Select Committee on Economic Affairs Minutes of Evidence

Examination of Witnesses (Questions 40 - 59)


Professor Stephen Nickell

  Q40  Lord Sheldon: But when they come in they get jobs. There must be some calculation as to the kind of job that they get.

  Professor Nickell: Yes, there is. Migrants overall get jobs at all levels. Basically, the skill levels of migrants are remarkably similar on average to the skill levels of the native population. I think slightly more migrants have degrees than the native population, but by and large the education levels match up quite well. However, because over time there is a persistent move in demand away from unskilled towards skilled, it is always in these circumstances that the unskilled part of the population tends to get worse off, and insofar as there are ethnic groups who tend to have lower skills than the average, they would be most affected by this.

  Q41  Lord Layard: How do you think the existence of a national minimum wage administered by law affects the employers' demand for migrant labour compared with domestic labour? Do you think that the existing policies ensure employer compliance with minimum wages for migrants?

  Professor Nickell: That is quite an interesting question. I am not sure I am the best person in the room to answer it. First of all, insofar as unskilled migrant workers are willing to travel to the UK and work for wages below the national minimum wage in the UK, clearly the existence of the national minimum wage, insofar as it is enforced, would reduce the demand for workers from that group. On the other hand it is worth bearing in mind that unskilled workers, ie, those who have no qualifications, are a relatively small proportion of all migrants, so I am not sure how significant this is. I fear I am not really an expert on compliance and enforcement with regard to the minimum wage. We do know, of course, that there are numerous stories in the press and elsewhere about migrant workers in agriculture and construction who are not well treated, but most migrant workers do not work in these areas. I guess my overwhelming answer to this is that I am not familiar enough with the compliance and enforcement literature on minimum wages to be able to answer this question very satisfactorily.

  Q42  Lord Turner of Ecchinswell: Can I return to the question as to whether the empirical evidence is in line with what we would theoretically expect, given that the theory would be that if you get a flow of new factors of production not matched by others, ie, more labour not matched by more capital or more unskilled labour not matched by proportional quantities of skilled labour, you would expect to see perhaps a short-term employment quantity effect but a long term relative price effect? You seem to suggest that we are seeing that because we are seeing some price effect, but is it your opinion that those price effects are of the quantity that one might reasonably expect, given the theory, or are they strangely smaller than one might have expected, given the theory? Is there any disconnect of empirical and theoretical approaches here or is it to your mind a fairly consistent story?

  Professor Nickell: In the literature most people are relatively surprised that the wage effects are not as big as they expect. A lot of this literature started in the United States, and a good early example was an analysis of the large influx of Cuban migrants into Miami quite a long time ago. When the wage levels of workers who would be expected to compete with these migrants were investigated before and after the movement of migrants the changes were very minimal. Some argued that one of the reasons for this was basically that if you analyse these things by region, by area, you do not take account of the consequent effects on the regional migration of native workers, so people argued that what happened in Miami was that a lot of native workers either moved out of Miami or did not go to Miami when they would otherwise have done so. George Borjas, who is a famous Harvard economist, espoused this theory and, using analyses which take account of this, he does find bigger wage effects. However, what I would say is that anyone who has tried to replicate this analysis in many other countries has never found big wage effects. This is an ongoing controversy but I think still, by and large, people think there are small wage effects and, furthermore, they do not think the small wage effects they find are due to responsive native migration around the country away from the immigrants. What is the answer? The best answer that people can come up is that in areas where, for example, in-migration has generated a large excess of unskilled workers the technology and the capital adjust very rapidly to take account of this. Putting it in the crudest possible way, lots of sweatshops suddenly appear and in some sense the capital and the other factors seem to adjust rather rapidly.

  Q43  Lord Turner of Ecchinswell: So the capital moves from somewhere else?

  Professor Nickell: Yes, and it is also of a different kind. It is of a more labour intensive kind if you have lots of unskilled workers. It has to be said that this is ongoing stuff and no-one has quite got to the bottom of it yet.

  Q44  Lord Griffiths of Fforestfach: Is there any empirical evidence to suggest that as we have a flow of immigration so employers in the private sector and the public sector invest less in training and in labour-saving devices in companies?

