Flexible labour markets and immigration

Immigration tends to encourage a range of emotive responses, but, its impact on the flexibility of labour markets is worth considering.

In the boom years, Ireland was growing by up to 5% a year or more. Growth was particularly strong in the construction sector. This led to a shortage of workers in certain low skilled jobs. Usually, this rate of growth and shortage of labour would push up wage costs and create inflationary pressure. However, the growth and membership of the EU, encouraged many workers from eastern Europe to travel and work in Ireland. Thus, the supply of labour was relatively elastic, enabling Ireland to pursue fast growth with minimal inflation.

Now, the Irish economy has come to a sharp slowdown as the global credit crunch bites. Usually, this would lead to sharp rises in unemployment. But, as economic fortunes in Ireland deteriorate, many of the temporary workers are returning to Poland / Russia / Eastern Europe.

Therefore, the rise in unemployment will be mitigated by a decrease in the supply of labour.

A similar situation has been occurring in the UK. The exodus of immigrants has been accelerated by the fall in the value of Pound which means it is much less attractive to work and save in the UK. The benefit for the UK, is that as workers leave, the rise in unemployment is mitigated.

A key issues is the geographical mobility of eastern European workers. Immigrants from the Commonwealth (West Indies, India) would find it much more difficult to return home, just because work was drying up. But, for many young Poles, it’s just a question of driving home.

Of course, the net migration isn’t going to stop unemployment rising. Also as workers leave it will have an effect on reducing demand in the economy. But, it does give at least one benefit – more flexible labour markets.

The other question is when UK and Ireland recover, would Poles want to return?

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Policies to deal with free movement of labour

To what extent can the government / EU mitigate these negative impacts, whilst retaining free movement of labour?

1. Funding related to number of people. One issue of free movement of labour is that certain areas can see a sudden influx of migrants, which places a stress on social services, housing and possibly wages. If government spending was more flexible, higher public funds should go to those areas with rising populations to mitigate issues of overcrowding and NHS waiting lists.

For example, the FT highlights Barnsley which in recent years has seen an influx of migrant workers from EU to low paid jobs, but, at the same time, Barnsley council was dealing with 40% spending cuts and firing half its staff.

Sir Stephen Houghton, the Labour council leader, said he had expected the Brexit result. “In the last four years we have had 5,000 migrants arrive, 4,000 from the EU. The proportion went from 0.5 per cent of the population to 4 or 5 per cent. FT

Migration is a net economic benefit and migrants are net contributors to treasury, but for those in certain areas it doesn’t feel like it, because austerity is the dominant force.

• Evaluation. Government spending invariable has time delays. It takes time to recognise rising population, and then time to actually improve services and housing.
• Also, it requires central government to be willing to increase public spending reserves, this may require higher taxes / and or less strict budget targets.
• Also, higher spending is not a panacea. It doesn’t deal with the cultural issues of sudden influx of people, nor would might government spending be sufficient to create good full time, highly paid jobs.

2. Labour market regulations to discourage net migration.

This could involve:

• Prevent UK firms advertising for jobs in Eastern Europe
• Regulation to outlaw zero hour contracts and flexible contracts.
• Limitations on out of work and in work-benefits for newly arrived migrants.

These may have a minor impact on reducing flow of workers, but they would only touch the surface of the issue. Migrants are more likely to work in flexible work, but that doesn’t mean you would want to necessarily ban zero hour contracts. Despite downsides they may help create jobs, which is better than unemployment.

More balanced information. Certainly one issue is that in many tabloid newspapers there is the perception created that migrants are universally bad – pushing down wages, taking housing, benefits and filling up the NHS e.t.c.. However, this is a misleading account. Migrants are net contributors to treasury. Also, as people come in, many UK pensions have gone abroad (reducing demand on UK NHSA). A more balanced understanding would help diffuse some tension, though it is much easier said than done.

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Problems of free movement of labour

Potential problems of free movement of labour

Large net flows of people cause infrastructure problems. The UK has seen a rise in population of 0.5 million in past year – approx 75% of this increase is due to net migration (though this includes both EU and non-EU). (link). There is concern that a rapid rise in population  places strain on public services – health, education and housing.

In theory, a rising working population should directly increase GDP, leading to more tax revenues which can be used to spend on improving public services. (Migrants are net fiscal contributors). However, in the UK, the net migration has occurred during a period of restrained public spending. Real GDP per capita growth has been low, and the government have been committed to cutting aspects of public spending. Therefore, the rise in population has put pressure on public services, with people feeling that public services, like the NHS have been under pressure because supply hasn’t met the growing demand from rising immigrant population.

However, see: NHS and immigration for evaluation of this point.

