Sunday, 20 June 2010

Yes, Prime Minister

The highlight of the election campaign for me was the ‘bigoted woman’ remark made by Gordon Brown just a few days before the election. My initial reaction was that Ms Duffy, the woman in question, deserved it because she complained about Eastern European immigrants coming to the UK – and hence she showed herself indeed to be a bigot. But on second thought, things are less clear cut and this incident raises several intriguing questions.

The first question is: did this woman deserve to be called bigoted? The answer is no. A bigot is someone who dislikes or despises foreigners or people of a different race, religion, etc. Ms Duffy’s complaint about Eastern European immigrants, instead, reflects plain and simple rational self-interested utility-maximizing behavior. The immigration from the new member countries of the EU was massive by any account – in the range of 1 million since 2004. The vast majority of Eastern European immigrants went for low-skilled low-paid jobs. By doing so, they directly threaten the employment prospects and wages of low skilled low paid UK workers (for more on that, see below). Ms Duffy is retired and therefore she would be little affected herself but many of the people she presumably cares about – her neighbours, friends and family – may well be affected.

Next, did the prime minister address her concerns well? Following her complaint (‘all these Eastern Europeans coming in, where are they flocking from?’) Brown replied: ‘A million people come in from Europe, but a million British people have gone into Europe.’ In other words, he says that British workers benefit from the free mobility of labor within the EU too. That is true enough, except it is not necessarily the same kind of workers. You don’t hear many stories about British plumbers or construction workers moving to France, Spain or indeed Poland. So Brown was really telling Ms Duffy that the hardship experienced by her children or neighbours is compensated by the gains enjoyed by British consultants, bankers and managers moving overseas. As the prime minister, he should indeed care about the wellbeing of all citizens, regardless of their social class or bank balance. But he cannot expect Ms Duffy to feel the same.

Now, is immigration good or bad for the UK labor market? The answer is that immigration can be good or bad, depending on who you ask. Recent work of Christian Dustmann of UCL (with various co-authors) sheds light on this question specifically in the UK context (in particular, his articles in the Economic Journal in 2005, with Fabbri and Preston, and in the Oxford Review of Economic Policy in 2008, with Glitz and Frattini). Let’s consider first what the theory says. Most people intuitively think of a standard demand-supply framework. If the number of workers goes up because of immigration, the supply curve shifts out and as a result the price of labor, or wage, falls. Or, if the wage is fixed, for instance because of trade-union pressure or minimum-wage rules, then the result is involuntary unemployment. However, this framework assumes autarky – no trade with the rest of the world and no mobility of the other factor of production – capital. Once we consider an open economy, things change. If the structure of immigration is the same as that of the native population, then immigration has no long-term effect. Increased supply of labor initially exerts downward pressure on wages, this increases firms’ profits and more firms enter the market. In other words, the economy adjusts to immigration by importing capital.

Most of the Eastern European immigrants, however, are low skilled. Hence, they are substitutes for low-skilled workers like Ms Duffy. In contrast, they are likely to be complementary with high-skilled workers. In this case, the labor-market impact of immigration becomes varied: wages of low-skilled workers go down while those of their high-skilled counterparts go up. Overall, the average effect on wages is close to zero and is in fact even likely to be positive, leading to the so-called immigration surplus.

What about empirical evidence? Dustmann and his co-authors look at the wage impact of immigration along the entire distribution of UK natives’ wages. They find that if immigration increases by one percent, the average wage goes up by 0.35 percent. This increase, however, is not universally shared by all. The effect is negative for those with the lowest wages, positive for those with intermediate wages (median wages increases by 0.6 percent) but becomes insignificant again for those with the highest wages. This pattern nicely mirrors the relative distribution of immigrants to the UK: most are low-skilled but there are also quite a few very high-skilled ones. Hence, immigration is good for this country, on average, but has distributionary implications: it produces both winners and losers.

And finally, is Ms Duffy an exception in her dislike of immigrants? As I explained above, her remarks make economic sense: low skilled workers should be opposed to immigration while high skilled workers should be in favor. Or, to be more precise, this pattern should prevail in the UK and other developed industrialized countries in which skilled labor is relatively abundant. Such countries should import the relatively scarce factor of production – unskilled labor – and export the abundant factors – capital and skilled labor (the opposite should hold in less developed countries where low-skilled labor is abundant and low-skilled workers should be therefore in favor of unrestricted migration). This is again the reason why Brown’s argument about Brits moving to other European countries doesn’t hold water with Ms Duffy. It turns out that Ms Duffy’s view of immigration indeed holds more generally. This is confirmed by recent work by Kevin O’Rourke and Richard Sinnott (European Journal of Political Economy 2006) and Anna Maria Mayda (Review of Economics and Statistics 2006). They look at preferences over immigration expressed by respondents in large multi-country opinion surveys and find, as the theory suggests, that high-skilled individuals are more likely to be in favor of immigration in rich countries than in poor countries. Hence, Ms Duffy is not a bigot, she’s part of the mainstream.

Some food for thought instead of a conclusion: if immigration hurts the low-skilled and the less well-off and benefits the high-skilled and those relatively well-off, and given that Conservatives traditionally draw their support from among the well-off while Labour seeks to represent the working class, why are the Conservatives and not Labour opposed to immigration?

[Originally published in Economics and Finance Newsletter, Brunel University, May 2010]

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