Memo to Jericho: Lower UK immigration boosts wages

By Leith van Onselen

Back in November, Robert Skidelsky, Professor Emeritus of Political Economy at Warwick University, penned an excellent article in Project Syndicate which, among other things, explained why never-ending mass immigration pushes down wages growth:

Standard economic theory tells us that net inward migration, like free trade, benefits the native population only after a lag. The argument here is that if you increase the quantity of labor, its price (wages) falls. This will increase profits. The increase in profits leads to more investment, which will increase demand for labor, thereby reversing the initial fall in wages. Immigration thus enables a larger population to enjoy the same standard of living as the smaller population did before – a clear improvement in total welfare.

A recent study by Cambridge University economist Robert Rowthorn, however, has shown that this argument is full of holes. The so-called temporary effects in terms of displaced native workers and lower wages may last five or ten years, while the beneficial effects assume an absence of recession. And, even with no recession, if there is a continuing inflow of migrants, rather than a one-off increase in the size of the labor force, demand for labor may constantly lag behind growth in supply.

This analysis followed an empirical study by the Bank of England, which found that immigration into the UK had pulled down average wages:

This paper asks whether immigration to Britain has had any impact on average wages. There seems to be a broad consensus among academics that the share of immigrants in the workforce has little or no effect on native wages…

We find that the immigrant to native ratio has a small negative impact on average British wages. This finding is important for monetary policy makers, who are interested in the impact that supply shocks, such as immigration, have on average wages and overall inflation. Our results also reveal that the biggest impact of immigration on wages is within the semi/unskilled services occupational group… where a 10 percentage point rise in the proportion of immigrants is associated with a 2 percent reduction in pay.

…the impact of immigration on wages in semi/unskilled services is much larger than can be accounted for by purely compositional effects, suggesting that the vast majority of this effect refers to the impact on native workers.

With the above analysis in mind, The Telegraph in January reported that UK wages were expected to lift following curbs on immigration, which have tightened the labour market:

Businesses across Britain are short of workers across scores of sectors and at all skill levels, putting pressure on bosses to hike salaries, recruiters are warning.

Companies are reluctant to raise pay when productivity has been stagnant but have found themselves with no choice as staff, from minimum wage entrants through the professions and all the way to leadership positions, are so scarce…

Mr Green expects employers to continue to raise their salary offers to get more workers – and it may also force them to raise wages for existing employees to stop them leaving for higher offers elsewhere.

And now, the Financial Times has reported that UK wages are finally rising as employers try to fill so-called labour shortages [my emphasis]:

Nik Wyers cannot find enough workers for Floorbrite, his office cleaning company in Manchester. So for one recent contract, he had to up Floorbrite’s hourly rate from £8.50 to £10.

“The cleaning staff that are available are able to pick and choose which jobs they accept,” he said. “We have been forced to increase the rate of pay. It’s not an ideal solution.

“Mr Wyers is not alone. The Bank of England believes that after nearly a decade of stagnation, it is seeing evidence of rising wages as companies are forced to pay more to fill their vacancies…

At the Georgian House hotel in London, Serena von der Heyde said she has raised wages twice, by a total of 20 per cent, so far this year.

“We’re focusing on retention, the less we have to recruit the more we’re shielding ourselves from the pressures that are out there,” said Ms von der Heyde, the hotel’s owner. But she added: “For all the efforts we make, we’re fighting against the tide. I really just don’t believe we are going to meet our requirements with the low unemployment rate we have in London.”

Data last week from the Office for National Statistics showed that the number of unfilled jobs in UK job market reached a 17-year high in the final quarter of last year, with 2.8 vacancies for every 100 employees. At the same time, the unemployment rate is close to its lowest level since 1975, suggesting that there are few workers out there to fill positions, especially with immigration from the EU falling since the Brexit referendum.

Power has shifted to employees, said Kevin Green, chief executive of the Recruitment and Employment Confederation (REC). “It’s a seller’s market,” he said…

“Employers are trying to attract people to their organisations by paying a bit more,” he added…

Mr Wrethman said the departure of EU migrants, who are often more willing to work anti-social hours, has exacerbated his problems.

…at its latest meeting, the bank cited survey data from the REC which found new hires receiving significant pay rises. It also pointed to official statistics showing that those switching jobs enjoyed wage hikes above 6 per cent, close to pre-financial crisis levels…

Martin Hurworth, managing director of Harvey Water Softeners… [said] in the longer run, as the company gets bigger, the plan is to do more training, he said, including apprentices and those starting a “second career”. But for the time being, he said, “the view is to be a great payer because it is a competitive market and we’re doing very well”.

More from Bloomberg:

U.K. pay is picking up after employment among citizens of the eastern countries that joined the European Union more than a decade ago fell for the first time since 2009…

BOE officials estimate there is little slack left in the economy, with surveys suggesting recruitment difficulties are forcing some firms to raise wages.

Employment rose by 330,000 last year and the gain was largely driven by U.K. nationals, the ONS said…

Low unemployment. Wages growth. Increased training of the local workforce. What’s not to like?