Large net flows exacerbated housing crisis. The UK has a housing crisis – demand is growing faster than the ability (or willingness) to build new houses, the result is house prices and rents have been rising faster than prices and wages, increasing living costs. The large net flows of migrants has not caused this housing crisis, but the additional flows of people has exacerbated the gap between supply and demand. In theory, more houses could be built to deal with rising demand and population growth. But, this is complicated by the fact UK has limited land it is willing to give up for building, e.g. protests against building new houses on greenbelt land.

See: Immigration and housing.

Congestion

Even if public services and housing increased to meet supply, you could argue a rising population leads to a decline in quality of life because it increases population density and congestion. For example, in UK, there is limited land to build new roads (without going through countryside). Therefore, a rapid rise in population due to free movement of labour, will contribute to more traffic congestion, which has both economic and social costs.

On the other hand, higher population densities can have some benefits.

Downward pressure on wages. The argument is that, if you allow large net flows of workers from low wage countries, these workers will be willing to bid down wages and the increase in supply of labour will lead to a fall in wages of native born workers. This is particularly the case for unskilled workers who are closer substitutes for immigrant labour.

However, this is complicated........READ MORE

Free movement of labour

Advantages of free movement of labour

1. Can help deal with labour shortages. Countries may experience labour shortages, especially in certain skilled positions or undesirable jobs many domestic workers don’t want to do. Immigrants can fill these vacancies. The UK has relied on many immigrants to work in the NHS, filling skilled jobs, such as nurses and doctors. Across UK, migrants account for approx. 10% of doctors. (full fact)
2. Can diminish the rise in unemployment. If there is free movement of labour, then workers from oversees can take temporary jobs when an economy is booming and then return home, when the boom is over. This is particularly beneficial for cyclical job markets, such as construction.  For example, during the Irish property boom (2000-2007), construction workers migrated to Ireland. However, the property collapse and subsequent recession saw many immigrants from eastern Europe return to their native country.”The number of Personal Public Service (PPS) Numbers issued to non-Irish nationals went down by nearly 50% between 2008 and 2009, and over the past two years the number of employment permits issued has dropped by 66% (Facts about Migration) Without this free movement of labour, the rise in unemployment would have been sharper in Ireland.
3. Can prevent wage inflation. If an economy experiences labour shortages, it will put strong upward pressure on wages; higher wages can easily lead to inflationary pressures. Free movement of labour means rising wages will attract more labour into a country and this will prevent excess wage inflation.
4. Labour migration creates additional demand. Many focus on the increase in labour supply, pushing down wages, but migration also leads to additional demand. UK economic growth has been boosted by rise in population (partly caused by net migration).
5. More flexible labour markets. In an economy there may appear shortages in certain professions such as teaching and nursing. These vacancies can take a long time to fill because of the time taken to undertake training. If there is free movement of labour, qualified workers will be attracted to fill these vacancies making the economy more flexible and overcome shortages quicker.
6. Fill undesirable jobs. In developed countries, there are often jobs which are difficult to fill because they are deemed unsavoury. This may involve cleaning, bar work or dangerous jobs. Immigrants may be willing to fill these jobs because of the wage premium from working in that country.
7. Opportunities for workers to work elsewhere. In addition to migration into the country. Free movement of labour enables people to work (and retire) elsewhere. Over 2 million British workers moved abroad during period of free movement of labour in the period of EU membership.
8. Help deal with demographic challenges. Many countries in Western Europe are experiencing a demographic time-bomb – with a rapidly ageing population. This places strain on public finances because people over 65 are net recipients of state spending (pensions + health care, less income tax contributions). Free movement of labour can see young immigrants come to areas of declining working population and make a net contribution to public finances. (See: immigration and public finances)
9. Helps to reduce regional inequalities. Free movement of labour should help to regional disparities between the economic union. Free movement of labour has enabled workers in Eastern Europe to save money and increase their living standards. Some of this income will be saved and sent home to increase living standards in Eastern Europe. After joining the EU, countries like Portugal, Spain and Ireland did get closer to average EU GDP per capita levels.

Non-economic advantages of free movement of labour

• One of the founding principles of the European Union was to avoid conflict and promote harmony between European nations. It was felt that the free movement of people across national borders would diminish national rivalries because countries would become more integrated and less opposed. To give a crude example –  if you live and work with Germans in France, you will see the human side and not want to go to war with Germany.

Disadvantages and problems of free movement of labour

Why is free movement of labour so often unpopular? Overlaps with issues such as austerity, housing and declining public services.

