Bank of England governor Mark Carney spent the best part of Wednesday’s press conference slamming immigration, according to some newspapers this morning.
The Daily Mail’s front page on Thursday screamed “BANK CHIEF: FOREIGN WORKERS DRAG DOWN WAGES“.
The Times similarly went with an article that opened with “immigration is posing a threat to Britain’s recovery by holding down wages, the Bank of England has warned.”
It’s based largely on this section from Carney’s opening remarks on Wednesday:
In recent years labour supply has expanded significantly owing to higher participation rates among older workers, a greater willingness to work longer hours and strong population growth, partly driven by higher net migration. These positive labour supply shocks have contained wage growth in the face of robust employment growth. Wages have grown by around 2% in the past year — less than half the average rate before the global financial crisis — and a key risk is that these subdued growth rates continue.
The way these comments have been covered is pretty misleading.
Let’s start with the bit that is true. Lots of low-paid workers moving to the UK does bring down productivity on aggregate for the UK. If you have 10 British workers that earn £10 per hour each, and they’re joined by 10 Romanian workers that earn £5 per hour each, then the average wage slips to £7.50. That’s just an extremely basic aggregation effect that tells us nothing at all about the outlook for productivity in the UK.
Here you can see that effect. The migrants coming to the UK are disproportionately young and in lower-paid jobs, weighing down that blue line:
What Carney and the Bank didn’t say (and the Mail’s story strongly suggests) is that migrant workers bring down the salaries of existing British workers.
But this is just an effect because of the change in the composition of the labour market — like in the example above, the UK is absorbing a lot more working hours (from both migrants and native workers). If those hours are generally less productive and lower-paid, it will make average productivity fall. But that does not suggest that there’s an impact on British workers’ wages or productivity from immigration. They are still earning the same wages.
In fact, the economic evidence for the UK tends to point in only one direction. Any effect by migrant workers on local wages is small and short-term, if such an effect exists at all. Economists on both left and right agree that immigration does not bring down native productivity.
Here’s the relevant section of Wednesday’s Inflation Report (emphasis ours):
Bank staff estimates suggest that the changing composition of employment growth — including the mix of occupations, industries, ages and job tenures — could explain around 1 percentage point of the recent weakness in average annual earnings growth (Chart 4.6). Compositional effects will only suppress wage growth for as long as such shifts continue.
So the reduction in average wages will only continue for so long as there’s an increasing number of younger and lower-paid workers coming into the UK — something the Bank of England doesn’t expect to happen. There’s been extremely high migration from countries like Spain and Italy in recent years, with high youth unemployment in those countries. But that doesn’t mean the flows will continue forever.
Carney was quick to clarify his comments on BBC Radio 4 this morning (from 2 hours and 10 minutes in here), noting that most of the increase in labour supply (hours worked, basically) has been down to British workers taking more hours, and older workers staying in employment. Over the last two years, increases in those factors have been 10 times as important as migration, according to Carney.
It’s nice to see a story about productivity on the front of British newspapers, since the country does have a big problem with it. As Paul Krugman once said, “productivity isn’t everything, but in the long run it is almost everything.” It just doesn’t have very much to do with immigration.