Mass Immigration Has Made Britain a Less Competitive Economy

Jeremy Warner
The Telegraph
September 3, 2013


When Mark Carney went to Nottingham last week to make his first speech as Governor of the Bank of England, media attention focused, naturally enough, on his reference to Jake Bugg, who we are told is a pop singer of some sort. Amazingly, Mr Carney had been to one of his gigs.

Yet Mr Carney’s more serious point was that UK productivity, which has been trailing other major advanced economies for decades, is no higher today than it was in 2005, when Mr Bugg got his first guitar. This appears to be the longest period of stagnation in UK productivity growth on record. Economists have widely described this phenomenon as a “puzzle”, a word they tend to use for any trend that breaks with past norms.

To most of us, however, it doesn’t seem in the least bit mysterious – it’s basically about the triumph in public policy of demand management over serious supply side reform. Unfortunately, this has got worse since the financial crisis began, not better.

Demand stimulus through monetary and fiscal policy is the politically easy option when an economy hits the buffers and perhaps vital in preventing a contraction turning into a depression but, as Britain’s nascent recovery gathers pace, it is worth reiterating that it doesn’t of itself lead to sustainable long-term growth or to rising living standards. These require more difficult choices.

An OECD assessment of the UK economy earlier this year attributed Britain’s poor productivity record since the crisis began to a number of factors, all of which are no doubt part of the explanation. To an extent, it’s plainly linked to the UK’s still impaired banking system, which, as Ben Broadbent, a member of the Bank of England’s Monetary Policy Committee, has argued, hampers the reallocation of capital across sectors.

Recessions normally weed out weaker companies and industries, allowing stronger, more productive ones to thrive more effectively. Reluctance to recognise bad debts, for fear of what this might do to banking solvency, has got in the way of this process. Easy monetary policy has also supported the overstretched, which again disrupts the Darwinian disciplines of market forces.

As we now know, trend growth ahead of the crisis wasn’t in any case as good as Labour made out; a lot of it was down simply to financial and housing market froth, now blown away by the banking implosion.

Hoarding of skilled labour, declines in North Sea oil production and statistical omissions in capturing the growth in Britain’s digital economy, may also have played their part.

Yet none of these things adequately explains Britain’s dismal long-term productivity performance.

In the search for answers, I want to highlight two other aspects of the problem – the negative impact of mass immigration on productivity and the failure to address simple supply side deficiencies in planning, education, infrastructure, public sector efficiency, the tax system and a perennially weak export performance.

On the whole, business leaders tend to support an open door immigration policy, which helps address skills shortages in key industries. But, more particularly, it also puts downward pressure on wage costs. The effect is similar to having permanently high levels of unemployment, since it creates an inexhaustible supply of cheap labour.

This may or may not be good for corporate profits but it is certainly not good either for productivity or for living standards among low and middle income earners. By making labour cheap, it removes a powerful incentive to productivity gain.

Read More