  Professor Nickell: As far as the evidence is concerned, there is some evidence along the lines which I just mentioned, namely, when there is a big influx of unskilled workers into a particular area there does seem to be more response in the type of capital that is employed and that capital is fundamentally at a lower technical level than in areas where there is a ready supply of skilled workers than of unskilled workers, but most of that evidence is from the United States. The thing about the UK is that the skill mix of migrants is so similar to the skill mix of the native population that the training incentives are not affected that much, at least in the longer term. Of course, if there is a surge of migrants, some proportion of whom are skilled, then the employers may be tempted to go out into the market rather than do their own training, although we know there are a lot of other issues at the moment about why they might go out into the market instead of doing their own training anyway, but ,leaving that aside, there may be these short-run effects. My reading of such evidence as there is and my understanding of what goes on is that because of the similarity between the pattern of skills in the migrant workforce and the native workforce there is not much of an impact over the longer term on training incentives and incentives to invest in particular types of capital.

  Q45  Lord Skidelsky: You have partly answered this, I think, in an earlier reply, but I want to ask you what effect you think immigration has on the rate of inflation. In your experience has immigration been a significant consideration for the Monetary Policy Committee?

  Professor Nickell: The answer to the last bit of your question is yes. The first and obvious effect with migrants moving is that there is an inflow. Probably that temporarily increases the degree of labour market slack, puts down the pressure on inflation and the monetary policy response. That in some sense is not very troubling because we can respond to the inflationary consequences. Where we found in-migration troubling was that what we wanted to do was to try and get good estimates of the potential output in the economy going forward, and in particular the growth of potential output, and the growth of potential output is basically productivity growth plus the growth in the number of people, and it was the latter where we had trouble because the estimates of projected in-migration, which was a key part of the projections of the growth of the labour force going forward, first of all kept changing all the time and, secondly, they seemed to be based on a method of collection which did not appear, at least then, to be wholly reliable. Since the growth in the potential output is a key part of monetary policy making because we are interested in that relative to the growth in demand in the economy, and if you do not have a very clear idea of what the rate of growth of potential output in the economy actually is, your forecasts of inflation become that much more uncertain. We used to worry about this quite a lot and we had people at the Bank going to talk to people at the ONS about how the data were collected and so on, and this was quite a serious issue for us.

  Q46  Lord Skidelsky: The task would have been easier had the numbers been better?

  Professor Nickell: Yes. I do not want to go too far in this and say it was really a disaster because we just did not know what was happening, but yes, it was somewhat frustrating in the sense that we spent a lot of time looking forward and, of course, you do not know what is going to happen in the future, but not knowing where you are at any given time is rather frustrating because it does not just happen for migration; it happens for GDP and all sorts of other things as well.

  Q47  Lord Griffiths of Fforestfach: From your experience of the Committee do you think there was ever a time, as you look back over the decisions you made in setting interest rates, when, if you had had more correct forward data or better predictions going forward, you would have set a different interest rate?

  Professor Nickell: That is a good question.

  Q48  Lord Griffiths of Fforestfach: Because that, it seems to me, is the real rub. I see intellectually you make a case, and if I were on that Committee I would feel exactly the same as you did, but the rub is, did you set interest rates on the numbers?

  Professor Nickell: Let us put it this way. We may have made mistakes but I do not think we made mistakes because of in-migration.

  Q49  Lord Kingsdown: I have another question on the impact of immigration, this time on housing and on house prices, both in the private housing market and on social housing.

  Professor Nickell: Since the late 1990s, as far as we know, net migration to the UK has been around 180,000 a year, which is considerably faster than it was in the past, and that has probably contributed to between a third and a quarter of the rise in the number of households over that period. House prices over that period, as we know, rose very rapidly, and the drivers of the rise in house prices have been the continuing rise in household incomes, the rise in the number of households, and the comparatively low levels of house building. I think, of these, the rise in household incomes is the key. We have quite good information on the impact of changes in the rate of increase of the number of households on house prices and looking at historical data we know something about that. So, to give you an example, doing a bit of a back-of-the-envelope calculation, I found the following: if there had been no net migration since 2000, then instead of house prices rising over the period from four times average earnings to seven times average earnings, the calculation I did suggests that house prices would have risen to around six and a half times average earnings. So that is not insignificant but it is not in any sense the story. So that gives you some idea of the market housing sector. What about social housing? In the big picture, the demand for social housing is actually driven in quite large part by the price of housing and the level of rents in the market sector, and as these have gone up so the demand for social housing has risen. That is very important. What particularly about migration directly, though? We know that some migrant groups, such as Somalis and Bangladeshis, are much more likely to live in social housing than the average UK individual but, perhaps more importantly, the vast majority of migrants are far less likely to live in social housing than average. Of course Indians, who are currently the largest migrant group, are only half as likely to live in social housing as the average UK citizen and the same applies to Poles. Of course there will be some groups of migrants who, for a variety of reasons, make particular demands upon social housing; but, overall, migrants are less likely to use social housing than the native population.

