Seminar in International Economics 16072015: The Long ......This seminar series is an activity in the framework of FIW ('Forschungsschwerpunkt Internationale Wirtschaft'), which is

This seminar series is an activity in the framework of FIW ('ForschungsschwerpunktInternationale Wirtschaft'), which is a project designed to build a center ofexcellence in research on International Economics, funded by the Austrian Ministryof Science, Research and Economy (BMWFW).

The Long Term Economic Impacts

of Reducing Migration in the UK

Katerina Lisenkova (with Marcel Merette and Miguel Sanchez-Martinez)

NIESR, UK

Seminar in International Economics

16 July 2015

National Institute of Economic and Social Research

The Long Term Economic Impacts of Reducing

Migration in the UK

Katerina Lisenkova (NIESR)

Marcel Merette (University of Ottawa)

Miguel Sanchez-Martinez (NIESR)

WIIW

Vienna, July 16, 2015

Financial support from the Economic and Social Research Council under the grant: “A dynamic

multiregional OLG-CGE model for the study of population ageing in the UK” is gratefully acknowledged.


Overview

Introduction

Model

Results

Conclusions


Two views on immigration

Solution for ageing countries

– immigrants are younger than natives →replacement for falling native working age population

Competition with natives →

– higher unemployment for native workers

– lower pay for native workers

– demand public services (net contribution to welfare system?)

Our aim: provide a formal analysis in favour/against each of these “opinions”


Projection

Old age dependency ratio*

24%

28%

49%

0%

10%

20%

30%

40%

50%

60%

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17

20

19

20

21

20

23

20

25

20

27

20

29

20

31

20

33

20

35

20

37

20

39

20

41

20

43

20

45

20

47

20

49

20

51

20

53

20

55

20

57

20

59

* Population aged 65+ divided by population aged 20-64


UK net migration

318,000

-100,000

-50,000

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014


UK migration policy

Conservative government’s target is to reduce net

migration “from hundreds of thousands to tens of

thousands”

Difficult if not impossible to achieve

– Despite toughening of migration rules, during 12 months

to December 2014 record net migration of 318,000

2010-based principal ONS population projections

assume long-term net migration of 200 thousands

per year

– To achieve target, net migration has to decline by a

factor of 2


Overview

Introduction

Model

Results

Conclusions


Structure of a CGE model

Firms Households

Goods

market

External sector

Capital

market

Factors

market

Public

sector

Goods

Mig

ratio

n

Taxes Taxes


Household. Overlapping generations

A1 A2 A3 A4 A5

T1 G1

T2 G2 G1

T3 G3 G2 G1

T4 G4 G3 G2 G1

T5 G5 G4 G3 G2 G1

T6 G6 G5

T7 G7 G5

T8 G8 G5

T9 G9 G5

T10 G10 G9 G8 G7 G6

T11 G11 G10

T12 G12 G10

T13 G13 G10

T14 G14 G10

AgeTi

me

• Several generations

• Finitely-lived individuals with complete life cycle (birth, work, retirement, death)

• Age specific characteristics

• productivity (age-earnings profiles)

• employment rates

• demand for public services


Main features of the model

Closed economy

– Interest rate reacts to population ageing

One final good

– Cobb-Douglas production function

Demography:

– 21 generations (0-4, … 100+)

– time-variable fertility rate

– time/age-variable mortality and migration rates

Unintentional bequests

– distributed via a perfect annuity market

In every generation six types of households

– Three qualification levels

– Two origins• Native-born

• Foreign-born

Age-specific public consumption

– Health and education


Household problem. Forward-looking

Household Utility Function

Household Budget Constraint

Euler Equation

Household problem is qualification- and origin-specific

sra,t -- conditional probability of survival from age a to age a+1

20

4

1

,,0 )(1

1

1

1k kgktmgmt

k

m

k

CsrU

0< θ < 1

/1

1

,

1,1

1

1

t

gt

gt r

C

C

gt

c

gttgt

l

gt

gt CHArYsr

HA ,,,

.

1,1 )1(1)1(1


Government

• Revenues

– Labour income tax (endogenous)

– Consumption tax

– Pension contributions

Expenditures

– Age-independent (fixed level per capita)

– Health expenditures (mostly in old age)

– Education expenditures (mostly in young age)

– Transfers (origin-specific)

– Pensions (for 65+ year old)


Age distribution of health and education spending per capita

0%

5%

10%

15%

20%

25%

30%

35%

0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90+

Health

Education


Demography

Fertility

Mortality

Two types of migration

20,1

0

1,11,11,1

15,1

,

kformrsrPop

kforfrPopPop

kgtkgtkgt

tkgt

kgt

kgtkgtkgt fmrnmrmr ,,,

Realistic

population

structure


Modelling migration

We introduce differences between natives and

immigrants in two main dimensions:

