Lecture 4 & 5 - Labour Immigration
Learning objectives
This lecture set develops an integrated economic framework for understanding labour immigration, moving from (i) descriptive facts about UK migration, to (ii) the microeconomics of who migrates (self-selection), to (iii) labour market effects under different assumptions about substitutability and complementarity, and finally to (iv) fiscal impacts and wider macro and political economy channels.
1. Why immigration is persistently salient
Immigration regularly becomes a focal point in UK political discourse, partly because it combines distributional labour market effects with visible pressure on local services, and because voters may evaluate immigration through cultural as well as economic lenses.
The slide frames immigration as a high-salience issue in the UK. Economically, this is the context in which immigration policy is chosen: even when aggregate effects are small, who wins and who loses matters politically. A key exam move is to separate (a) overall welfare and efficiency effects from (b) distributional effects across worker groups and owners of capital.
The cross-country comparison underlines that immigration debates are not UK-specific. The economic link is that similar mechanisms appear across destinations: changes in labour supply, changing composition of skills, and public finance effects, with different institutional settings shaping the outcomes.
The historical quote (Benjamin Franklin, 1753) signals a recurring pattern: anxieties about language and institutions often accompany immigration. In economic terms, this anticipates the later “institutions and social norms” channel: concerns may not be about wages only, but about social capital and political cohesion.
Interpreting a political speech economically
Theresa May’s conference speech highlights three claims: (i) migrants plug skill shortages but many are not high-skilled, (ii) students should not overstay, (iii) EU migration had become “unbalanced” and “unsustainable”. The lecture’s analytical task is not to evaluate the rhetoric but to translate it into testable economic objects:
- Skill composition (high-skilled vs low-skilled) and substitutability with natives
- Visa compliance and selection (who stays after study)
- Push–pull factors (relative growth and job creation influencing inflows)
2. UK migration overview: the key time-series facts
This chart is the baseline stylised fact: net migration in the UK was negative in parts of the 1960s and 1970s, low in the 1980s and early 1990s, and positive every year since 1994, with a notable increase in the 2000s (linked to EU migration). The lecture uses this to motivate why we should treat immigration as a structural feature of the UK labour market rather than a one-off shock.
Economic interpretation
- Persistent positive net migration implies that labour supply is influenced by international mobility, so “closed economy” labour market models can mislead.
- A rise in net migration during high UK growth is consistent with migration responding to relative labour demand (a pull factor), not just source-country push factors.
Exam-friendly summary
- Net migration becomes persistently positive post-1994.
- Large 2000s rise is associated with EU inflows.
- Immigration analysis must account for policy regimes (free movement) and business cycle conditions.
3. Institutions: Free movement as a labour market integration mechanism
The lecture stresses that EU free movement reduced legal barriers to mobility for EU citizens, with rules covering short stays (up to three months) and longer residence linked to employment, self-employment, study, sufficient resources, or family status. Transitional restrictions (e.g., Romania and Bulgaria) delayed full access to UK labour markets until end-2013.
Economic intuition
- Free movement lowers migration costs (legal, administrative, informational), increasing the responsiveness of labour supply to wage and employment differentials across member states.
- In integration terms, it is a “quantity adjustment” channel: instead of wages adjusting to clear labour markets nationally, migration can adjust labour supply across countries.
Exam insight
- Treat free movement as institutional deepening that increases factor mobility, which can raise efficiency but can also shift adjustment burdens onto specific local labour market segments.
4. Reasons to migrate: self-selection and why migrants are not random
4.1 Concept: selection is the core empirical difficulty
Migration decisions are made by individuals with heterogeneous abilities, preferences, and constraints. Therefore, immigrants will differ from non-migrants in systematic ways. Any “impact of immigration” estimate risks conflating the effect of immigrants with the fact that immigrants choose where and when to move.
The lecture contrasts older negative-selection narratives (e.g., Franklin’s pejorative view) with positive-selection arguments:
- Chiswick’s view: immigrants are “more able and more highly motivated”
- Carliner’s view: immigrants “choose to work longer and harder”
These are not merely claims about character: in labour economics they imply higher effective labour input (hours, effort, productivity) and therefore potentially higher earnings conditional on observable skills.
4.2 Borjas selection logic: inequality and returns to skill
This diagram summarises Borjas’ (1987) selection model: the key is relative returns to skill between source and destination. Even if mean wages are higher in the destination, who migrates depends on how the earnings distribution differs.
Interpretation of the figure
- When the source country has low inequality, high-skilled workers may gain more from moving to a destination where skills are rewarded more strongly, generating positive selection.
- When the source country has high inequality, low-skilled workers may have stronger incentives to move if the destination offers relatively better pay at the bottom, generating negative selection.
Economic intuition
- A migration decision compares expected earnings net of migration costs. If the destination compresses wages less (higher skill premium), high-skilled workers gain more.
- Selection is about the slope of the wage–skill relationship, not only about average income.
Exam insight
- Use the model to explain why different origin groups can exhibit different skill profiles in the same destination country.
