Immigrant Song

by Ken Gibb

There was much froth earlier this week after UCL widely disseminated their academics’ fiscal effects of migration study, published in the Economic Journal. Politicians made claims about the research, lobbies like MigrationWatch UK made predictable points, media commentators struggled with the research. There was more heat than light. So, I thought it would be helpful to actually read the paper (thanks to Tony O’Sullivan who forwarded both the paper and a complementary report [1]).

The paper by Christian Dustmann and Tommaso Frattini is called ‘The Fiscal Effects of Immigration to the UK’ and was newly published by the EJ with the digital identifier – 10.1111/ecoj.12181. The essence of the paper is that the authors consider the fiscal impact of resident immigrant population to the UK for each year from 1995 to 2011. They find that immigrants from the European Economic Area ‘have made a positive fiscal contribution, even during periods when the UK was running budget deficits, while non-EEA immigrants, not dissimilar to natives, have made a negative contribution’. Moreover, ‘for immigrants that arrived since 2000, contributions have been positive throughout, and particularly so for immigrants from EEA countries. Notable is the strong positive contribution made by immigrants from countries that joined the EU in 2004.’ (Both quotes from the abstract of the paper).

The authors start from common concerns widely expressed across Europe and the UK that immigrants receive more in welfare and public services than they pay in through taxation. This was ramped up in 2004 with the accession states entry to the EU and their access to the UK via the single market agreement (though with restricted access to benefits) and of course in the context of the 2014 accession of Romania and Bulgaria. There is a nice descriptive section on immigration to the UK between 1995 and 2011, which is worth the admission price alone.

The researchers use Labour Force Survey data to calculate the probability of different groups receiving benefit payments, tax credits and social housing. They then consider for each year between 1995 and 2011 the total immigrant population (EEA and non-EEA) and compute their ‘net fiscal position’ for each group and for each year. They then go on to undertake the same analysis but for all migrant cohorts who had arrived since 2000 (up to 2011) and this was further broken down between A10 and other EU immigrants. For each year they can therefore compute the net fiscal outcomes for the different immigrant groups as compared to the native population. The authors also perform extensive sensitivity analyses, which do not change the main thrust of their conclusions.

The authors argues that this new study goes well beyond the existing literature on fiscal effects of migrants via its disaggregation of migrant types, it covers a longer period of years and it is more comprehensive in calculating the expenditures and in-kind services versus tax contributions.

Developing their findings, Dustmann and Frattini argue that migrants from this time period were less likely than natives to either receive state benefits or reside in social housing in the same region. This difference is even larger for post 2000 immigrants. At the same time non-EEA migrants are more likely than EEA migrants to use these benefits (post-2000, non-EEA migrants were much the same as UK natives).

The headline figures can be summarised. Between 1995 and 2011, EEA migrants contributed 10% more than natives while non-EEA migrants contributed 9% less than EEA migrants. To put this in perspective, the baseline scenario suggests that between 2001 and 2011, EEA migrants made a net fiscal contribution of £20 billion (£5b of which was accounted for by accession state migrants) and non-European immigrants made a net fiscal contribution of £5 billion. Over the same period, UK natives made a negative fiscal contribution of £617 billion.

A key point not developed in the media yesterday was the additional benefits ot the UK economy arising from the fact that the UK has not paid for the education of these immigrant workers bring human capital and productivity to the UK economy. The authors estimate that for the period 1995-2011 the European immigrants effectively contributed £14 billion in implicit savings of the cost of such human capital to the UK economy. Over the same period non-European immigrants boosted the UK economy in the same way by £35 billion. In short as the authors put it, European immigrants have helped to reduce the fiscal burden for native workers.

How do the authors explain these findings? First, they point to the age structure of the young and economically active immigrants from Europe who generate revenues and have relatively few social outlays. Second, they argue that non-European migrants tend to have children and this may explain how they have higher costs on a par with Native UK residents. However, third, they argue that this second point underestimates the fiscal contribution of these children or second-generation migrants. This is because the education and health costs of children of migrants in the UK is accounted for as a cost but later benefits they contribute as adults are counted as native rather than migrant workers – this therefore is an underestimate of the migrant fiscal contribution.

The final point worth noting is that many European migrant workers return home and actually have age-related higher social and public service costs when they go back to their origin countries. Related to this, the authors argue that many European immigrants are at the start of their career and their language skills, etc. will grow and they will thereby enhance their earnings and hence fiscal potential – so rather than costing more to the public purse as they age (if they stay in the UK), the reverse is the case. The ageing of migrants who remain in the UK does not have a straightforward fiscal impact.

The authors claim that their findings are much more robust because of the long time period they cover and they offer better fiscal outcomes than is the case in other European countries, for instance, Norway. The research suggests further areas for investigation e.g. the drivers of reverse migration by migrant workers; and, related to this, whether it is above average or below average labour market migrant performers who are likely to remain longer in the UK?

This is a strong piece of applied economics. Not only do the authors work hard to make their approach as transparent as possible, they recognise shortcomings and apply exhaustive robustness or sensitivity checks. The key conclusions are backed up and reinforced throughout the exercise. It is for opponents who hold contrary position either based on evidence or not to counter this work with a similar level of detail, evidence and rigour.

Note: Centre for Research and Analysis of Migration (2014) What do we know about migration? Informing the debate. CReAM/University College London.