Fall in European migration would hit UK growth, finds NIESR

The British economy will see its growth hampered by a fall in immigration from Europe following the Brexit vote but low-paid workers in some sectors will see a “modest boost” to their income, according to the National Institute of Economic and Social Research.

In a new report, seen by the Financial Times, Niesr predicts that in the case of a “middle-range Brexit”, where EU immigration falls by as much as 91,000 a year, the growth of gross domestic product per capita will be 3.4 per cent lower by 2030 than it would have been otherwise. If immigration drops by 150,000 a year, the drop will be 5.4 per cent.

By contrast, the effect on wages would be mildly positive for Britons working in low-skilled sectors such as construction, retail, hospitality, food processing and agriculture. In the middle-range scenario, NIESR suggests that wages for these employees could increase by up to 0.51 per cent by 2030 or by 0.82 per cent in the “hard Brexit” outcome.

Jonathan Portes, NIESR research fellow and one of the report authors, admits that the forecasts are “highly uncertain” but said: “I think this provides a useful guide to the potential magnitude of the impacts from Brexit on both migration and the wider economy.”

By directly assessing the effects of migration after Brexit on national income, living standards and wages, the analysis contrasts with pre-referendum studies from the Treasury, International Monetary Fund and Organisation for Economic Co-operation and Development, which all ignored the economic effects of an end to free movement of people.

The Treasury’s central forecast was that the economy would be 6 per cent smaller than it would have been had the UK stayed in the EU by 2030, purely on the effects of lower trade reducing productivity growth and prosperity at home.

Last month in the Autumn Statement forecasts, the Office for Budget Responsibility chose a lower forecast for net migration, with the numbers falling gradually from 330,000 today to 185,000 by 2021. Those figures were around 80,000 a year lower than the numbers it said would have applied in the forecast had the UK voted to remain in the EU.

NIESR’s central estimate is similar, but the big difference in the studies is that the OBR did not assume net migration improved UK productivity by increasing competition for work. NIESR bases its estimates on the fact that reduced migration will lower productivity growth of UK-born workers, on the basis of recent academic work, but accepted “the growth impact of migration [is] probably less reliable than those of the growth impact on trade, since the literature is more recent and less extensive”.

If the more extreme assumptions on both the reduction in migration and its wider impact prove accurate, the effect of migration falls would exceed those predicted by the Treasury to be the long-term consequence of Brexit on living standards through reduced trade. Most of these losses would occur in the 2020s.

Carlos Vargas-Silva, a senior researcher at the Oxford Migration Observatory, said: “This report is valuable in thinking through one of the many possible post-Brexit scenarios. Of course it is based on certain assumptions, and we simply don’t know if these will prove to be correct. While it is reasonable to conclude that significant reductions in EU migration will have economic ramifications for the UK, we really cannot say what impact Brexit will have on the UK labour market yet because we don’t have any clear picture of what Brexit will look like.”

NIESR calculations are based on two scenarios: one, a “middle-range Brexit”, which assumes that EU citizens still have some preferential treatment under the immigration system, though not free movement; and the second, a “hard Brexit” that assumes a harsher deal. It is estimated that EU migration could fall by as much as 91,000 a year in the event of the former or by up to 150,000 in the latter case.

The GDP per capita ranges from a fall of up to 3.4 per cent in the first instance and a drop of up to 5.4 per cent under the more extreme scenario.

However, there are already some signs that “peak” EU migration may have been reached: figures from the Department for Work and Pensions indicate that national insurance number allocations to EU nationals dipped slightly in the three months to September 2016, compared with the previous quarter.