- Link selection directly to policy: points-based systems attempt to engineer positive selection by raising the relative payoff to high skills.
4.3 Evidence on selection: mixed patterns across groups
The lecture reports:
- Mixed evidence for immigrants to the US.
- Israeli immigrants to the US are positively selected (Gould and Moav).
- Mexican immigrants originate from the middle of the skill distribution (Chiquiar and Hanson).
- On average, positive selection on educational attainment from almost every sending country (Feliciano; Grogger and Hanson).
Exam-friendly summary
- Selection can be positive, negative, or “middle” depending on relative returns and costs.
- Empirical work frequently finds positive educational selection on average, but important heterogeneity remains.
5. Labour market impact: theoretical framework
5.1 A simple production setting
The slides assume production uses capital and labour. Wages reflect the marginal product of labour (MPL) under competitive labour markets. Immigration affects outcomes by changing:
- total labour supply
- the composition of labour by skill
- returns to capital (and hence investment and labour demand over time)
A crucial modelling choice is whether immigrants and natives are:
- perfect substitutes (compete in the same labour market segment), or
- complements (immigrants raise natives’ productivity)
5.2 Why time horizon matters: capital fixed vs capital adjusts
The lecture’s central message is that short-run and long-run effects can differ because capital is sluggish in the short run but adjusts in the long run. Therefore, wage impacts predicted by “fixed capital” models may overstate persistent harm to natives.
6. Immigrants as substitutes: short-run partial equilibrium
This diagram is the core short-run story under substitutability. With capital fixed and labour mobile, immigration shifts the labour supply curve outward. The wage falls from
How to read the figure
- The demand curve is derived from MPL: firms hire until
- The domestic supply curve is native labour supply; the total supply adds immigrants.
- The fall in wage is the mechanism through which the labour market clears with more workers.
Distributional implications
- Native workers with similar skills lose via lower wages and potentially lower employment.
- Owners of capital gain because labour is cheaper, increasing returns to capital (as the slide notes).
- The magnitude depends on labour demand elasticity and the degree of substitutability.
Exam insight
- Always specify “native workers with similar skills”. Immigration does not mechanically harm all natives, even in this simple model.
- State that this is a short-run outcome with fixed capital.
7. Immigrants as substitutes: long-run adjustment via capital accumulation
The long-run diagram adds a dynamic adjustment channel: when wages fall initially and returns to capital rise, firms invest, expanding the capital stock. This shifts labour demand outward, restoring wages and native employment to
Interpretation
- Immigration initially raises the profitability of expanding production.
- Investment increases capital per worker, raising MPL and shifting demand rightward.
- The long-run equilibrium can feature similar wages for natives but a larger economy.
Exam-friendly summary
- Short-run: wages down, natives potentially displaced.
- Long-run: capital adjusts, wage effects attenuate, total employment and output rise.
- The key is endogenous capital accumulation responding to higher capital returns.
8. Immigrants as complements: when immigration raises native wages
The complementarity model assumes immigrants increase natives’ productivity. The diagram shows a shift out in demand for native workers, raising wages from
Economic mechanisms behind complementarity (from the slide)
- High-skilled immigrants can enable specialisation among researchers and academics.
- Low-skilled immigrants can free natives to move into more complex, communication-intensive roles.
Intuition
- If immigrants fill tasks that are different but connected to natives’ tasks, the marginal product of native labour rises.
- In wage terms, immigrants can raise the demand for native labour rather than replacing it.
Exam insight
- Complementarity is fundamentally a task and skill composition story.
- A common exam mistake is to treat “immigration” as a single undifferentiated labour supply shock.
9. Empirical evidence: identification problems and why natural experiments matter
9.1 Correlations across cities can mislead
The lecture notes that many studies correlate local wages with local immigration. The logic is: if immigration is harmful, then natives in high-immigration cities should be worse off. However, migrants may choose prosperous cities, creating endogeneity.
The “potential problems” slide states two central threats:
- Non-random settlement: immigrants cluster in prosperous areas, so wage–immigration correlations may be biased upwards.
- Open local labour markets: natives can move away in response to immigration, spreading adjustment across regions and making local effects appear small even when national effects exist.
The Miami population growth comparison is used to illustrate the second point: if native out-migration offsets immigrant inflows, local outcomes understate the true equilibrium adjustment.
9.2 What a natural experiment aims to do
The lecture defines a natural experiment as a setting with treatment and control groups without random assignment, with selection into treatment remaining a concern. The point is methodological: the credibility of immigration impact estimates depends on whether we can isolate plausibly exogenous variation.
The minimum wage example (Card and Krueger) illustrates the design logic: comparing outcomes in a treated region with a similar control region helps net out confounding time trends. The lecture uses this as an analogy for how immigration shocks can be studied when a credible comparison group exists.
