Does Migration Benefit the Economy?

Hello readers,

Welcome back to my blog. In this post I thought I would discuss a topical yet controversial issue: migration.

With the recent vote to leave the EU in the UK to the refugee crisis across the world from war torn areas in the Middle East, I thought I would discuss some of the economics behind migration and dispel some of the myths that many people have about this topic. I will evaluate whether international migration creates more opportunities than threats, in the context of the UK and will also consider the social, political and moral issues. If you have any questions or would like to share your own views please comment below.

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It is widely debated in today’s society as to whether the benefits of international migration actually outweigh the potential costs; and despite the fact that there have been many studies into this field, the nature of migration is extremely complex and thus the issue remains controversial. Many people across the world are attracted to this so-called “treasure island” due to a combination of factors ranging from higher salaries and existing migrant communities to increased quality of life and standard of living. This, coupled with an open visa policy and the recent rise of “Corbynism’ demonstrate how the UK is generally perceived as being more open/cosmopolitan compared to the USA, China or France. According to the ONS, the number of foreign-born people of working age in the UK increased from nearly 3 million in 1993 to 7 million in 2015. The recent outcome of the vote to leave the EU exemplified the growing tensions between different social groups and their negative views/perception on immigration with many stating that they wanted to get “our borders back” and “protect our jobs”. However one could argue that many people were myopic in the sense that they were not looking at the long-term viability of the UK economy or provision of services in light of the current crisis with the NHS and the growing problem of an ageing population/state pensions. Clearly these services are not sustainable and we need a stream of economic migrants to contribute to the tax base of the UK if we are to have a chance at tackling the increasing budget deficit. Many do not realise that migration may be the answer and with the possibility of a ‘Hard Brexit’ we may be headed in the wrong direction. That being said terrorism, which has been associated with increased migration, remains a topical and pressing issue.

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Let us first consider the economic opportunities that are actually gained via pro-immigration strategies. Firstly it has been estimated that a 1% increase in immigration on average leads to a 1.25% increase in GDP (i.e. there is value added). This means that despite the fact that migration is often associated with creating unemployment for local people or putting pressure on “our” services, it actually has a net benefit. Furthermore, the claim that immigration takes jobs could be argued to be incorrect as often migrants are able to fill specific skill shortages or they take jobs which locals are unwilling to take e.g. Fenland-agriculture. It has also been shown that many of these migrants are extremely determined/motivated often with the goal of sending remittances abroad to support their families. As a result they have a higher productivity that employers favour. In fact a report by The International Longevity Centre think-tank suggests that EU immigrants can actually help increase employment opportunities instead of taking people’s jobs. On average, areas with higher employment rates for immigrants also tended to have more of the white UK-born population in work. Furthermore they suggested that by 2064-65, the UK’s GDP would be 11.4% (£625bn) larger with high migration than it would with low migration. They argued that because EU migrants have a higher employment rate than the UK average and because migrants from the European Economic Area made net tax payments totaling £22.1 between 2001 and 2011, they could be an asset in supporting the UK’s ageing population. The idea that immigrants crowd native Britons out of the jobs market “is built on the false premise that there are a fixed number of jobs in the economy.” Moreover, people often forget that Migrants also buy goods and services – providing a boost to the economy and creating new jobs. Migrants may also bring useful skills that complement those of the indigenous workforce. It also suggests migrants could boost the sustainability of government finances in the long run; under a high net migration scenario by 2064-65 net public debt would be expected to reach about 70 per cent of GDP – compared to 104 per cent of GDP in a low migration situation. Migration could therefore help support a population where the number of pensioners is expected to double between 2000 and 2050 and the number of over-85s is thought to be on course to more than quadruple in the same period. By contrast a reduction in the level of migration may require unpopular changes to government policy in other areas such as increased national insurance contributions or higher levels of tax.

Economists from the Centre for Economic Performance at the London School of Economics say that when they look at the areas with the largest increase in EU immigration, these have not seen the sharpest falls in employment or wages, and the OBR suggests that the UK’s fiscal position would be significantly worse in 50 years if migration was to be lower.

