Are puzzling labour market trends due to EU immigration?

Posted by Tim Congdon in News Archive | 0 comments

Official statistics say that UK output has still not recovered its previous peak in the first quarter of 2008, but that employment has risen to an all-time high. By implication, recent productivity performance has been appalling. Indeed, it seems  to  have  been  worse  in  the  five  years  to  end-2012  than  in  any comparable peacetime period since the start of the Industrial Revolution.

In a presentation I gave earlier this year at Investec I argued that one reason – but only one – for the weakness of productivity was that the composition of the labour force had changed during the Great Recession. (See the 21sMay weekly e-mail on ‘UK productivity check’.) The opening of the UK’s borders to East European workers in 2004, as eight former Soviet bloc countries joined the EU, was followed by heavy immigration from these relatively poor countries.  The  immigration  was  mostly  from  people  of  working  age  and seeking employment.  I suggested that,  because  on  average the  immigrant workers had lower pay than their UK-born counterparts, they were on average less productive. It followed that – if their share of employment increased – productivity would fall. This suggestion has often been met very critically, not least because it seemed to imply that the East European migrant workers were in  some  sense  unsatisfactory.  I  meant  nothing  of  the  sort  and  have  no personal animus towards East Europeans whatsoever. However, it must be possible to make statements about the pay and productivity levels of groups of workers, while a 2010 ONS paper confirmed that East European employment has been particularly ‘at the bottom end’ of the labour market in terms of pay and productivity. (See footnote 6 below.)

It is important to realize that UK-born employment remains lower – by about half a million – than at the start of the Great Recession, while foreign-born employment has risen strongly. The full interpretation of this point – which is a matter of fact – is for others to settle, but the discrepancy may be part of the explanation for puzzling features of the UK labour market at present.

Unprecedented patterns in the UK labour market

One on the strange features of the UK economy in recent quarters is that employment growth has been strong and apparently consistent with above-trend growth, while the actual data for demand and output have been disappointing. Gross domestic product is reported as having bounced back by 1% in the third quarter, but that would restore the level of GDP only to its figure in the third quarter of 2008. The contrast between relatively buoyant employment (which may rise by about a half a million in 2012) and sluggish output argues that productivity (i.e., output per head) is performing badly.EU Immigration - UK Labour Market

Closer inspection of the employment information argues that a change in labour force composition may be part of the story. In Q3 2008 total employment was 29,492 thousand, split between 25,762 thousand UK-born and 3,730 non-UK born. (Of course people born in the UK are still the dominant group in the UK labour market, as the chart above confirms.) Since then UK-born employment has declined. It reached its low for the current cycle in Q2 2009 at 25,063 thousand and has since recovered some ground, with the Q2 2012 statistic being 25,213 thousand. Meanwhile the part-time and self-employed proportions of total employment have increased, so that for the UK-born working in their own country the Great Recession has indeed been a difficult time. (Significant numbers have gone to work abroad, but that is not the immediate concern here.) On the other hand, foreign-born employment has kept on growing during the Great Recession. In its grimmest phase, in early 2009, foreign-born employment did fall, but from the autumn of 2009 it has increased by almost 15%.
EU Immigration - Change in employment, in '000s, during the Great Recession

The growth of non-UK born employment has been dominated by immigrant workers from Eastern Europe. Since Q3 2009 non-UK-born employment has risen by just under half a million. Within that figure employment of people born in the so-called ‘EU8’ (or ‘EUA8’, for ‘European Union accession eight’, i.e., the former Soviet bloc countries that joined the EU in May 2004) jumped by almost 200,000. The resilience of total employment in the Great Recession has surprised and perplexed many observers. However, the employment pattern of long-term members of the UK workforce (i.e., of people of UK birth, citizenship and residence) has been less anomalous than that of the labour market as a whole. The salient feature differentiating the labour market in the Great Recession from its situation in earlier downturns has been the strong growth in the employment of foreign-born and foreign-national workers, particularly of such workers from Eastern Europe. With people in Bulgaria and Romania becoming free to live and work in the UK from 2014, this feature is likely to continue for some years yet. (The note below is taken from chapter four of my recent study of the costs of the EU for the UK Independence Party.)

Recent labour market trends: the effect of EU immigration

When  the  UK  joined  the  Common  Market  40  years  ago  no  one  envisaged  large-scale  inward migration from the rest of the EEC/EU and certainly not from Eastern Europe, which was then ‘behind the Iron Curtain’. Suggestions have been made in the media that that in the last few years inward migration particularly from Eastern Europe, has restricted the availability of jobs to the UK- born. This development has therefore hurt the citizens of our country and been costly to us. Precise calculations of the costs are difficult and will not be attempted here.i But it is clear that a denial of job opportunities is bad for the people affected. A harm has been inflicted on ‘the British people’, in the sense of people who are UK-born as well as enjoying British residence and citizenship.

