Weaker migration from the EU could put further pressure on the UK labour market

27 September 2018

The appeal of living in the UK has continued to weaken for other Europeans. New data on migration has showed that overall net movements remained broadly stable over the past year, but fewer EU citizens chose to move to the UK and more EU citizens already living in the country opted to leave. Consequently, the net number of EU citizens living in the UK rose by 87,000 in the year to March 2018, compared with 189,000 in the year to June 2016, prior to the Brexit referendum.

For context, the accession of Poland and seven other central and eastern European economies to the EU in 2004 pushed up the rate of European migration to the UK. The substantial wage differential between the UK and eastern Europe meant that moving westwards could create significant benefits. This trend went into reverse in the years following the global financial crisis. A sharp rise in UK unemployment and the depreciation of the pound made moving to the UK less attractive. However, the subsequent improvement in the UK economy and the ending of work restrictions on two further lower-wage EU members (Romania and Bulgaria) resulted in a renewed rise in EU migration to the UK from early 2014, peaking in the year to June 2016.

Breaking down the EU migration data is instructive. Net arrivals from western Europe (EU15 countries) still represent the largest group, but the number has fallen by 46% since the Brexit vote. Romanians and Bulgarians represent the next largest cohort, but the net number migrating to the UK has fallen by 39% the same period. Meanwhile, for the first time in a decade, there were more citizens from the so-called EU8 group (which includes Poland) choosing to leave the UK rather to than move there in 2018.

Economics-in-business

That the overall direction of movement among this latter group has switched should not be surprising. We can assume that citizens from the EU15 countries were the least likely to move to the UK solely for economic reasons as the wage differential between their home countries and the UK was the smallest. Among the other two groups, the pound has depreciated further against the Polish zloty (16%) than either the Romanian leu (10%) or the Bulgarian lev (13%) since the referendum. This means that for Polish workers looking to remit earnings home, the wage differential that was already smaller than for workers from Romania or Bulgaria has shrunk at a quicker rate. The fact that more EU8 workers are leaving the UK than arriving is evidence of the weaker competitiveness of the UK labour market.

The state of the labour markets in EU8 economies and in Bulgaria and Romania suggests that these trends may continue in the coming quarters. Polish unemployment fell below 6% in mid-2018, the lowest since 1990, while joblessness in Romania and Bulgaria is also at multi-year lows (and approaching the level of around 4% in the UK). Jobs continue to be created in the UK at an impressive rate, which ought to be an encouraging sign for migrant workers. However, wage growth in the UK has shown no consistent signs of acceleration in the past two years, but it has picked steadily in Poland, for example, and stood at more than 7% year on year in mid-2018. We note, of course, that economic fundamentals are only one factor in migration decisions. We have not considered, for example, the effect on migration of a perceived hardening of attitudes towards immigrants among the UK population—in the run-up to the Brexit referendum, immigration displaced the economy and the NHS as the issue Britons felt was the most important facing the country, according to Ipsos MORI polling— or of the uncertainty that currently surrounds the UK’s future trading relationship with the EU.

In our UK Economic Outlook report published in late 2017, we used alternative Office for National Statistics (ONS) population projection scenarios to examine the effect on the UK economy of a 50% fall in net EU migration from mid-2019 relative to the ONS’s principal projections, and estimated that the annual cost could be just over 1% of GDP by 2030 (or around £22bn at 2017 GDP values). Much of this would just be due to a lower total population, however, with per-capita GDP in 2030 estimated to fall by a more modest 0.2% in this lower EU migration scenario.

Although the macroeconomic effect may not be that large, our analysis showed that it would be felt unevenly, both geographically and by industry. In London, 14% of the work force was born in the European Economic Area (EEA, the EU plus Iceland, Liechtenstein and Norway), compared with a UK-wide average of 7%, while more than one-third of the workers in the food-manufacturing sector were EEA-born. The NHS and social care are also heavily reliant on EU migrants. If levels of European immigration continue to tumble, very specific labour shortages could emerge in particular cities or industry sectors.

A fall of 50% in net EU migration after Brexit sounds dramatic, but it actually represents the difference seen between mid-2016 and early 2018. Such a decline is also, loosely at least, in line with UK government policy. Since 2010, the government has targeted annual net migration in the “tens of thousands”, a level it has yet to come close to reaching. Indeed, despite the declining numbers of European migrants over the past two years, annual net migration to the UK remains at around 275,000. The decline in European net migration has been closely matched by an increase in the number of people arriving from the rest of the world.

Further study could examine how closely the skills of migrants from the rest of the world could be matched to those no longer available as a result of fewer European arrivals. But if there are limits to this, then companies will need to consider longer term solutions such as increased investment in automation and in developing the skills of British-born workers, as well as raising wages so as to attract those workers to jobs that have recently been largely filled by EU migrants.

Mike Jakeman

Mike Jakeman | Senior Economist
Profile | Email

More articles by Mike Jakeman

Twitter
LinkedIn
Facebook
Google+

Comments

Verify your Comment

Previewing your Comment

This is only a preview. Your comment has not yet been posted.

Working...
Your comment could not be posted. Error type:
Your comment has been saved. Comments are moderated and will not appear until approved by the author. Post another comment

The letters and numbers you entered did not match the image. Please try again.

As a final step before posting your comment, enter the letters and numbers you see in the image below. This prevents automated programs from posting comments.

Having trouble reading this image? View an alternate.

Working...

Post a comment

Comments are moderated and will not appear until the author has approved them.