Aside from the economic benefits, there are a number of social and cultural opportunities created. Perhaps the best example of this is China Town. Not only does this allow people to experience and enjoy a different culture to escape their homogenized routines, but also it allows existing communities to feel at home-voluntary segregation as opposed to forced. Other benefits include new flows of ideas, work ethics, hobbies, sports, and beliefs. In terms of political benefits, it could be argued that migrants may have new ideas about certain policies, which may have previously worked, in their home countries.

Despite the opportunities created by international migration we must also consider some of the potential economic, social and political threats. Another issue felt keenly in the UK, is the concept that we are already ‘overcrowded’. In this case, a rapid increase in the population due to migration could lead to falling living standards. For example, the UK faces an acute housing shortage, but also an unwillingness to build on increasingly scarce ‘green belt’ land. In many cities, it is difficult to build more roads because of limited space. Increased population could increase congestion and urban pollution. Therefore, the increase in real GDP has to be measured against these issues, which affect the quality of life. From one perspective an increase in the labour supply may push down wages. This is especially true if migrants are keen to accept lower wages (e.g. willing to bypass traditional union bargaining/equilibrium level). However, again, net migration doesn’t have to push down wages. The massive immigration into the US, during the twentieth century, was consistent with rising real wages. That being said a Bank of England report found that a rise in immigration had a small impact on overall wages – with a 10% increase in immigration – wages fall by 0.31%.

The most common argument against increased migration as a solution to the problems associated with an ageing population is that ultimately the migrants themselves will get old thus contributing to the dependency ratio. However these arguments assume that migrants will remain in the UK for the entirety of their working lives and into retirement and there is evidence that migrants often choose to go home before they get old.

Although migration seems to have a broadly positive impact on public service delivery, there can be important problems at grass roots level. High net migration has resulted in rapid population growth. The Office of National Statistics ‘high’ migration scenario, which assumes net migration of 265,000, projects that the UK population will now increase by around 500,000 a year – the equivalent to a new city the size of Liverpool every year. This is unsustainable. It would result in the population growing by nearly eight million over the next fifteen years bringing it to 73 million. England is twice as crowded as Germany and nearly four times as crowded as France. To cope with this population increase huge amounts will have to be spent on the expansion of school places, roads, rail, health and other infrastructure. This is at a time when the government is running a budget deficit and aims to reduce public spending over the long term.

Public opinion however is clear. A large majority (76%) of the public want to see immigration reduced. The greater the number of new arrivals, the harder it is for everyone to become fully integrated in British society and undoubtedly the flow of new ideas leads to a loss of “Britishness” and cultural erosion.

In 2013, 62% of Britons worried that an increase in the Muslim population would weaken Britain’s national identity. This coupled with recent Islamist extremism attacks has led to a number of political issues and perhaps was one of the driving forces behind the vote to leave the EU. In addition, the rise of ‘white flight’ in Britain is ‘self-segregating’ as white families flee urban areas for the countryside and outer suburbs. The trend is causing an ‘ethnic cliff’, in which the proportion of households from minority backgrounds is vastly different in areas just a few miles apart.

In conclusion, I believe that migration is a process rather than a problem and given the rise of globalization, and the fact that humans will always strive to seek the best life possible it is almost inevitable. From considering the data, the consequences of international migration seem to be offset by the benefits such as increased contributions to taxation thus helping to reduce the deficit, promoting further investment and allowing for the expansion of the economy. Although statistically it may seem that by increasing migration the number of terrorist attacks have increased, it is important to note that correlation does not imply causation and it may be argued that the increase in such attacks reflect modern day conflict and political issues with previous government interventions in Middle Eastern countries. Even though there is evidence against immigration which suggest that it can have negative impacts, the majority of evidence states otherwise and generally the net benefit, taking into consideration all of the factors points towards a better future. Moreover, if we look back at history-immigration that supplied the labour that aided the post war economic recovery was vital. In more recent times, many doctors and healthcare workers in the NHS are migrants. Without them such services would not be able to function. Finally from a moral high ground, surely we have a responsibility to help fellow human beings where possible? Before employing anti-immigration policies or campaigns we should consider the stark juxtaposition between the lives of migrants and our current lifestyles and think about what we would do if we were in their shoes. Therefore since migration helps to support growth and the sustainability of public finances as our society ages we need not fear it. Migration is an expression of the human aspiration for dignity, safety and a better future. It is part of the social fabric, part of our very make-up as a human family.