It is basic economics that if you stem the flow of foreign workers, then workers’ bargaining power will increase. This was explained beautifully by The Australia Institute’s chief economist, Richard Denniss, last year when he noted that the very purpose of foreign worker visas is to “suppress wage growth by allowing employers to recruit from a global pool of labour to compete with Australian workers”.  That is, in a normal functioning labour market, “when demand for workers rises, employers would need to bid against each other for the available scarce talent”. But this mechanism has been bypassed by enabling employers to recruit labour globally. “It is only in recent years that the wage rises that accompany the normal functioning of the labour market have been rebranded as a ‘skills shortage'”.

Sadly, Australian economic commentators like The Guardian’s Greg Jericho cannot bring themselves to even acknowledge these basic facts when discussing wages, because to do so would somehow be ‘racist’:

Immigration – because there are many desperate to hate – must be treated with extreme care by politicians and journalists, and certainly with more care than Abbott seems capable. The inherently racist parties will seek to use any discussion and any seeming evidence of the negative impact of migrants as fuel to burn their fires of hate.

When will the Fake Left (including Labor and The Greens) stand up for ordinary Australian workers and commit to lowering Australia’s reckless ‘Big Australia’ immigration program, which is not only lowering workers’ wages but also raising their cost of living via housing as well?

It’s precisely because of the Fake Left’s failure to rationally discuss immigration that ordinary Australians are being pushed to “the inherently racist parties” that Jericho hates so much.

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  1. The “if you oppose excessive immigration you are a racist” line is gonna turn around and bit the SJWs on the arse bigly…unintended consequences, and all that.

  2. Strayan workers in general are done.
    Wages have to come down by half to 2/3.
    Bought a packet of safety pins this am, once made in Lithgow NSW, now made in India.
    (so all that coal we are selling em, and now big Clive is on to it as well, privately funded and has all the approvals) is not to be used so the poor uneducated can study at night, but to assist their manufacturing to compete with once Strayan made goods)

  3. Australia needs to regain competitiveness to gradually claw back the mountains of CADs.

    The obvious way is to lower the costs of land, labour and energy. But Strayans do not want to lower the costs of land or energy, so what is left is….

  4. Early days with some modest rises leading to expectation that future rises are a given. Looks to me, if the above data is reported accurately by media, that UKs version of temporary migrants (workers from EU) leaving may have had a modest impact. Rising productivity is also a factor. Ironically if wages rise that will put upward pressure on interest rates…

    In Australia we have nearly 1.5m temporary migrant workers – imagine if subclass 444 – all 650k of them – left en masse!

  5. Plus, in some cities, house price to income ratio is 3x. Oh, and the houses aren’t made of wood or cardboard.

  6. And this caused Brexit. Britons are averse to marching in the street yet will vote with determination against the great and good when opportunity presents. Wages are poor; work fiercely competed for, land is expensive.They are aghast at the cultural and social destruction of their country. Pauline Hanson’s supporters hold similar views. Ignore them at your peril.

  7. “the inherently racist parties”

    It looks like we are back to a bizzarro type of “reds under the bed” scare campaign. How many of these “inherently racist parties” are there exactly?

    Perhaps Greg can make a list?

  8. A significant part of the equation is that if immigration is slowed and those jobs are freed up, that the locals need to then harden the f#ck up, and be prepared to do some of those lower skilled, less desirable jobs that imports now do.
    Anything that causes callouses or requires someone to be outdoors when it’s over 27 degrees scares the bejesus out of some of the next gen. Regional work needs to be done too. This is ‘part’ of the reason we shot our own foot among others !
    Be ready for a few I told you so ‘s, if we can’t then fill jobs ……..
    This is a problem of many many parts.

  9. I don’t know why you bother countering Jericho, UE. Do you think he really believes the garbage he spouts?

    He’s a hired gun. Nothing less.

  10. Pulling down wages provides a short-term sugar hit to profits.

    After that, the only way to maintain profits is for consumers to run up debt to maintain their consumption.

    Eventually, this hits a limit as debt loading gets too high to increase, thereby resulting in constrained consumption.

    To maintain profit margins without increasing income, interest rates must be lowered to increase debt-issuance → ensure consumption → ensure profits.

    Eventually this too hits a limit as the distortions caused by low interest rates start to negatively impact the broader economy (misallocation, asset bubbles, etc).

    As Steve Keen points out in his dynamic modelling, the last people to become aware of the damage done by falling wages and rising debt are the capitalists. They’re the last ones to keel over and by the time they finally get it, it’s far, far too late.

    Wages need to be higher, interest rates need to be higher, debt needs to be lower. These conditions would make for a more robust, stable economy and allow companies to maintain profit margins (newflash: people buy products and services with their wages, pay them more, they buy more). Yet we opt for maintaining profits by cutting wage growth and replacing it with debt growth. Not smart.

    Final note, we have a huge additional problem in Australia. Years of white-anting our economy, through adherence to Neoliberal ideology, means that consumption increasingly means importing, thereby blowing out our current account deficit. There’s hardly any point improving the income and debt situation if we don’t address the qualitative collapse of our economy.

    We don’t make anything anymore.

    Protectionism, mercantilism, tariffs, a managed currency, bank nationalisation, etc. All dirty concepts to the Neoliberal, all required to clean up this mess.