The very wicked French novelist Michel Houellebecq recently asked: “It should be strange for the British: they voted for Brexit to have no more immigrants and you have more?” Yes Michel, it is strange – and not just for Britain. Migration to the western world has reached record levels, despite popular blowback in nearly every country.
Migration demonstrably lowered wages for native workers
Even excluding refugees (from Ukraine and elsewhere), permanent migration to the OECD hit a new high in 2023. Over a third of OECD countries registered their highest levels ever, particularly the United Kingdom, but also Canada and France.
The unlikely key to this story isn’t politicians but economists. There was a very real fear among economic policymakers in several countries of a brutal post-covid slowdown in an election year – one that never materialised, in part because of the economic statecraft that was deployed. In places like the United States, the migration lever was actively pulled to avert recession. In other countries, like Britain, jitters about the economy were yet another reason holding politicians back from reducing numbers.
We forget now but forecasting teams in the City put incredibly high probabilities of a 2023 recession for most of 2022. I remember these meetings well; everyone was very sure about what was around the corner. To give a flavour, at the Bloomberg Economics and Conference Board, the forecast likelihood of recession was higher than 95 per cent.
City forecasters are not dogmatists. The analysis is thorough and the logic typically sound. In response to a sharp jump in inflation, central banks had begun to deliver the third most aggressive hike in interest rates in at least fifty years. In the US, the only three Fed tightening cycles in 60 years that led to unambiguously soft landings involved interest rate increases of 175-315 basis points (bps). By September 2022, markets were already expecting 450 bps of hikes – it ended up being 550 bps. After a decade where interest rates reached new lows, there were fears that thousands of zombie companies and over-levered homeowners would go bankrupt at the first sign of a brutal interest rate adjustment, pushing growth sharply down.
How brutal? Forecasting models suggested a percentage point interest rate hike would ultimately reduce economic growth by 1 percentage point about a year later, implying a GDP hit of about 4-5 percentage points by 2024. Layoffs would rise. Former US Treasury secretary Larry Summers unhelpfully suggested a full year of 10 per cent unemployment would do the trick; or two years of 7.5 per cent; or five years of 5 per cent. Larry seemed indifferent as to which scenario would transpire. Peak searches for “recession” occurred in summer 2022.
To offset the anticipated hit from monetary tightening, the Biden administration – chiefly Ron Klain, the president’s chief of staff; Brian Deese, the director of the Economic Council, and Janet Yellen, Secretary of the Treasury – deliberately used two countercyclical economic levers to keep the economy growing: fiscal and migration policy.
The fiscal deficit rose 1.5 percentage points of GDP between 2022 and 2023. Separately, consumers spending pandemic-era savings from previous fiscal stimulus counteracted about 3 percentage points of tightening. Finally, adjusting the maturity profile of debt issuance reduced the 10-year yield by 25 basis points, as Nouriel Roubini and Stephen Miran have pointed out. In other words, there was enough fiscal firepower to counter the 4-5 percentage point hit from monetary policy.
But the Biden administration went further. We only learned how large the migration lever was in 2024, when the Congressional Budget Office released numbers showing that net migration in the US for 2023 was close to 3.3 million people, 2 million more people than prior Census data had indicated. From suspending pandemic era restrictions to turning away a smaller share of “encounters” on the Southern border, it is now clear the Biden administration at some point made it easier to enter the country. Inflows ballooned to four times inflow of the Obama years. When it became clear migration was going to be a major election issue, they reversed tack and cut levels sharply. In other words, these were active and deliberate levers.
The migration surge boosted overall GDP immediately, as adding hands and feet to the economy always does. Specifically, 0.75 per cent to real GDP from 2021 to 2024. This also boosted the noninflationary capacity of the economy: more jobs can be filled without causing inflation. But migration is complex, and this surge had three less desirable economic consequences.
First, in this particular instance, it demonstrably lowered wages for native workers. In a sense, this was always part of the plan, since higher wage growth would keep interest rates higher for longer. According to Goldman Sachs, immigration lowered wage growth by 0.4 percentage points across the US, but by 1 percentage point in industries with high rates of migrants, such as food services. (In Britain, Boris Johnson recently pointed out that migration numbers were jacked up to “deal with inflation.” In fact, the ill-fated Health and Social Care visa was launched in August 2020, when wage inflation was just 0.1 per cent. In the US, migration was a cyclical lever pulled to avoid a recession; in Britain, the problem is structural. Visa mechanisms had been prepared beforehand to allow the Treasury to get out of a short-term budget jam and bypass a failing financial settlement between local government and central government. Inflation and recession were just more reasons for the government to avoid the long-promised tightening of migration flows).
