Migration, Trade and Wages Migration, Trade and Wages

.............................................................................................................................6 RÉSUMÉ .................................................................................................................................7 RÉSUMÉ COURT .....................................................................................................................8 INTRODUCTION......................................................................................................................9 2. MIGRATION INTO THE UNITED KINGDOM ....................................................................11 3. THE GNP FUNCTION APPROACH...................................................................................15 The Basic Model.............................................................................................................15 Empirical Specification ..................................................................................................16 4. DATA ..............................................................................................................................19 5. RESULTS.........................................................................................................................21 Trade, Wages and Exogenous Migration........................................................................21 Migration and Welfare ...................................................................................................26 Trade, Wages and Endogenous Migration......................................................................27 6. CONCLUSIONS ................................................................................................................31 REFERENCES........................................................................................................................32 DATA APPENDIX ..................................................................................................................35 LIST OF WORKING PAPERS RELEASED BY CEPII ...............................................................37 Migration, Trade and Wages 4 MIGRATION, TRADE AND WAGES NON-TECHNICAL SUMMARY Few issues are more politically sensitive than that of immigration. The promise of ‘controlled immigration’ was central to the manifesto promises of the Conservative Party at the 2005 General Election. This they sought to do by introducing a points-based system for work permits that gave ‘priority to people with the skills Britain needs’. In addition the Conservatives sought to stem the flow of ‘bogus’ asylum seekers and stated that they would ‘take back powers from Brussels to ensure national control of asylum policy, withdraw from the 1951 Geneva Convention, and work for modernised international agreements on migration’. Further, there would be an absolute cap to the total number of immigrants allowed to enter the UK, including a fixed quota on the number of asylum seekers. The other political parties were also not immune from the pressure to tighten up administrative procedures relating to immigration. Both the Labour Party and the Liberal Democrats committed themselves to introducing a points based system, which would effectively exclude the lowest skilled from entering the UK to work. The tightening up on asylum procedures would also seek to stop economic migrants entering via this route. So why should these concerns exist? Opponents of immigration will often point to the supposedly adverse impact of migrant flows on labour market outcomes. The argument runs that relaxing immigration controls will allow a flood of (presumably) low skilled ‘economic migrants’ who will displace some UK nationals from jobs and reduce the wages of others. Much the same arguments have been made against trade liberalisation. The fear that trade with low wage economies will have adverse consequences for the wage and employment conditions of low skilled workers is one that is deeply held in the popular consciousness. It is also a hypothesis that has received much attention in the empirical economics literature. To proponents of globalisation, the defence made for relaxed controls on the international movement of labour are similar to those made for reductions in barriers to trade. Free movement of labour and free trade enhance the allocation of resources and should thereby contribute to aggregate welfare. However, like trade, immigration is likely to have distributional consequences, which will lead to both winners and losers. Despite the distinct parallels in the issues involved (and in the techniques adopted), an issue that has been largely ignored by both literatures is that trade and immigration are not independent features of globalisation. Moreover, apart from providing a comprehensive perspective on the debate on globalisation and labour markets, the question as to how and to what extent immigration and trade are related is potentially important in its own right. To the extent that migration reduces trade barriers of different types it may contribute to a superior allocation of resources thereby improving aggregate welfare. CEPII, Working Paper No 2005-06 5 In this paper we simultaneously analyse the impact of trade and migration on the UK economy using data for the period 1975-1996. More in particularly, we evaluate in a single framework that is derived directly from production theory, to what extent migration affects the distribution of income through its impact on the UK labour market and how migration and UK trade are interrelated. We thereby distinguish between skilled and unskilled migrants, skilled and unskilled residents, as well as native and non-native resident workers. We arrive at very similar conclusions whether we assume that migration is entirely determined by administrative controls or that it is solely driven by market forces, i.e. responding to factor rewards. In the former case, a relaxation of controls, which allows an increase in the number of unskilled migrants, reduces the wages of unskilled domestic workers. While the quantitative impact on foreign born unskilled workers may be sizeable it is very small for native unskilled workers. By contrast, relaxing controls on the entry of skilled workers appears to have no discernible impact on their domestic counterparts, with the wages of both skilled native and foreign-born workers remaining unaffected. When the number of migrants is treated as endogenous to the model, the impact of migration is measured by changes in the migrant wage. As before this indicates that unskilled migrants and unskilled domestic workers are substitutes. The results further suggest that an increase in unskilled migrants reduces imports whilst an increase in skilled overseas workers sucks in more imports. This suggests that unskilled migrant workers and imports are substitutes in production, whilst skilled migrant workers and imports are complements. This presumably reflects the low skilled labour that is embodied in imports. When we look at the overall impact of migration on the welfare of domestic factors we find that the contribution of unskilled immigration to national income is greater than that of skilled immigration. This suggests that unskilled migrants play a more complementary role to domestic factors than do skilled migrants. However, in economic terms the impact of migration on aggregate welfare is quite small, which is perhaps not surprising given the relatively small redistributive effects. In short, we conclude from the results that the current political furore over migration cannot be justified by looking for labour market consequences of migration, since these impacts prove to be modest. Migration, Trade and Wages