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Interest Rates in the UK rise for the first time in 10 years!

Hello readers, welcome back to my blog.

I hope you enjoyed reading my post last time about the financial crisis and now have a clearer understanding of why it actually happened. This week I thought I would take a look at the recent rise in the base rate of interest, by the Bank of England on the 2nd of November from 0.25% to 0.50%. As I discussed in my last post, interest rates have been at ‘ultra low’ levels since the financial crisis and only now are they starting to rise. The Bank of England is expecting two further rises by the turn of the decade which would leave them at 1%-still considerably lower than pre-crisis rates, thus indicating that Brexit related uncertainty and low overall ‘animal spirits’ in the economy are limiting the UK’s growth potential. However, Mark Carney has said that “any further increases in interest rates would be at a gradual pace and to a limited extent”. Despite the fact that high street sales are falling at their fastest level since the height of the recession in 2009 as consumers “tighten their belts”, and even though the UK is facing high levels of consumer debt, coupled with mounting uncertainty and sluggish growth, Threaneedle Street has indeed taken the decision to reverse the emergency action taken immediately after the Brexit vote, voting 7 to 2 for a raise. Within this post I will explain why we have  seen a rise, the impacts of this rise as well as evaluate whether monetary policy has been effective over the last few years.

Why have they risen?

For over 30 years control of inflation has been the main objective of U.K. monetary policy; in order to create conditions in which the ultimate policy objective of improved economic welfare can be attained. Changes to the Bank rate is referred to as conventional monetary policy; however, in come cases central banks have to resort to unconventional monetary policy measures such as Quantitate Easing (QE) as interest rates are at the ‘zero lower bound’ i.e. the bank has ‘run out or road’ and cutting interest rates will no longer control the economy.

The Bank of England has a target of 2.0% for CPI inflation and currently the level is at 3.0%, expected to rise to 3.2% next month. The rise in inflation is linked to the weaker pound which has meant that UK exports become cheaper in foreign currency terms and imports to the UK become more expensive in domestic currency terms. Although cheaper imports are likely to lead to an increase in demand for them, this is not always the case. For example, the ‘Martial Learner Condition’ suggests that the effectiveness of a depreciation depends on price elasticities of demand for exports and imports. It states that “For a fall in the exchange rate to improve the trade position, the combined elasticities of demand for exports and imports must be greater than 1. If combined elasticities are less than one, a fall in the exchange rate will worsen the defect”.

We could also look at the ‘J curve’ effect which states that in the short run, quantity demanded of exports and imports may be inelastic due to short term contracts and the ‘wait and see policy’ where by firms/consumers hold back spending to see what is likely to happen next in the economy. Thus if we consider the flipside-for a depreciation to be successful, firms in the domestic economy must have spare capacity to meet the surge in demand for exports. Also, the effect of a depreciation may be short lived as competitiveness may be eroded by cost push inflation. Hence, trade balances may actually worsen in the short term following a depreciation of the exchange rate. Moreover, the UK has a marginal propensity to import; that is, we as a nation are likely to spend more on imports as our disposable income rises.

Last month’s inflation was also thought to have risen since the cost of fuel and raw materials for industry was up by 8.4% a year ago, although clothes had come down in price. Consequently prices in the UK are rising at a faster rate than anywhere in the G7 group of leading global economies, according to the Organisation for Economic Co-operation and Development (OECD). The UK is only behind Turkey, Mexico and the eastern European states of Latvia and Estonia in the club of 35 developed nations. The rise in prices was also above the averages for the euro area, the wider European Union and the G20 nations.

The graph below from the BBC illustrates how the base rate of interest has changed since the millennium.

