Curbing immigration into Britain

Under pressure from Ukip, the prime minister is tacking to the right on immigration and perhaps towards the exit from the EU. Simon Wilson reports.

Can immigration easily be cut?

Yes, but it would involve radical changes in the UK's foreign policy, and in particular it would involve leaving the EU. Up until the mid-1990s the principle of free movement of people was a relatively uncontroversial cornerstone of the EU, largely because it was a much smaller club of rich countries with broadly similar levels of wealth.

Following the collapse of communism in eastern Europe and the EU's expansion eastwards in the 1990s and 2000s, it has become a very different institution, with significant differences in wealth between the richest and the poorest members.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

For example (according to figures from MigrationWatch), in 2013 the UK had a GDP per capita of €29,600, while Bulgaria's was only €5,500. That kind of disparity obviously creates major incentives for intra-EU migration, which did not exist in the 1950s.

Is the free movement principle sacrosanct?

It certainly looks that way a situation that has got the Conservative party into an almighty tangle. On coming to power, David Cameron pledged that he would cut net inward migration to the "tens of thousands", but in fact it has increased.

The latest figures show that net migration in the year to March 2014 was 243,000, a surge of 40% on the previous12 months. Of this figure, 131,000 was net migration from the EU.

Cameron knows that under current EU rules there is nothing he can do to prevent greater flows of migration from the EU and until recently has attempted to skirt over this issue by promising to clamp down on EU migrants' access to the UK benefit system, rather than on immigration itself.

Now, however, in the face of the continuing rise of Ukip, Cameron has suggested that he will put an "emergency brake" on EU migrants perhaps by introducing quotas.

Would the EU agree to this?

In a word, no. The outgoing EU Commission president, Jos Manuel Barroso, was in London this week to remind the UK that "arbitrary caps [on the number of EU migrants] will never be accepted". It is possible, of course, argues Gideon Rachman in the FT, that Cameron is "simply ahead of his time.

Resentment against immigration and EU rules on free movement is also rising in other key EU states, including France, Italy, and the Netherlands." In other words, there's a possibility that in the medium term the EU will reform itself in a way that limits free movement of labour. But not in the near future.

What does that imply?

Pretty much the whole of the UK commentariat from Polly Toynbee in The Guardian to an FT editorial was in agreement this week that by suddenly raising expectations of a curb on EU migration, Cameron has dragged Britain closer to the exit. For Toynbee, Cameron has "crossed the Rubicon" in recent weeks and "joined the Ukip wing of his party, who won't let him renege".

And for The Times, Cameron is panicking in the face of Ukip's by-election success: instead of giving in to populism, he should be explaining why immigration is good for the UK economy.

So why is immigration a good thing?

Most fundamentally, because incomers fill gaps in the labour market that would otherwise not be filled, boosting the economy as a whole. Also, aggregate migrants pay more in tax to the national coffers than they receive in benefits largely because they tend to be younger and more skilled than the population at large.

Research by two academics at University College London found migrants to the UK since 1999 have paid £25bn more in tax than they've taken in benefits (Europeans contribute 34% more than they take; non-Europeans are net contributors by just 2%).

Moreover, the same research found that new arrivals since 1999 are better educated and (despite a frequent media focus on "benefit tourism") 45% less likely than natives to receive benefits or tax credits.

No doubt for some migrants the ability to claim in-work benefits, such as tax credits, might act as a supplementary factor in deciding to come to the UK. But (according to research by Cambridge economics professor Robert Rowthorn) the main driver of migration is the difference in wages and job opportunities.

How does migrationaffect wages?

One of the common political objections to large-scale immigration is that it tends to depress wages of the low-skilled, while medium- and high-paid workers gain by it.

In fact, the academic consensus is that while immigration does exert downward pressure on unskilled wages, the effectsare small compared toother factors (such as technological change, efforts to enforce the minimum wage, and so on).

Lessons from Canada and Australia

If you are serious about analysing the economic benefits of immigration, it pays to think about which migrants you want to attract. That's because countries with immigration systems biased towards attracting highly educated newcomers, such as Australia and Canada, saw large increases in wages for less-educated native workers, according to a paper inThe Economic Journal by economist Caglar Ozden.

In other words, immigrants tend to drive up wages overall, and high-skilled migrants drive up wages the most even for low-skilled workers.

This implies that while the government might be right to clamp down on bogus educational institutions offering student visas, it is wrong to impose inflexible caps on workers from outside the EU who genuinely are highly skilled.