Migration & businessPost Brexit sharp fall in migration to U.K. could shrink GDP per capita by more than 3%

EU migration to the United Kingdom could fall by well over half over the period from now to 2020, resulting in net EU migration falling by more than 100,000, a new National Institute of Economic and Social Research (NIESR) paper estimates. According to the research the fall in migration would also lead to a significant reduction in GDP per capita – up to 3.4 percent over the period to 2030 — whilst providing a modest boost (less than 1 percent) to low paid Brits in the most directly affected sectors.

NIESR notes that the research, by NIESR fellow and U.K. in a Changing Europe Senior Fellow Jonathan Portes and NIESR research assistant Giuseppe Forte, first estimates the determinants of EU migration to the United Kingdom. Both the state of the economy and the existence of free movement of workers are significant determinants. In particular, free movement within the United Kingdom results in an increase of almost 500 percent — that is, by a factor of six. These estimates are then used to construct scenarios for future migration flows. Under the central scenario, net migration from the EU falls by about 91,000 by 2020.

The paper then uses existing empirical research on the impact of migration on productivity, growth, and wages to estimate the broader economic impacts. Over the period to 2020, the resulting in GDP would be about 0.6 to 1.2 percent, with a GDP per capita reduction of 0.2 to 0.8 percent. Over the period to 2030 – the period covered by the analyses published by HM Treasury, the OECD, and NIESR — the hit to GDP per capita could be up to 3.4 percent, a similar order of magnitude to the impact from falls in investment and trade found by these studies. By contrast, the increase in low-skilled wages resulting from reduced migration is expected to be relatively modest.

Jonathan Portes said: “Prior to the referendum, a number of analyses estimated the long-term impacts of Brexit on the U.K. economy; but none incorporated the impacts of Brexit-induced reductions in migration. Our estimates suggest that the negative impacts on per capita GDP will be significant, potentially approaching those resulting from reduced trade.”

He added that the 3.4 percent hit to per capita GDP from a 91,000 reduction in EU migration in the NIESR’s central scenario was on a similar scale to the impact from the falls in trade and investment projected by the Treasury, the Organization for Economic Co-operation and Development (OECD), and the International Monetary Fund (IMF) before the Brexit referendum.

The analysis shows that the economic damage of deep cuts in EU migration go even beyond the estimate made by the Office of Budget Responsibility (OBR) at the chancellor’s autumn statement last month.

The Guardian notes that the OBR, in the absence of a new government policy on immigration, based its assumptions on a conservative 80,000 a year reduction in net migration to Britain. It estimated that this cut would cost the economy £0.8bn in 2016-17 rising to £5.9bn a year by 2000-21 and with a total hit of £16bn over the next five years.

The NIESR estimate suggests a similar fall in EU immigration will prove even more damaging to the British economy. This is because, unlike the OBR model, it includes an assumption that the fall in net migration will also cut the growth in labor productivity in Britain by reducing the competition for work.

The researchers say their analysis uses a methodology similar to that employed by mainstream economic forecasters to model the impact of Brexit-induced reductions in trade on productivity and growth.

“The broad scenario (not forecasts) we depict imply that the negative impacts on per capita GDP will be significant, potentially approaching those resulting from reduced trade. By contrast, the increase in low-skilled wages, resulting from reduced migration is expected to be, if at all, relatively modest,” the authors conclude.

The paper was prepared for the Oxford Review of Economic Policy/British Academy conference on the economics of Brexit. The paper presents a high-level summary of the results of an econometric analysis of the determinants of migration flows. It will be followed by a more detailed, technical paper by the same authors setting out the methodologies used.

— Read more in Jonathan Portes and Giuseppe Forte, The economic impact of Brexit-induced reductions in migration (National Institute of Economic and Social Research, 7 December 2016).