economics

Immigrants are Stealing our Jobs : True or False?

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I’m sure you have seen the awful photos of the people fleeing from their countries and trying to enter others. It is heartbreaking. It is also a little worrying. What will happen to our country if we allow all these people in? There has already been a lot of talk about immigration, about the impact on our economy and employment figures. What will happen?

It is a big topic, so this article will look at one small area. What is the impact of immigration on unemployment? I live in the UK, so will narrow it further: what is the impact of legal EU immigrants on UK unemployment? My assumption is that more immigrants equals more unemployment for British people. I asked my economics advisor if that was true. This is what he said.

He looked at legal EU immigrants between the age of 16 and 60 who come to the UK for work related reasons. So, either they have come to look for work or they are with someone (like a spouse) who intends to find work. He also looked at the UK unemployment rate. This is the percentage of the population who are willing and able to work (so not your toddler or great granny) but cannot find jobs.

The effect of immigration on unemployment is dependent on the ‘substitutability’ of immigrants and native labour. If they are ‘substitutes’ they will be able to do the same jobs, ie they will take the jobs from the British citizen (and increase unemployment.) If they are ‘complements’, having skills which we lack, they will decrease unemployment, increase the GDP and the country is better. So, are EU immigrants complements or substitutes?

All previous research of similar countries with similar demographics of immigrants show that there is very little long term rises in unemployment. However, there were very significant rises in the short term. (These studies include Mexican immigration into the US.) My advisor took these studies, built a model that was a compromise of all the methodology to see if the results were consistent with the UK and EU immigrants. The method is rather complicated, so I have included it at the end of this article (for those readers who enjoy a bit of economics.)

The results showed that the method worked and was statistically significant. It showed that a year after immigration, there was a rise in unemployment. Two years after that increased immigration, unemployment was at the same level that it would have been if there had been no immigration. So, if in 1980 there was high immigration, in 1981 there would be high unemployment but by 1982, the unemployment rate would have settled back to where it would be if no immigrants had arrived. Why would this happen?

Well, initially, those immigrants are unemployed (but not part of the ’employment statistics’.) So why is there a one year delay? This is because it takes a year for the employers to notice. You see, the bargaining power of immigrant labour is very low, they have very few ‘rights’. This means they are not in trade unions, their lifestyle at home was cheaper so they will accept lower wages, they are easier to ‘exploit’, so employers prefer them. After a year of immigration, employers notice they are surrounded by an available work force. They realise they can employ people for less money, easily replace workers if they leave and so on. Hence unemployment (of British people) increases (because the immigrants have been given jobs that Brits could do.)

However, after two years, something interesting happens. Companies spend a lot of money on labour, especially if they employ relatively unskilled workers. As their labour costs become lower (because they pay immigrants lower wages) the companies make more profit. This then enables the company to grow. A bigger company employs more people, which in turn reduces unemployment. This is helped by the fact that mobility within the UK is easy. People can move to where there are jobs, companies can expand to new places and the work force can follow.

However, we began the article by discussing Syrian refugees, not EU immigrants. Is that the same? Well, because Syrian refugees will be a similar demographic to migrant EU workers, they will have a similar impact. After two years of them immigrating, we can expect unemployment to be back to the levels it is at now.

So, I asked, that is good then? Lots more people but no big rise in unemployment after two years, so no big problem?

I was told that no, that was not true. The one year ‘blip’ after they first immigrate, that rise in unemployment, although temporary, could be potentially very damaging to the UK economy. If we take lots of refugees then it needs to be managed very carefully. The government needs to introduce them to the work force gradually, perhaps staggering the time that they can begin to find work in the UK. This article has only looked at one, very specific area, of immigration. It is a potential minefield of problems, all of which need to be carefully managed. So glad that I am not Prime Minister…….

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Methodology used to reach the conclusion: (not for the faint hearted…I have included it because I am told mathematicians and economists will find it interesting.)

The core of the model is a basic OLS regression model. This will show to what extent the independent variable of EU immigration (X) and the dependent variable of UK unemployment (Y) are correlated. However this correlation will not necessarily robustly prove any degree of causality between EU immigration and UK unemployment. To test this, modifications must be made to the model.