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What does the rate rise mean for you and has monetary policy been effective?

For those of you who don’t know, Monetary Policy is part of the economic policy that attempts to achieve the Government’s macroeconomic objectives such as low and stable inflation using monetary instruments, such as controls over bank lending and the rate of interest. Quantitative easing an unconventional measure essentially involves new money being created electronically to buy financial assets such as government bonds, on the country’s financial markets, which influences a commercial banks’ ability to lend money. This can stimulate consumer spending (approx. 65% of Aggregate Demand), as well as investment spending, thus boosting AD and economic growth. The effectiveness of monetary policy however is questionable and certain policies have been carried out with varying degrees of success. For example changes to the base rate feed through the ‘Monetary Policy Transmission Mechanism’ meaning that there is an 18-24 month time lag before we see the full effects of a change to interest rates. Similarly with QE, many economists argue that this £375bn asset purchasing scheme did not drastically raise demand after the great recession since banks were reluctant to lend. Some economists argue that it would have been better to give people the money to spend rather than to the banks and that the money should have gone into the real economy e.g. via tax cuts. That being said, we cannot test the counter-factual; what would have happened without QE and we do not know where the economy may have been without these emergency measures. In  addition monetary policy may have been unsuccessful in 2010 since it was not in line with other macro-economic policies such as fiscal policy. During this time the coalition party, enforced austerity (higher taxes and less government spending) thus contracting the economy and the aims of expansionary monetary policy. Therefore we can say that although the economic theory may suggest what is likely to happen, the actual success of certain policies depends on a range of factors that economists cannot predict.

In Economics, there is never a “one size fits all” policy and inevitably there will be winners and losers in these situations. The winners will include 45 million savers, who are likely to see higher returns from savings accounts. A number of providers have already announced they will be increasing savings rates in line with the rise. Mark Carney, the Bank’s governor, said he expected other providers to follow suit. Those planning on buying an annuity to finance their retirement will also benefit. But for at least four million households with variable rate mortgages, monthly payments are set to rise immediately. Across the UK, 9.2 million households have a mortgage. Of these, around half are on a standard variable rate or a tracker rate, amounting to between four and five million households. These are the people who will be most affected, as their monthly payments will increase.

The average easy-access savings account is currently paying 0.14% in annual interest, according to the Bank of England. So someone with £10,000 worth of savings is earning £14 a year. If the rate rise is fully passed on, they would earn an extra £25 a year, making £39 in total. A saver with £10,000 in a typical cash Individual Savings Account (ISA) would see their income rise from £30 a year to £55.

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Households, in total, are expected to face about £1.8bn in additional interest payments on variable mortgages in the first year alone. It is also estimated that households will pay as much as £465m in additional costs on credit cards, overdrafts, personal loans and car repayments.

Many argue that this is the last thing that hard pressured families need. With UK living standards falling, the economy needs boosting not reining in. Furthermore, many poorer households are using credit cards to finance their day to day spending suggesting that they are already struggling. With real wage growth still being negative, and rising household debt which ultra low rates have encouraged over the years, such a rise is likely to be regressive i.e the poorest and most vulnerable in society will be hardest hit. The prevalence of low interest rates has promoted a culture whereby such low levels of interest are the norm. While consumers may have got used to these levels, it is estimated that 8 million Brits have not seen a rise in their adult life.

The rise in interest rates is also likely to improve the exchange rate and help the weak pound to recover amidst the Brexit related uncertainty. This is because raising interest rates makes Sterling more attractive to foreign investors leading to a flow of money into the UK referred to as ‘hot money’.

Carney’s main justification was that adding higher interest rates in small incremental steps, were part of ensuring that the real income squeeze ends and does not come back i.e. reducing inflation back to ‘sustainable’ levels and helping the economy to rebound from what some call “the permanent damage to the economy” after the financial crisis, deep recession and the credit crunch.

Others argue that interest rates need to rise because if the UK does face any more external shocks, as interest rates are at the zero lower bound, there is little room left for any adjustment to control the economy.

The graph below shows how interest rates have changed over the last few decades in the UK:

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