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:

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: