© Institute of Economic Affairs 2005. Published by Blackwell Publishing, Oxford Economic viewpoints Blackwell Publishing, Ltd. THE ECONOMIC CASE FOR IMMIGRATION 1 Diane Coyle Immigration into the UK has increased in response to high labour demand in the recent past. This additional supply of labour has helped keep interest rates lower, and growth higher, than they might have been otherwise. The longer-term impact of higher immigration may be an increase in trend productivity growth. Although the evidence on such long-term economic effects is incomplete, there is no reason to believe market principles – or fundamental freedoms – are any less relevant when it comes to flows of people rather than goods or capital. The subject of immigration sometimes arouses heated passions, which makes it all the more appropriate for an economist to wade in wielding a fire extinguisher. In this article I focus on some key aspects of the relevant economic theory and empirical evidence of immigration. What are the potential benefits and costs, and how do they balance out in practice? It is important to first put the UK’s migration flows into context. In recent years the annual inflow of legal migrants has risen – it has been in the 170,000–180,000 range, which is about 0.3% of the existing population each year. The number of naturalisations in 2001 amounted to 0.15% of the population. As a result of these flows, the foreign-born now account for about 8% of the total UK population and 10% of the working-age population. This means that about 1 in 12 people in the UK is foreign born, reflecting the whole postwar experience of immigration, and about 1 in 200 is a recent migrant. Of these totals, some two-fifths live in and around London. Just over two-fifths come from the rest of the EU and Western Europe, North America and Australasia. The great majority of the others are from the Commonwealth. Of course, some Britons emigrate too, and more so in recent years, with net emigration at 53,000 in 2001. People clearly draw different implications from these figures, 2 but it is just as well to start with them in mind. The administrative division of the recent arrivals into ‘asylum-seekers’ and ‘economic migrants’ has given rise to some topsy-turvy political rhetoric (not to mention the fact that people will often not fit neatly into bureaucratic categories). Many politicians seem to think they have to pay lip service to the legal and moral requirement to offer asylum to ‘genuine’ refugees, yet at the same time the government is vigorously seeking to reduce the number of successful asylum claims. At the same time, it tends to condemn economic migrants – that is, people seeking a better opportunity in life ( just as many Scots or northerners also want to move to the bright lights of London). And yet there has been a substantial increase in economic migration since 2002 thanks to big increases under schemes such as the Highly Skilled Migrants Scheme, the Sector Based Scheme and the Seasonal Agricultural Workers Scheme, reflecting a deliberate policy drive to attract economic migrants. These schemes have all targeted specific areas of skill shortage in the labour market. In the latest year for which the figures are available, a quarter of the new work permissions were in healthcare. The shifts in the asylum figures reflect in part the relative ease or difficulty of entering the UK as an economic migrant, as well as the degree of turmoil in the source countries. It seems that what is good in terms of plugging skill shortages in the labour market does not coincide with what is politically correct. There has been less economic research than one might imagine on the consequences of immigration. Much of the available evidence in the economic literature covers the United States, but in theory the economic impact of inward migration will depend very substantially on the specific labour market context. What is the skill composition of the existing population and of the would-be immigrants? How rapidly is demand for labour growing? How flexible are labour market institutions? Is it easy for employers to create new jobs if labour supply increases? Other impacts will depend on the specific welfare rules, on the capacity of the local infrastructure to absorb new users