The first of these modifications will be to introduce control variables to address the problem of omitted variable bias. These will be factors that economists know to affect the unemployment rate. When these are accounted for model will explain more of the variation in Y.. This formula will use four such control variables – unemployment benefit, union density, real GDP growth and the interest rate. Next dummy variables are added into the model, used as ‘impulse dummies.’ This is where an effect takes place over a specific time period that would significantly affect the model, however at the end of that time period the effect would end and the model would return to normal.

By using dummies, the effect can be compensated for in solely the periods which it is active, therefore not changing the whole curve. There are three dummy variables added to the model to increase its usefulness. The first will be equal to one over the period of the financial crisis of 2007/2008 as the recession had a large effect on the UK economy, including on unemployment. The remaining two dummy variables will be the two separate years where a large amount of additional countries were added to the free movement of labour policy – 1994 and 2004.

Time lags will then be added. There are several reasons for this. Firstly, this will allow immigration in past time periods’ effect on unemployment can be analysed. Secondly it is assumed that the series are not completely non-stationary, in other words that past relationships have some relevance to the present economy. Finally, adding lags to the model will help to reduce reverse causality, a problem which is likely to be relevant. This is because the present state of the UK economy (of which unemployment is a large factor) will be included in a potential migrant’s migration decisions, therefore affecting immigration levels. 2 lags of X will be used in the t-1 and t-2 periods. This will give results of the immediate effect of immigration in period t, the relatively short term effects in t+1 and the long term effects in t+2.

The resulting model:

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The Chinese Economy

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Will the Chinese Economy Collapse? Since I published the article, ‘The Hiccups of the Chinese Stock Exchange’, there have been dramatic changes to the Chinese economy. If you look at share prices, they have dropped by another 20%. On ‘Black Monday’ there was a huge drop in a single day which knocked stock markets around the world and they too lost value. So, could the whole Chinese economy collapse? If it did, what would be the impact on normal people (you and me)?

The Chinese government has taken measures to try and stabilise their economy. They have lowered interest rates and cut the exchange rate. (You will understand how that works from the article ‘Interesting Interest Rates’) However, will it work?

To answer this, we need to understand a little about China. Firstly, it is huge. Look at an atlas (okay, google maps). It owns a massive amount of land. Secondly, there are loads of Chinese people. Loads. This means that what China does is slightly different to the rest of the world, an elephant moves differently to an ant.

If we go back twenty-five years, the idea that China could totally collapse was a real possibility. Why? Well, have a look at what all those Chinese people do, how they live. In the past, when there were 1.1 billion people in China, 800 million of them lived on farms. They were subsistence farmers, surviving on what they could grow. Think about it, that was one sixth of the world’s population, living in rural China, dependent on their own piece of land for survival. This made for a very unstable country. If there had been a drought, for example, 800 million people would have up sticks and moved. Imagine if they had rioted! This would create something of a crowd control problem.

Now, that didn’t happen and since that time, China has been increasing industrial development and urbanising such that today under half of its population lives in rural communities. (That is still 10% of the world’s population but it is significantly less than it was.) This makes the country more stable, there are more safety nets if there is a disaster.

As an interesting aside, if you look at world poverty, China, through urbanisation, has done more to move more people out of poverty than any single aid agency. You might not agree with how that has been achieved but it still makes for an interesting fact.

So, if we go back to our original point, will China collapse, then no. A complete melt down now seems unlikely. Okay, but could it still have a serious wobble? Could they be heading for a massive recession? Could the Greece thing happen but on a hugely magnified scale? Could the growth of the last 15 years come to a grinding halt?

Well, let’s look for a minute at how that growth came about. Firstly, China has a stable government. Again, you might not like the way it runs the country, but it is stable and that is good. That government has incentivised the massive population so that they leave their little rural areas and move to the cities. They have encouraged people to start businesses, to be entrepreneurs. They have unlocked innovation and allowed huge growth. They have done this by largely ignoring: the environment, human rights, health and safety. You might think the costs are too high. But it worked. The Chinese economy grew very large very fast. At least, it worked in the short term. However, there are weaknesses.

The weakness can be seen if you take a train ride from Beijing to Shanghai. You will pass empty city after empty city. All the infra structure is in place, massive stations, sky scrapers, office blocks, housing, roads, electricity. But no people. They are like ghost towns. Why?