Blair opens UK labour market

The downfall of communism in the late 1980s and early 1990s was one of the most welcome developments in modern European history. It was welcome not least because it confirmed the superiority of the market economies of Western Europe, with their respect for the rule of law and private property, over the planned and largely state-owned economies of the former Soviet bloc. Once they were freed from Moscow’s clutches most of the countries in the former Soviet bloc wanted to join the EU. Various entry criteria were specified in the 1990s and these took a number of years to meet, but eight central and Eastern European countries (Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia) were able to join the EU on 1st  May 2004. This was the largest single enlargement in terms of people, and number of countries, in the history of the EEC/EU. (Note that Cyprus and Malta joined at the same time, but they were of course not from the former Soviet bloc and are ignored in the rest of the chapter.)EU Immigration - Income disparity between the UK and Eastern Europe

Income levels in the ‘EU8’ (as they became known) were appreciably below those in Western Europe. (See the chart above. In 2004 income per head, at over $36,000 in terms of current price $s, was more than five times higher than in Poland or Lithuania.) The freedom of movement of people is one of the ‘four freedoms’ of the EU’s single market. But, if the EU8 had been granted such freedom on their accession to the EU, the income disparities would almost certainly have led to large movements of workers to the richer EU member states. Most of the EU’s older member states therefore introduced a seven-year transition period, in which they limited inward migration from the EU8. The UK, led by prime minister Tony Blair, decided not to follow this course. Instead people would be free to move from the EU8 to the UK as soon as the EU8 belonged to the EU. From 1st  May 2004, potentially millions of working-age people were free to move from the EU8 to the UK (and indeed Ireland, since people can move freely between the UK and the Republic of Ireland).

The British government expected only a modest influx of new workers. In practice immigration from the EU8 was on an extensive scale, with major effects on the UK labour market. Official data show that in spring 2004 64,000 people born in the EU8 were employed in the UK, about double the level of five years earlier, but still only 0.2% of total UK employment. Between March 2004 and the end of 2007, a period of relatively buoyant economic conditions and strong demand for labour, the number rose from 64,000  to  487,000.  Within  less  than  four  years  the  importance  of EU8  workers  had increased  so  sharply  that  they  accounted  for  1.7%  of  total  UK  employment.  The  growth  of employment in this period for UK-born workers was only a little more than 100,000, a mere quarter of the surge of over 400,000 in employment of EU8-born workers.EU Immigration - Employment trends in the Great Recession

From late 2007 the UK economy’s performance deteriorated markedly. The situation was not too bad in early 2008, but by late 2008 grave weaknesses in the international banking system became evident, and a major downturn in demand and employment began. The worst phase of the ensuing Great Recession was in the opening months of 2009, when tens of thousands of jobs were disappearing every week. The labour market in the UK was then dominated by UK-born workers, as it still is today, although to a lesser extent. At the end of 2007 total employment was just under 29.5 million, split between UK-born of 25.9 million (87.7% of the total) and foreign-born of 3.6 million (12.3%). On the whole the foreign-born workers had generally been in their jobs for a shorter period than the UK-born, while in many cases they occupied temporary positions or had only a half-hearted commitment to the UK.ii A reasonable surmise might have been that a fall in the demand for labour would cause higher job losses for the foreign-born than the UK-born. That surmise would, in the event, turn out to be completely  wrong.  In  the  Great  Recession  UK-born  employment  has  dropped  heavily,  whereas foreign-born  employment  has  risen  and  employment  of  people  from  the  EU8  has  climbed substantially. The figures are set out in the above chart.EU Immigration - Chart shows % cumulative change, quarterly, from end-2007 levels in UK- and foreign-born employment

UK-born people did lose jobs

The fall in UK-born employment was concentrated in the year to mid-2009 and amounted to about 800,000 people, about 3% of the number of UK-born people in jobs at the end of 2007. After mid-2009 the number of UK-born people at work has fluctuated from time to time, but the underlying trend has apparently been for stability. In reality labour market conditions have remained tough in the last three years. Many British people have left full-time employment, while part-time employment and self-employment have expanded. By contrast, foreign-born people have made continuing inroads into the UK job market. The chart on p. 5 above relates to changes in the level of employment, in terms of thousands. It shows that employment of both people born in the EU8 and people born in the rest of the world (i.e., in neither the UK nor the EU8) has increased by about 200,000 in the Great Recession (i.e., by about 400,000 for the two foreign-born groups altogether). The chart on p.6 above gives the percentage change in employment relative to the end-2007 figure. The result is an altogether more dramatic picture, because the number of Eastern European people in Britain in late 2007 was still quite low and the employment surge was from a small base. Employment of EU8-born people soared by 45% in the four years to end-2011. In short, in the Great Recession the number of jobs occupied by the UK-born slumped by 800,000 in a year and stayed down, whereas the number of jobs occupied by the EU8-born increased by 200,000 and increased by about 45%.