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Adv/disadv flexible labour markets

Disadvantages of Flexible Labour Markets

1. Part time and temporary staff may not get sufficient training from firms because they only have short term contracts. Therefore many low skilled workers will remain under-skilled because they never gain job stability and the training this encourages

2. Flexible labour markets create greater job insecurity and stress. Job security is often as important to workers as the level of wages. This insecuity could lead to lower morale and lower productivity for the firm in the long-rin

3. Rising inequality as non-unionised part-time workers get smaller pay increases. Arguably flexible labour markets have created a bigger gap between those ‘insiders’ with secure job contracts, and those ‘outsiders’ without job contracts.
4. Higher search costs for workers needing to find new jobs. Also firms may have higher replacement costs for hiring more workers. Firms may end up paying a premium to employment agencies to help fill gaps in their workforce.

Advantages of Flexible Labour Markets

1. Firms will be more efficient and competitive. Flexible labour markets help keep costs down for firms. For example, firms can get ride of surplus workers. This may help prevent the firm go bankrupt and protect jobs in the long term. Arguably with globalisation, it is increasingly important for firms to remain competitive within the global economy.

2. With increased labour productivity there could be an increase in output and exports. There could be a lower rate of natural unemployment and lower inflation.

3. Many workers will prefer flexible employment patterns because it suits their life style and offers a greater range of choice. For example, flexible labour markets have played a role in increasing female participation rates.
4. May encourage inward investment. Multinational firms may be attracted to invest in countries with more flexible labour markets, creating jobs in the first place.
5. Arguably countries with restrictive labour market practises, such as France and Spain have experienced higher rates of structural unemployment.

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Flexible labour markets

Flexible Labour Markets  means that the labour markets quickly adjust to a competitive equilibrium. Flexible labour markets involve factors such as:

• Easy to hire and fire workers
• Labour is occupationally and geographically mobile
• Government intervention does not distort the market

Characteristics of Flexible Markets:

1. Skilled workforce which can adapt to changing requirements
2. Flexible hours and working contracts e.g. more temporary employment or working from home.
3. Self-employment where workers and firms can be more flexible in how and when to work.
4. Greater flexibility in pay arrangements

Why has there been an increase in labour market flexibility?

1. Globalisation has opened the UK  to more international competition therefore to remain competitive firms have to keep labour costs relatively low

2. Technological change has made it easier to have flexible labour markets. For example the internet has increased the provisions of information better and makes it easier to work from home.

3. Changing social environment e.g. increased female participation in the labour force, women are more likely to favour part time flexible work.

4. Core periphery model. This states that firms are making more use of a core workforce but also part time temporary workers who are more flexible.

5. Privatisation. Private firms have sought to increase profitability by cutting excess workers

6. Reduced power of trades unions such as banning closed shops and limitations on the right to picket.

7. Harder to get unemployment benefits.
8. Growth in self-employment – more people classed as self-employed rather than employed
9. Increased migration, e.g. workers from Eastern Europe coming to UK to fill labour shortages.

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Labour shortages

Reasons for labour shortages

1. Geographical shortages. An area with a booming economy, but poor housing can experience labour shortages quicker than the rest of the economy. In the UK, London has strong employment demand but suffers from high rent costs which make London relatively unattractive to workers, causing labour shortages.
2. High skilled jobs. Occupations which require particular skills/qualifications have only a limited pool of workers who can apply. For example, an occupation like doctors/nursing requires a lengthy training period. If there is a shortage, there will be a considerable time lag in training new workers.
3. Unattractive jobs. In the service sector or agriculture, there are some jobs which are hard to fill because of non-monetary costs and negative social perceptions about the job. For example, fruit picking – is long hours, repetitive work and exposed to the elements. In a developed economy with high expectations, farmers can struggle to fill these low-paid jobs, which are seen as undesirable.
4. Social prestige. Job professions are not just about wages, but the prestige attached. In the UK, there has been a push to increase rates of students studying at university. For many schools and parents, vocational jobs, such as plumbing, electrician and technician are seen as relatively unattractive. The retail sector has a perception it is just a ‘temporary’ job and many want to avoid a career in this sector.
5. Fixed pay. Public sector jobs have pay determined by the government and not market forces. For political reasons, the government may implement a prolonged pay freeze – even in public sector occupations where shortages are beginning to show. This is often a problem for an occupation like teaching, which is high-skilled but relatively low paid compared to private sector alternatives.
6. Economy at full employment. Labour shortages will be more likely in vulnerable sectors when the macroeconomy is close to full employment

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Imperfections in the Labour Market

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In the real world labour markets are rarely perfectly competitive. This is because workers or firms usually have the power to set and influence wages and therefore wages may be set to levels different than anticipated by MRP theory.

Different Imperfections in the Labour Market

1. Monopsony:

This occurs when there is just one buyer of labour in a market.
Even if there are more than one employer, firms may still have the ability to set wages. Therefore they have Monopsony power

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