How small is small? The impact of immigration on UK wages

The publication of a new paper on the impact of immigration to the UK on wages was pounced on by some sections of the media. The Telegraph wrote:

Mass migration is driving down the wages being offered to British jobseekers, a major report by the Bank of England has found.

The headline finding of the paper, entitled, “The impact of immigration on occupational wages: evidence from Britain”, by Stephen Nickell and Jumana Saleheen, was the following:

In the latter cases, the coefficients indicate that a 10 percentage point rise in the proportion of immigrants working in semi/unskilled services –  that is, in care homes, bars, shops, restaurants, cleaning, for example – leads to a 1.88 percent reduction in pay.

Lord Green of Deddington, chairman of Migration Watch UK, said:

For many years the immigration lobby have claimed that there is no evidence that immigration has any significant effect on the wages of British workers. ‘This new research by the Bank of England blows their claims out of the water. It has found a significant negative impact on those in the lower-skilled services sector in which six million UK-born are working. This amounts to nearly a quarter of all British workers.

You might reasonably conclude from this that this result was new; that is, that no previous economic analysis had suggested any negative impact from immigration on wages; and/or, that the estimated impact was larger than that found by other studies, or that other economists thought plausible. In fact, both of these claims would be false.

Indeed, not only is this not the first time research on this topic has been published in the UK – it’s not the first time this paper has been published!  Indeed, as the paper notes, it is “an extension of a paper previously published in 2008 under the same title.”

And what did the authors find in 2008:

In the latter case, the coefficient indicates that a 10 percentage point rise in the proportion of immigrants working in semi/unskilled services—that is, in care homes, bars, shops, restaurants, cleaning, for example—lead to a 5.2 percent reduction in pay.

In other words, not only was the result not new, but the main actual “news” in this latest version of the paper is that the estimated impact is considerably smaller than their original estimate. This is, according to the authors, the result of improved methodology and several more years of data.  In other words, better, more accurate estimates using more recent data have reduced their estimate of the impact of immigration on wages in the UK.  [Of course, there are other interesting findings, for example that EU and non-EU workers have more or less identical impacts on occupational wages].

Well, perhaps this simply indicates that the “immigration lobby” described by Lord Green had successfully suppressed the results of the original paper. In fact, if by “immigration lobby”, Lord Green means (as seems likely) those of us who actually conduct, read and understand the research on this topic, the opposite is the case.  In fact the original paper is one of those frequently cited by those of us who argue that the overall impact of immigration on jobs and wages in the UK is small.  As this evidence review puts it:

Empirical research on the labour market effects of immigration to the UK finds little overall adverse effects of immigration on wages and employment for the UK-born…The less skilled are closer substitutes for immigrants than the more highly skilled. So any pressures from increased competition for jobs is more likely to be found among less skilled workers. But these effects are small (Manacorda et al, 2011; Dustmann et al, 2005, 2013; Nickell and Saleheen, 2008).

So in my view the news in this latest paper is not “new evidence shows for the first time migration depresses wages”. Rather, it is “economists revise down estimates for wage impacts of migration on low skilled workers – from small to very small”.

And how small is small?  Well, the first thing to note is that a 10 percentage point rise in the proportion of migrants working in a sector – the amount needed to generate the “nearly 2 percent” wage impact is very large.  Indeed, it is larger than the entire rise observed since the 2004-06 period in the semi/unskilled services sector, which is about 7 percentage points.

Moreover the estimated impact is partly simply a compositional one – reflecting the fact that migrants earn less, as well as the impact on native wages. Allowing for this, we can calculate that the new paper implies that the impact of migration on the wages of the UK-born in this sector since 2004 has been about 1 percent, over a period of 8 years. With average wages in this sector of about £8 an hour, that amounts to a reduction in annual pay rises of about a penny an hour.

Now 1 percent, even over 8 years, is not nothing, especially to relatively low paid workers. But it stretches credulity to suggest that other things – the level of the minimum wage, the decline in trade union power, technological and industrial change – have not had far bigger impacts on pay in these sectors.

In other words, the research confirms what we already thought.  Immigration may have some, small, negative impact on wages for some low-paid workers.  But  the idea that immigration is the main or even a moderately important driver of low pay is simply not supported by the available evidence. Politicians who claim the contrary are either so obsessed with immigration that they are blind to more important issues – or they are merely trying to divert attention from their failure to propose policy measures that would actually make a meaningful difference to the low paid.