Well, the local governments have had a policy that “if we build it, they will come”. They have built cities and when they are complete, people have moved from the rural areas and opened business, run factories, made money. They have filled the cities with tax paying workers, that tax has been used to pay back the loans from the banks, everyone is happy. It fueled development on a huge scale. It was also like a lot of spinning plates, if you could keep them spinning it was great, if they start to slow down you have a problem. The plates are beginning to slow down.

If people stop coming to the empty cities, if they remain empty, then no one will pay tax, the local governments will default on their loans. Then the small banks will need help from the big banks. The big banks will need help from the government. In real terms, for real people, what would that mean?

In 2008, the UK had a banking crisis which led to a recession. People lost jobs, businesses stopped growing and so stopped recruiting (even good graduates could not find work anywhere, it was bit of a shock!) The housing market slumped, people had less money. It was an uncomfortable time, one we are still recovering from, but the country did not collapse. At the same time, in Ireland, they had a bigger banking crisis and there was a much bigger recession. Their economy collapsed and the IMF had to bail them out.

Now, my guess is that China will be more like the UK in recession than like Ireland. It has not, as a country, borrowed much from other countries, it is fairly self-sufficient. They do buy a lot of raw materials, which will impact the markets, some stock exchanges may have a dip. However, we will not see a disaster like Greece has seen. Which is good because on the scale that China is, that would be devastating.

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Can the Euro Survive?

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Can the Euro Survive?

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      What will happen to the euro in the light of the Greek crisis? Does it have a long term future or will it disintegrate?

     I have no real opinion on this. So I listened in on a debate between two of my sources: an economist and a city worker. We will call them T (Tomato Source) and B (Brown Source). The words in italics are mine – either questions, or explanations of some of the terms used.

     Do you think the euro will survive for much longer?

T: No, because Germany will soon start to want it’s own monetary policy. At the moment, the eurozone has a monetary policy but Germany will decide it needs it’s own one soon. At present, if say Greece, France, Italy have slow economies, they will want to lower interest rates across the euro zone. Germany would have to comply with this, even if their own economy is over heating. (If you cannot remember what this means, read the article on interest rates published 11-7-15)

     The bigger point though is the opposite of this. When Germany wants to lower interest rates to increase consumption but most other economies are over heating. Then they will ‘stagflate.’ (This is not a form of indigestion, it means the economy is not growing but inflation is. It’s bad.)

B: I don’t agree. The currency wont inflate because it will always be balanced by those other economies. True, if Greece now had the drachma, it could use different techniques to the rest of the eurozone to sort out its economy. However, the USA works because it is centrally run. (Central government decides on tax, government borrowing etc for the whole country. Individual states decide on only some financial points.) A new ‘United States of Europe’ would work financially but all the countries would need to agree to be centrally run.

T: At present, if France, has a fast growing economy, they cannot lower interest rates unless all the eurozone agree. All they can do is change their fiscal policy. Classical economists think this cannot work.

Fiscal policy is what the government spends and what it sets taxes at. In the eurozone, the other measures to control the economy, like interest rates and the number of euros in circulation, are all agreed centrally. So, Greece could not decide to just print more euros when it ran out of money. Germany cannot decide to lower its own interest rates.

B: California is as big as a eurozone country and central policy works for them. Detroit went bust recently, but it works because they have more central control. The eurozone would work if they decided tax and government borrowing centrally, if it became a full union, like the USA. However, the citizens of the countries, the people who get to vote for governments, have never wanted this, they want the control to remain in the individual countries. This is why they have a sort of ‘half way house’, despite the theorists wanting a full union. That halfway situation is why it went wrong. They have now centralised the regulation and insurance of banks. This was an important step. The central bank (called the ECB) now controls all the domestic banks in all the eurozone countries.

So why weren’t the Greek banks protected? Haven’t they just gone bust?

B: It doesn’t stop them going bust. The insurance just protects the deposit, the money of the general public.

T: Another big problem is, monetary policy is effectively free, but it takes a long time to take effect. We’re in a recession. If I want to encourage people to spend more (and speed up the economy) I will lower interest rates. But that takes a long time to be effective. So the public feels its not effective at all (people tend to be impatient. Especially when their money is involved.)

     A faster way to speed up the economy, is through fiscal policy. The eurozone can only work if fiscal policy works. Everyone believes this. (Classical economists believe that fiscal policy does NOT work, therefore they believe the eurozone will NEVER work!)