1) Labour market characteristics

– Qualification distribution

– Employment rates

– Productivity

2) Use of public funds

– Origin-specific government transfers


Modelling migration: employment rates/qualification distribution

Immigrant workers display a higher qualification compared

to that of natives but lower employment rate:

Workers Native-born 84% Foreign-born 16%

Employment rate 75% 70%

High qualification 22% 44%

Medium qualification 31% 35%

Low qualification 47% 21%

Source: LFS, Q2:2008-Q1:2013


Modelling migration: age-earnings profiles

Immigrants’ earnings (a proxy for productivity) are lower

0

2

4

6

8

10

12

14

16

18

20

20

-24

25

-30

35

-40

40

-45

45

-50

50

-55

55

-60

60

-65

65

-70

70

-75

Native-born

highqual mediumqual lowqual

0

2

4

6

8

10

12

14

16

18

20

20

-24

25

-30

35

-40

40

-45

45

-50

50

-55

55

-60

60

-65

65

-70

70

-75

Foreign born

highqual mediumqual lowqual

Source: LFS, Q2:2003-Q1:2013


Modelling Migration: differences in demand for government

services

Immigrants are estimated to be 4.6% less likely

to claim social benefits than natives

This difference feeds into origin-specific

government transfers in the model

Source: LFS, Q2:2008-Q1:2013


Overview

Introduction

Model

Results

Conclusions


Principal ONS population projections: baseline scenario

0%

20%

40%

60%

80%

100%

120%

2010 2015 2020 2025 2030 2035 2041 2046 2051 2056 2060

0-19 20-64 65+ Total


Low migration scenario

Experiment: net migration level 2 times lower

than in baseline scenario

We assume that native net migration level is not

affected by the government migration policy

And impose a reduction in the foreign net

migration rate only


Population age structure in 2060

0%

1%

2%

3%

4%

5%

6%

7%

0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90-94 95-99 100+

Baseline

Low migration


Output and factors of production

-2.7%

-11.0%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060

output

output per capita

labour demand

capital demand


Government spending % of GDP, pp difference

0.2%

0.5%

0.1%

0.6%

0.0%

1.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060

age-unrelated expenditure

health

education

pensions

transfers

total


Labour income tax rate, pp difference

2.2%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060


Wage and net wage

-3.3%

-4%

-3%

-2%

-1%

0%

1%

2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060

wage net wage


Sensitivity analysis . Effects for different labour market

characteristics

Output per person

difference in 2060

Labour income tax rate

pp difference in 2060

Foreigners are like natives -2.8% 2.4%

Different productivity -2.2% 2.1%

Different employment rates -1.8% 1.9%

Different qualification distribution -4.1% 2.9%

All characteristics are different -2.7% 2.2%


Sensitivity analysis. Quality of migrants

The results shown before show the effect of the

number of immigrants on the economy

We want to check how sensitive the results are

to the “quality” of immigrants

For this, we chose A8 immigrants (8 Eastern

European countries that joined the EU in 2004)


Why A8 immigrants?

This subgroup differs significantly with respect to

the average migrant:

All immigrants A8

Employment rate 70% 85%

High qualification 44% 37%

Medium qualification 35% 53%

Low qualification 21% 10%

Probability of claiming state benefits

(pp less than that of natives)4.5% 13.0%


Sensitivity analysis. If all future migrants are like A8 migrants

Output per person

difference in 2060

Labour income tax rate

pp difference in 2060

A8 migrants -3.2% 2.5%

All migrants -2.7% 2.2%


Overview

Introduction

The model

Results

Conclusions


Conclusions

Lower net migration policy has

– significant negative effect on output and a smaller but non-

negligible negative effect on output per person

– negative impact on the public finances, owing to the shift in

the demographic structure

– small and temporary positive effect on gross wage.

However, if growing fiscal imbalances are covered by income

tax, the effect on net wage is large and negative

Qualification distribution of migrants has the

strongest effect among labour market characteristics

“Quality” of migrants has expected effect, although it is

much smaller than the effect of the number of migrants


Caveats

Downward bias of our estimates – the least strict interpretation of the migration target

– the model does not take into account potential positive productivity

effects from higher levels of immigration (TFP growth, imperfect

substitution between natives and migrants)

– closed economy model => higher equilibrium capital-labour ratio and

lower returns on capital. In an open economy model with perfect capital

mobility, downward pressure on interest rates would lead to capital

outflow and thus even stronger negative effects of reduced migration

Upward bias of our estimates– we do not capture the negative externalities resulting from, for instance,

congestion

– do not take into account the potential social impacts of higher

immigration

Documents

Seminar in International Economics 16072015: The Long ......This seminar series is an activity in the framework of FIW ('Forschungsschwerpunkt Internationale Wirtschaft'), which is