Does this constitute prima facie evidence that people of British birth have lost jobs because of the influx of  working-age  men  and women  from the EU8,  because – in other words  – of  our  EU membership? The UK labour market has undoubtedly become more difficult and hostile for UK-born people in the last few years. There must be a strong presumption that jobs are harder to find not just because of the Great Recession, but also because a large number of immigrants, many of them from Eastern Europe, are competing for the reduced number of positions available. Admittedly, a strong presumption is not definite proof. But one further set of numbers may open the minds of even those who deny obstinately that EU immigration has affected job availability. These numbers, prepared by the Office for National Statistics, ought to be enough to persuade most people that over the last decade immigration from the EU has reduced job prospects for people who are not just British by residence, but British by citizenship and birth.EU Immigration - Employment ratios in the Great Recession of people of different nationality, by birth

The chart on p. 7 shows the proportion of the resident working-age population that is actually in UK employment for three groups, the UK-born, those born in the EU14 (i.e., existing members of the EU before the 2004 enlargement) and those born in EU8. In other words, it shows what we might term ‘employment ratios’ for these groups. Until the 2004 enlargement, UK-resident people born in the EU8 had an employment ratio beneath that of both the UK-born and those born in long-standing EU member states. Their propensity to seek employment then changed radically. Notice what happened in the four years from the first quarter 2004. The employment ratio of the EU8-born group soared from 61.9% to 82.6%. So in those years UK-resident people born in the EU8 had an employment ratio well above that of both the UK-born and those born in the EU14. The greater part of this increase occurred in a spectacular leap in late 2004, just as the UK labour market was opened up workers from Eastern Europe by the EU8’s accession to the EU. The obvious interpretation is that these workers were keen to take advantage of the much higher wages offered in the UK and sought work in our country. Further, when the Great Recession hit and the number of job opportunities declined, the immigrants did take jobs from the British-born. In this sense EU membership did destroy UK jobs.

Some academic research is also consistent with the claim that immigration hurt the job prospects of UK-born people, particularly the young. Youth unemployment has been appreciably higher over the last ten years than in the 1980s. As noted by Petrongolo and van Reenen in a study for the London School of Economics’ Centre for Economic Performance, since ‘the rise in youth unemployment dates back to 2004, the year of the EU’s enlargement to take in eight central and eastern European countries…, it would be natural to think that the increase in youth unemployment is related to stronger competition from immigrant labour’. When a regression was estimated between youth unemployment and the immigration across UK regions over time, evidence showed that ‘a one percentage point increase in the proportion of foreign-born in the working-age population is associated with an increase in youth unemployment of 0.43 percentage points’.iii

Official endorsement, sort of

The conclusion just drawn is highly contentious, not least because it challenges the ‘cosmopolitan’ or ‘internationalist’ outlook of many key opinion-formers.iv However, the notion that immigration could reduce UK-born employment did receive official endorsement in January 2012 in a report prepared by Professor David Metcalf, the chairman of the Migration Advisory Committee, which is sponsored by the UK Border Agency. The MAC report claimed that employment of 160,000 more British people would have been possible in the 2005 – 10 period if no migrants from outside the EU had come to the UK. Asked directly if there would have been this number of extra jobs if immigration from outside the EU had been stopped, Metcalf answered, ‘yes, that would be a reasonable way of putting it’.v

The puzzle here is the restriction of the MAC analysis to immigration from outside the EU. If immigration  from  outside  the  EU  can  reduce  employment  for  British  citizens,  why  cannot immigration from within the EU have the same effect? Common sense would suggest that the employment-reducing effect of immigration ought to apply regardless of the source country. The argument might be made that immigration from outside the EU was generally of lower-wage workers than, say, EU8 immigration. However, that in fact was not true. Non-EU immigration was partly from such countries as the USA, Canada and Australia with much higher living standards than the EU8. Indeed, an analysis prepared inside the government machine showed that workers from the EU8 countries tended to be in low-wage employment to a far greater extent than the UK-born. To quote, ‘Examination of the occupations of workers born in EU14 countries show that they are predominantly employed in “Professional occupations” (23.3%), “Associate professional and technical” (17.6%) and “Management and senior officials” (14.3%). These categories account for 55.3% of EU14-born workers. The same occupations account for 44.2% of UK-born workers and 46.6% of other non-UK- born workers, but only 14.5% of EU8-born workers. EU 8-born workers are predominately employed in “Elementary occupations” (37.5%).’vi

