Economics - Paying their way

The political temperature in Britain was raised several degrees over the
summer by the bomb outrages in London. In what subsequently passed for debate,
several separate issues were lumped together to explain what had happened and to
suggest measures to avoid any repetition. Too few commentators wanted to make a
distinction between illegal immigrants, asylum seekers, economic migrants and
any other category of foreigner which might potentially be a threat to society.

Such a superficial approach ignores the valuable economic contribution made
by a significant number of employees in the UK, those who are non-British
nationals. Their residential status is irrelevant. The important point is that
they have been allocated a National Insurance number, which makes them an
integral and official part of a very buoyant UK labour market.

Latest government figures show that 272,000 overseas nationals entering the
UK in 2002-03 were allocated a National Insurance number. Around 25% came from
other EU countries, with a further third coming from India, South Africa,
Australia, China, Philippines and Pakistan.

Since then, the enlargement of the EU in May 2004 has changed the
geographical balance. The UK did not impose the temporary restrictions allowed
under the accession treaties on the free movement of workers from these
countries. In the first 12 months, more than 230,000 eastern European migrants
applied to work in Britain.

Denied easy access to benefits, the attraction for migrants was the prospect
of a job. From the UK’s perspective, a growing economy and record levels of
employment had led to a tightening of the jobs market, with the potential for
labour shortages and wage demands to build up. The incoming workers clearly
helped to relieve these pressures.

The Chartered Institute of Personnel and Development reported that, during
2005, 85% of employers had experienced recruitment difficulties, with 38%
turning to migrants to fill vacancies. Over half of those using migrant labour
said they had increased the proportion of vacancies filled by overseas workers
compared with the previous year. Even more revealing was that 75% of employers
recruited migrant workers on permanent contracts; 19% were recruited for
one-year contracts; and 16% taken on for short-term contracts.

The hospitality and catering trade is no longer the major employer of migrant
workers. The industrial base is now widening, with ‘administration, business and
management’ the sector employing the most eastern European EU accession nation
workers.

Organised labour has a more ambivalent attitude. While the deaths last year
of 21 Chinese cockle-pickers in Morecambe Bay raised issues of protection for
migrant workers, there is also concern that immigration will have the effect of
depressing wage levels. In the construction industry, some estimates suggest
that pay rates for migrant workers are 20% to 30% lower than rates for
indigenous workers, implying a downward pressure on pay.

This may help to explain why such a robust labour market has not generated
more demands for higher pay. The Governor of the Bank of England, Mervyn King,
said in June that “the inflow of migrant labour has probably led to a diminution
of inflationary pressures in the labour market relative to previous experience”.

The Government, aware of the arguments about a low-wage economy and
“deskilling” the workforce, has launched initiatives to resolve these
conflicting pressures, resulting in a complex regime of about 50 ways in which
people can come to Britain to work or study. A consultation paper issued in July
proposed a radical overhaul by introducing a points-based system that would rank
migrants into five tiers, with priority given to the most highly-skilled and to
those working in areas experiencing skills shortages. Crucially, the government
states that the changes are not intended either to increase or decrease the
number of skilled workers coming to the UK, but to ensure that the system is
effectively “targeted”.

In the longer term, demographic trends will be of crucial importance. An
ageing population in the UK, and one in which those of working age account for a
declining share of the total, means that the UK will need migrant labour. But
just as the need for immigrants is rising, so does the demand from some quarters
to keep them out.

The message is simple. If the people are not allowed to come to the work, the
work will go to them, with the obvious consequences for growth and living
standards.

Dennis Turner is chief economist at HSBC