuals or groups of individuals acquired during their life and used to produce goods, services or ideas in market circumstances.” (OECD, 2001)5

Why does it matter? The ONS points out;

“Firstly, it has been shown that individuals’ labour market outcomes are linked to their human capital. In general, individuals with low skills or levels of education are more likely to be unemployed and face social exclusion.

Broadly, the measure used by the ONS is the present value of all future income streams earned by an individual throughout their lifetime; to provide a figure for this requires estimates of working life, likely or possible income stream(s) and a suitable discount rate. Notwithstanding this, the ONS estimate that returns to human capital in the form of a degree amount to £628,000 versus £274,000 for those with no formal qualifications.

There appears to be clear advantage to gaining a degree or above in terms of lifetime returns. This matters to the UK after the referendum decision because a potential migrant will look for the highest returns on their investment in human capital.

This return would be influenced by macro factors such as GDP growth rates, employment growth and overall economic conditions whilst micro influences might include schooling, taxation, legal frameworks and potential for career advancement. There is also evidence that institutional quality and governance effectiveness increases a destination's attractiveness for highly-qualified migrants.

The UK would be expected to rank quite highly on these factors; however, there appears to be increasing global competition for highly skilled and educated workers.

A recent paper by the EU Commission cites a Gallup survey 6 finding: “33 % of all highly-educated workers intending to migrate prefer the EU/EEA, compared to 19 % that prefer the United States”

However, on further analysis there are wide variations with the EU as destination countries. Research into criteria for the EU’s ‘blue card’ system indicated the following preferences between countries: “...several Member States, notably Germany (32 %), France (11 %), the Netherlands (8 %) and the United Kingdom (7 %), on par with the United States (30 %), Canada (27 %), Norway (14 %) and Australia (11 %).” (EU op.cit)

Therefore the UK ranks below our major competitors as a preferred destination for inward migrants. The perception is that migrants are somehow fortunate  to be coming into the UK  to work whereas, given the likely growth outside developed nations over the next decade, we need to see the UK as one of a portfolio of destinations among which talent can choose.

Potential UK employers of that talent need to make case for the UK to be a preferred destination for the highly qualified and to provide a framework that clarifies the pathways for maximising the returns to human capital.

What might happen now?

In economics it is often relative prices that influence behaviour, not absolute prices. If we look at relative incomes in the EU, as shows by the data below, it is clear that the UK offers attractive salary returns compared to other EU destinations.

But will this continue? Since the referendum outcome the pound has devalued against the Euro by around 12%. This immediately reduces the attractiveness of the UK in terms of wage levels in the migrants’ domestic currency. This is unlikely to change (and quite clearly may worsen) for two reasons: setting Article 50 in motion and triggering at least 2 years of negotiations and, the recent QE announced by the Bank of England that will serve to keep the value of the £ low. This also has an effect on the value of remittances made from the UK.  The returns to labour might therefore be lower in the future for migrants into the UK.

EU nations GDP

Source: Eurostat, http://appsso.eurostat.ec.europa.eu/nui/show.do

On the supply of labour the EU recognizes, “The EU already faces structural skills shortages and mismatches in certain sectors that have the potential to limit growth, productivity and innovation (e.g. healthcare, ICT and engineering) and thus slow down Europe’s continued economic recovery and limit its competitiveness. (EU op.cit).

The UK also suffers staff shortages in the same areas as the EU7 and it relies on non-EU as well as EU migrants to fulfil its labour needs. If we are outside the EU it is possible that the UK looks less attractive. Previously such workers might go to the EU and subsequently onward to the UK. However, this avenue will now be blocked for them (or it will be potentially more difficult).  Moreover, at the moment the UK is successfully recruiting from outside the EU, but it will soon be competing directly with the EU for these people.

The relationship appears asymmetric

If we look at the relationship between the UK and EU in terms of job numbers we can see further pressure on the UK arising from a squeeze on labour movement.

If we examine job searches by destination country, the UK is the dominant location searched for. The graph below shows how popular is the UK when residents from other EU countries undertake a job search.

Graph: Share of all EU15 cross-border job searches by destination country

EU15 cross-border job searches by destination country

Source: Adapted from INDEED Blog; Not That Into EU? Insights on Job Search, Migration and the EU Referendum

14 June 2016 by Mariano Mamertino

When the criteria are changed and we look at the percentage of a countries’ job searches that focus on the EU, we can see the UK is out of the picture. In fact the UK ranks 15th in this category; jobseekers from mainland EU countries focus a lot more on the UK than UK jobseekers on the EU.

Graph: Share of searches by origin country that go to other EU15 countries

Share of searches by origin country that go to other EU15 countries

Source: Adapted from INDEED Blog; Not That Into EU? Insights on Job Search, Migration and the EU Referendum

14 June 2016 Mariano Mamertino

Implications

To summarise, the UK has so far received a lot of migrants and has been able to offer competitive salaries compared with other parts of the EU. The UK does however rank behind other parts of the EU when looking at job seekers from outside the EU, and both the EU and UK face shortages and global competition for highly skilled and qualified staff.

Prior to the referendum, the UK was the prime focus for job searches originating from the EU, but post Brexit, continued low interest rates and QE that keeps the value of the pound on a lower path will reduce the value of the UK salary. This, combined with the absence of freedom of movement, may reduce the appeal to work in the UK and decrease the inward flow of highly skilled and qualified migrants.

The implication is clear: once we leave the EU, the UK is likely to become a far less attractive destination for highly qualified staff.

Retaining and attracting staff with the correct skills into the UK and preventing salary inflation of current staff at these levels is going to be a key problem: employers should start working on a refined structured process for ongoing recruitment and clear talent pathways very soon.

Sources

  1. EU Immigration and NHS staff, July 2016
  2. Auntminnieeurope.com, June 2016. This is a website for radiologists and the radiology profession
  3. EU membership and the Bank of England October 2015
  4. ONS, Measuring the UK’s Human Capital Stock  August 2012
  5. ONS, Human Capital Estimates 2015, August 18th 2016
  6. EU Commission 7 June 2016; Proposal for a Directive of the European Parliament and the Council on the conditions of entry and residence of third-country nationals for the purposes of highly skilled employment
  7. OXFORD ECONOMICS, THE RECRUITMENT OF MIGRANT WORKERS BY LONDON SCIENCE AND TECHNOLOGY FIRMS, March 2016

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.

To learn more about how Brexit will affect business and to gain practical tips on how to deal with business uncertainty, please join us for our Brexit Business Workshops. To book the event or to inquire about discounts available for groups and Kaplan students, please call 020 3468 0907 or email: businesstraining@kaplan.co.uk. Alternatively, fill in the form and one of our team will call you back.

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