What economic theory says about immigration

The UK continues to post high immigration figures. For 2022, net migration into the UK stood at 745,000 people.

Immigration is a contentious topic. On the political spectrum you will find people viewing immigration as always being beneficial. Others will view immigration as harming the economy.

For economists, most sit somewhere in the middle. There are both positive and negative impacts from migration. But the question is: do the positive effects outweigh the negative or vice versa? This is where economists are more likely to take different positions.

So, what does economic theory say about the effects of immigration on the recipient country?

1. Labour supply increases

Immigration increases the labour supply.

Other things being equal (and they may not be here), an increase in labour supply results in lower wages.

Moreover we can use the original labour supply curve as the labour supply of workers already in the country. In this case, an increase in labour supply from abroad reduces the employment of workers originally in the country.

Note this assumes the original labour and immigrant labour are substitutes, not complements.

2. Labour demand increases

Higher immigration increases consumption and derived demand for labour.

Moreover immigration may cause a higher demand for “complementary labour”. Here are a few examples:

Complementary construction workers. An increase in immigration for one type of construction worker (e.g. a day labourer) makes it cheaper and easier to build homes. This increases demand for other types of construction workers such as plumbers.
Start businesses. Immigrants may start businesses. Business owners may need to hire workers, increasing demand for labour.

Higher labour demand, other things being equal, increases wages and employment.

3. Effects on public spending and public services

Immigrants help staff public services, including health and education.

Increasing population will however also increase use of public services.

Those migrating to the UK do pay a health surcharge, effectively an extra tax for healthcare costs. They also pay income and other taxes but may also receive state benefits.

One question is: are migrants “net contributors” to the government budget or “net takers”?

The answer depends on the type of migration. Broadly, those with higher wages are more likely to be net contributors, all else being equal.

With an aging population, migration may help increase payments into pension systems and the state. This would mean those retiring in the future would have a larger pension pot than would otherwise be the case.

4. Inequality and other effects

Some other economic effects may include, but are not limited to:

Inequality. There is some evidence that immigration may increase inequality. For instance the labour supply increase and the substitution this causes may affect those on lower incomes to a greater degree.
Shortages for particular workers may be filled more easily. Skill gaps in health and social care and construction, for example, are more likely to be filled with migration.
A counterargument is that UK firms have been excessively reliant on hiring more workers, as opposed to retraining existing workers or increasing investment. This has been suggested as one possible cause of the UK’s weak productivity performance relative to past trends and to other countries.
There may be complementarity through the labour supply. For instance, a better staffed care sector may free up time and funds for people looking after family members as they can now access care. These people can now enter the labour force.
Increased housing demand (as more need a space to live) versus increased housing supply (as there are more construction workers, depending on which workers immigrate).

5. Some evidence on immigration

Just as correlation does not imply causation, there is a risk of “misdiagnosis” of the consequences of migration too.

Specifically, suppose we see higher immigration. This is followed by worsening public services plus stagnant real wages. Does this mean that immigration caused these effects? Not necessarily.

In fact, there could be another cause for worsening public services and slowing real wage growth. For instance, a lack of government spending in public services or general productivity weakness. Either could slow income growth and tax revenue growth.

In short, it is important to separate out the effects of immigration from the effects of other policies. We must not commit a post hoc fallacy. If x happens, then y happens, then it does not mean that x caused y.

There is so much academic work on the effects of immigration.

So, while I won’t be able to do the literature justice here, here are a few directions for further reading:

A summary of the evidence of the effects of immigration.
Evidence about migrants’ businesses. This is a really good piece for understanding the balance between labour supply and labour demand effects from immigration.
A natural experiment of the effects of free movement of labour in Switzerland. In particular, there are different impacts depending on the income level of the workers.
The Economist on the net fiscal contributions of immigrants.

About the author

Tom Furber

Helping economics students online since 2015. Previously an economist and economics tutor, I now focus on providing economics resources on tfurber.com. Read more about me here.