The MAC analysis said that the 160,000 jobs lost due to immigration reflected ‘700,000’ extra working-age migrants in the 2005 – 10 period. In fact, official data for the period from the final quarter of 2004 to the first quarter of 2011 show an increase in non-EU immigrant workers of 652,000 and of EU immigrant workers of 588,000. If the ‘700,000’ non-EU immigrant workers are supposed to have destroyed 160,000 jobs for the UK-born, then the 588,000 EU immigrant workers destroyed about 135,000 jobs for the UK-born. No doubt the government could find spokesmen to deny that its research effort had implied any adverse effect on UK employment attributable to the post-2004 influx from Eastern Europe. But the discussion in this chapter has been carefully argued and meticulously sourced.

Inspection of the official data identified two points. First, since 2004 immigration from the EU8 has been on an unprecedented and remarkable scale. Secondly, these immigrants have, to an exceptional extent, taken up employment in the UK. (As we have just seen, their ‘employment ratio’ soared in

2004 and 2005, and since then has been well above that for the UK-born or the other foreign-born groups.) The post-2004 influx has been the result of Blair’s decision in 2003 not to impose the seven- year transition period favoured by other long-standing EU members, but the influx can be seen as a consequence of EU membership. While the UK remains a member of the EU, it cannot restrict immigration from other EU member states because the free movement of people is one of the single market’s ‘four freedoms’. The UK’s membership of the EU has destroyed British jobs and, while we remain inside, it will continue to do so.vii  This conclusion is reinforced by the prospect that in 2014 people in Bulgaria and Romania will be free to migrate to the UK and to take jobs here, in just the same way that people from the EU8 have been able to do since 2004.


i The difficulty arises partly from the ambiguity of the concept of ‘a nation’. Is a nation to be defined as those people resid ent in it at a particular time or over a particular period, or the people born there (again with some time interval in mind ), or the people who are ‘citizens’ (where the notion of citizenship is also to some extent a matter of definition)? Later in the chapter a statement will be made to the effect that ‘135,000 jobs were lost because of immigration from the EU’ in the 2005 – 10 period. One calculation of the loss ‘to the UK’ might then be the output that would have expected from 135,000 people, if they had been in work and had had average UK productivity, which comes out at about £7 billion a year. I am under few illusions about the fragility of the assumptions required to deliver this result.
ii Official data show that in the year to September 2011 696,00 people of Indian birth and 614,000 people of Polish birth were estimated to be resident in the UK, and these were the two most common countries of birth (apart of course from the UK). They also show that in the same period the 654,000 Polish nationals, 341,000 nationals of the Republic of Ireland and 330,000 Indian nationals were estimated to be resident in the UK. Clearly, birth status and nationality did not coincide, and nearly all of the people of Polish birth resident (and usually working) in the UK regarded themselves as Polish, which was not true of those of Indian origin.
iii Barbara Petrongolo and John van Reenen ‘Youth unemployment’, Centrepiece (London: Centre for Economic
Performance), summer 2011 issue, pp. 2 – 5. The quotations are from p. 3. The authors of this piece tried to retract their conclusion by saying that it depended on the inclusion of London in the sample. But why should London be excluded? They refer to another paper in 2005 by David Card in The Economic Journal. But in 2005 no data whatsoever could have been available about the medium-run effects of opening-up of the UK labour market to EU8 immigration.
iv See David Held Cosmopolitanism (London: Polity, 2010) for an example of this sort of thinking. ‘Cosmopolitanism’ is defined on p. x as elaborating ‘a concern with the equal moral status of each and every human being and creates a bedrock of interest in what it is that human beings have in common, independently of their particular familial, ethical, national and religious affiliations’. Whether Britain exists primarily for the benefit of the British – meaning people of British birth, citizenship and residence – then becomes far from clear.
v ‘160,000 jobs “lost to migration”, article in The Daily Express, 10th January 2012.
vi Jessica Coleman ‘Employment of foreign workers, 2007 – 09’, ONS occasional paper (London and Newport: Office for National Statistics, 2010), p. 7.
vii This chapter has not discussed the employment-reducing effect of a range of employment directives and regulations. The omission is to avoid double-counting. Almost certainly EU legislation has cut employment by hundreds of thousands relative to the position that the UK would be in if it controlled employment legislation itself, but that should be seen as ‘a cost of regulation’. As the cost of regulation was covered in the second chapter, to quantify and add that cost here would be double-counting. The total employment-reducing effect of EU membership – both the lost jobs from inward migration and the lost jobs from misguided EU legislation – must run into the hundreds of thousands.

 

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