Second, migration will also contribute to shelter inflation (i.e. housing) for years to come. Migration reduces GDP per capita unless the capital stock rises, as the UK’s Office for Budgetary Responsibility showed in March 2024. In other words, migrants can work and pay taxes but they cannot bring with them houses or motorways. Migration cannot improve living standards if the capital stock doesn’t keep up, and there is a case that it isn’t. In the US, for instance, highway mileage has risen by 0.6 per cent since 2019, while the population is up 2 per cent in the same period. There is a cumulative housing stock deficit estimated to be north of 4 million homes in both the US and in Britain (despite a population five times smaller).
Here in Britain, there is an immense statistical hole where this data should be
Finally, the downsides of capital dilution could be offset if the migrants are big net fiscal contributors. But that has not been the case, because welfare programs keep expanding, and the wage profile of migrants seems to be falling in recent years. The fiscal impact of migration to the US economy is negative for state and local governments though positive for federal governments. The fiscal impact is negative overall, according to a report by Brookings’ Hamilton Project. On average, migrants and their dependents cost the state over $900 (£700) per capita.
That fits with common experience. When New York received a wave of migrants from the Southern border, its fiscal deficit shot up. Most New Yorkers I knew spent the year burying their heads in the sand whenever mayor Eric Adams spoke about the issue. But the police cordon outside of the Roosevelt Hotel processing centre on 45th Street told its own story. As Adams telling anyone who would listen: “We have a $12 billion (£9.5 billion) deficit that we’re going to have to cut — every service in this city is going to be impacted. All of us.”
The Brookings Hamilton study found that, over a 75-year time horizon, migration did, in fact, generate positive fiscal effects, after incorporating higher wages from descendants. But still only for those with a bachelor’s degree or higher.
None of this will have troubled the central planners, who until Trump’s election victory, were patting themselves on the back for a job well done
None of this will surprise anyone who has looked at the data. Low-skill migration was always going to be a challenge for fiscal positions in complex and large welfare states. In most analyses, low-skilled migrants contribute to future fiscal deficits in perpetuity. In Europe, where things always seem to be worse, an extraordinary piece of work by Jan van den Beek based on actual tax microdata in the Netherlands has illustrated the downsides alarmingly. Here in Britain, there is an immense statistical hole where this data should be, as MP Neil O’Brien and the Centre for Policy Studies’s Karl Williams have painstakingly pointed out. Policymakers are using incredibly simple toy models to guide a sophisticated £3 trillion economy. Yet even those have recently shown that over a lifecycle, for every £1 contributed to HMRC by the high-wage migrant group, the larger low-wage migrant group will have taken out £1.60.
Why is the impact of migration not more positive on the public finances? The question is jarring for people who have been told that migration is a “solution to long-term aging” or “will save the NHS”. The reality is that this notion was always strange. Most migrants are not superhuman. They are just like you and me – indeed I moved here in 2012. Labour economist Alan Manning put it this way: “Migrants age at the same rate as everyone else. They may be young when they arrive but don’t stay that way. All serious demographic work of which I am aware comes to a similar conclusion yet proponents of immigration as a solution to ageing rarely cite this work or give any impression they have ever read it.”
Put it another way, the median US resident is fiscally negative. Why would we assume the median migrant would not be? And, in fact, many of the migrants arriving will not be like the median resident at all. They will be in the bottom first or second quintile of earnings. In what context would this not be a fiscal burden? The whole premise of the conversation is backwards.
None of this will have troubled the central planners, who, at least until Trump’s election victory, were patting themselves on the back for a job well done even as migration rose up the list of the electorate’s concerns. Yet the fact is that, in very narrow terms, the US did avoid a recession in 2023. In the first half of 2024, nominal GDP growth was 5-6 per cent and inflation was 3 per cent and trending lower. “Soft landing” became the consensus view among City analysts.
In other words, by a very narrow economist’s definition the levers were “successful” in the United States. Here in Britain, there is hardly any case to be made that the use of the “third lever” has been cyclically successful – unlike the US, real GDP per capita is essentially flat on 2019 levels, and will keep having to be revised lower the more people we discover living in the country via Office for National Statistics revisions. The structural case is if anything even weaker, especially as we begin to internalise the deleterious long-run impact on public finances.
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