     Whether or not fiscal policy works depends on two different things. It depends on:
1)the size of the multiplier effect
2)the scale of the crowding out

     Hmm, complicated terms! Economists love to use fancy phrases. We need to know what each of them means.

      Let’s look first at the ‘multiplier effect’. This refers to the GDP of a country. The GDP is simply the amount of ‘stuff’ produced annually in a country. It stands for ‘Gross Domestic Product.’ We’ll use China as our example because they have a big ‘multiplier effect’.

     Pretend the government decides to build a bridge. It pays £5,000 to the builder. (Yes, I know it wouldn’t be in £, but we’re trying to make this simple!) Now, that builder spends £3,000 in China on Chinese products, spends £1,000 on imports, saves £500 and gives £500 in tax.

      This increases GDP by £8,000. (Are you keeping up? It’s the government’s first 5,000 plus the builder’s 3,000 – all spent in China on Chinese stuff.)

     Now, the £3,000 of the builder was spent on a Chinese car. The car man then spends that money. He spends £2,000 on Chinese stuff, saves £500, spends £500 on imports and tax. So now we have another £2,000 spent in China on Chinese stuff, so their GDP increases again.

      That same money keeps multiplying the increase to their GDP (I am getting a hint as to how they chose that name now.) In fact, that original injection of £5,000 (from the government to the builder) increases GDP by £20,000.

     We used China as an example because in China, no one saves much, no one buys many imports (most things are ‘made in China’) and no one pays much tax. So, the ‘multiplier’ is much higher than somewhere like Belgium. Therefore, government spending in China is very effective.

     Now let’s look at ‘crowding out’. Pretend a government wants to build that same bridge and to raise the money to do so, it sells government bonds. These are in effect a way the government can borrow with interest. It borrows from banks and individuals (perhaps through National Savings Bonds) for a set period and then pays it back with interest.

     That money, when it is lent to the government, stops circulating, which slows the economy. (If I put £100 in Savings Bonds, then I am not using it to buy a new tele.) This is called ‘crowding out’.

     So, the ‘multiplier effect’ is the inverse of ‘crowding out’. (I wanted to write that it was the “opposite” of crowding out – because to my mind it is – but both my sources inform me that strictly that is not true, so we will stick with “inverse” knowing that for normal people that means “opposite”.) Whether or not fiscal policy works depends on which one – multiplier or crowding – is the most dominant

T: Therefore, fiscal policy will be less effective in places like Germany and France than somewhere like Poland. (Remember ‘fiscal policy’ is government spending and taxes.) So, even if the whole eurozone economy is slow, countries within the zone will disagree on how to speed it up, because fiscal policy will work better for some but not others. This is due to the diversity of countries within the eurozone. If they were all like France and Germany, then a central policy would be much more likely to be possible.

B: I don’t agree. In the USA, states have huge economic differences and yet a central policy works there.

T: That is because the culture across the states is broadly the same, the amount of stuff they import, the amount of tax they pay does not vary much between states. This allows a central policy.

B: Actually, I think it is because of central policy that they are similar. If all the countries across the eurozone accepted centralised government borrowing and taxation, then the euro would work. The Greek problem would probably never have happened.

     Politically, this is very unlikely to happen.

     So, can the euro continue?

B: The trouble is, politicians need to be popular to get votes. Democracy means that they are pressurised into continually borrowing as much as possible, so that life is good for the current population. They borrow from the future to keep voters happy today.

     This causes the temptation to behave rashly, to alleviate hardships today and to not live within their means. The euro takes away some of the consequences of over spending. Bad government decisions are spread across the eurozone. In the UK (not part of the eurozone) if the government overspends, then fairly soon it will face the consequences. Like Brazil had to. The countries in the eurozone can behave how they want and know that the other countries will bail them out.

     Maybe, the lessons learned in Greece will cause a change in behaviour. Maybe they will do things like set up a system of policing each other, auditing what is happening in each of the countries. Part of the Greece problem was caused because they lied about the amount of debt they had and no one checked. Even if they reject a central policy, they could introduce greater accountability. They could agree on tough consequences for governments who break the rules.

T: Whatever happens, I don’t think Germany will bail out another country. If Portugal follows Greece, I think the German people will just say no and Portugal would be forced to leave the euro. The eurozone would crumble.

     So, can the euro survive? If some new rules and tough consequences are introduced, then maybe. But it is far from certain…….