  Q50  Lord Turner of Ecchinswell: My supplementary was whether you had looked at what the balance between household fragmentation and total population growth might be going forward. You said that over the last 15 years or so—I think it was—that a third of the increase in households was coming from net migration.

  Professor Nickell: Yes, that is what the ONS people think.

  Q51  Lord Turner of Ecchinswell: And about two-thirds from household fragmentation, ie smaller average size of household?

  Professor Nickell: Of existing households.

  Q52  Lord Turner of Ecchinswell: Presumably, however, the household fragmentation process, that people live in smaller and smaller households, is an effect which at some stage comes to an end, so beyond a certain date the proportion which is actually driven by population expansion would become bigger, would it not?

  Professor Nickell: I would think it is going to go on but one of the key features of this is the fact that people live for longer periods. Life expectancy is rising linearly and has been doing so since 1870. Despite projections at every point that it was going to level off, it never does, and of course if people live longer, and longer and longer, that of itself raises the number of households without anything else having to happen.

  Q53  Lord Turner of Ecchinswell: Because it drives population growth?

  Professor Nickell: Exactly, but also of course since old people rarely live in more than two-person households, and often in one-person households, that is a very important factor which is probably not going to level off. Certainly in the projections, there is no levelling off in this process of households getting smaller and smaller. Of course, we know that projections in this world are often extrapolations of existing trends and therefore you could say, well, of course, because that is the way they project. There is no real sign of it levelling off but I take your point.

  Q54  Lord Skidelsky: Maybe I could smuggle in two very quick questions. Your previous reply on the demand for housing suggested that perhaps a disproportionate demand from Indian migrants was for private rented accommodation.

  Professor Nickell: No, I said they did not use social housing. In fact, I looked at the numbers and 86% of Indians live in owner-occupied houses, by far the highest group of owner-occupiers in the whole country.

  Q55  Lord Skidelsky: That is very interesting and the second question, which no-one has asked but is on the menu, is: do you think the Government should curtail immigration in order to reduce housing demand and make housing more affordable?

  Professor Nickell: Well, that is politics, is it not?

  Q56  Lord Skidelsky: Everyone has got their opinion.

  Professor Nickell: My answer to that question would be no, which does not mean to say I think we should not curtail immigration, but you do not solve the housing problem by curtailing immigration. That is what I would say. So the argument is straightforward. It follows from my previous arguments, and at the National Housing Planning Advice Unit we have been making projections of where house prices are going, and at current rates of house building we reckon that the house prices to income ratio (that is at current rates of house building) would rise from seven, where it is now, to around 10 after 20 years. That rise is in part generated by the projected levels of in-migration, but making the same sort of calculations as I was telling you about before, supposing you reduced net migration to zero for the next 20 years, I reckon the house price to income ratio would still rise but to somewhat over nine rather than to 10, so we would still need to build lots of new homes if we wish to stabilise affordability and so there would still be a housing market challenge. Of course, you may wish to curtail in-migration in other ways, for other reasons, but, as I say, that would not change the fundamental housing market challenge.

  Q57  Lord Macdonald of Tradeston: Just another aspect on housing, I assume there is a strong demand from the indigenous population for social housing?

  Professor Nickell: Yes.

  Q58  Lord Macdonald of Tradeston: I think it is probably unlikely that will be met by new building but you are saying there are some groups that are disproportionately involved in social housing, which obviously creates tensions in communities.

  Professor Nickell: Yes.

  Q59  Lord Macdonald of Tradeston: Can you see a way of squaring that to give perhaps more opportunities for the indigenous population to get into social housing?

  Professor Nickell: The way I think about the housing market is the following: the first thing you have to do is if you have more housing in the market sector so that prices in the market sector moderate, then, almost by definition, there would be more people moving into the market sector and less pressure on social housing. That is the first point. Secondly, to put it bluntly, the reason why there is a demand for social housing is because people do not have enough money. Those groups of migrants who disproportionately make use of social housing by and large do so because they are poor, they do not earn enough money. It is not specifically because they are migrants; it is because they are individuals who do not earn enough money. You might ask why certain groups of migrants have low levels of earnings and that may be to do with their education, and so on and so forth, but if you then wish to say when you are allocating social housing, "We want to allocate social housing this way or that way," that is basically up to the people who allocate social housing. If they feel that they have to give preference to certain types of individuals, then they will do so. I am not sure that they should but that is what they will do.

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