10. Evidence: the Mariel Boatlift (US)
10.1 The shock
In 1980, about 125,000 Cuban immigrants arrived in Miami over a short period, increasing the labour force by about 7 percent, and many were low educated (57 percent without high school diploma). This is presented as an “unexpected exogenous supply shock”.
10.2 Labour market outcomes: unemployment comparison
The table compares unemployment rates for unskilled workers in Miami before (1979) and after (1981) the flow, versus comparison cities (Atlanta, Houston, Los Angeles, Tampa–St Petersburg). The slide reports no effect on unemployment or wages of less-skilled non-Cuban workers and rapid absorption.
How to interpret the table
- Miami’s unemployment rises slightly (8.3 to 9.6), but comparison cities also worsen (10.3 to 12.6).
- The inference is difference-in-differences style: Miami does not deteriorate relative to controls, suggesting limited adverse effects.
Economic explanations consistent with the lecture
- Fast assimilation of immigrants into the labour market.
- Native mobility and the fact that local labour markets are not closed.
- Capital adjustment may have occurred even within short horizons if firms expanded output.
10.3 “A debate for years”
The debate reflects exactly the identification concerns discussed earlier. Even if the event is large and sudden, conclusions depend on how we define the affected market and how we account for native migration responses.
Exam insight
- Use Mariel to show why small local wage effects do not necessarily imply zero national effects.
- Explicitly mention the “open city” issue: adjustment can occur via population movements.
11. Evidence: national effects and the “all markets are affected” argument
This figure (Ottaviano and Peri, 2012) is used to motivate that immigration can affect the national wage structure even when city-level comparisons show small effects. The lecture’s key line is: the unit of observation may need to be the national labour market, not the local market, because factor mobility and goods market linkages transmit shocks across space.
How to use this in an exam
- Contrast “local approach” vs “national approach”.
- Explain that local estimates can be attenuated by internal migration, sectoral reallocation, and price adjustments.
12. Evidence: Israel as a mass migration natural experiment
Friedberg (2001) studies the large inflow of Russian Jews to Israel from 1989 onwards. Between 1990 and 1991, around 610,000 migrants arrived (about 7 percent of the population), and the 1990s saw a 20 percent population increase. The migrants were more skilled than natives, yet real wages fell by about 5 percent.
Interpretation
- A fall in real wages alongside high-skilled inflows suggests the labour market adjustment was not a simple “more skills, higher wages” story.
- The slide’s explanation is occupational downgrading: immigrants entered low-wage occupations, which can temporarily raise labour supply in those segments despite high education.
Link back to theory
- Even with positive selection, substitutability can exist within particular occupations.
- Capital accumulation is highlighted as mitigating labour market effects, consistent with the long-run adjustment mechanism in the substitute model.
13. Evidence: France after Algerian independence
Hunt (1992) examines the return of about 900,000 French-born expatriates to France in 1962 (around 1.6 percent of the population), with similar education to natives. The lecture reports very small effects, with a slight wage decline.
Interpretation
- This supports the lecture’s broad theme: large inflows need not generate large wage collapses, especially when the economy adjusts through sectoral expansion, internal mobility, and potentially capital deepening.
14. Evidence: the UK
The lecture summarises UK evidence as follows:
- Immigrants to the UK are on average better educated than natives.
- Composition varies by skill and region (Dustmann et al., 2005, 2008).
- Some small negative wage effects at the bottom and small positive effects at the top, with no average wage effect.
- Manacorda et al. (2010): immigration depresses earnings of previous immigrants rather than native-born; small rise in returns to education for natives and small deterioration for previous immigrants.
Economic interpretation
- Distributional impacts are concentrated: low-wage segments may experience more competition, while high-skill complementarities can raise wages at the top.
- The “previous immigrants” result is consistent with substitutability within similar migrant networks, occupations, or local labour market niches.
Exam insight
- State clearly: “no average wage effect” does not mean “no effects”. It means the positive and negative effects across groups can offset in the aggregate.
15. Fiscal effects of immigration to the UK
15.1 Framework: net fiscal contribution
The lecture asks whether social benefits exceed taxes, and how much immigrants contribute to, and receive from, the public purse. This matters for the sustainability of the welfare system and for policy debates where “pressure on services” is central.
Dustmann and Frattini (2014) distinguish:
- immigrants residing in the UK from 1995 onwards versus those arriving since 2000 (“recent immigrants”)
- EEA versus non-EEA immigrants
15.2 Revenues vs expenditures: ratio chart
This figure visualises the ratio of revenues to expenditures for immigrants. The economic point is that fiscal effects depend not just on employment, but also on age structure, benefit take-up, and tax contributions. A ratio above one indicates a net positive contribution.
15.3 “Recent immigrants” fiscal contribution
This slide reports that recent EEA immigrants made a positive contribution (£22.1bn), paying 34 percent more than they took, and recent non-EEA immigrants also made a positive contribution (£2.9bn), paying 2 percent more than they took, while natives had a negative contribution over the period described.
How to interpret the numbers
- The fiscal balance reflects lifecycle effects: working-age groups tend to contribute more, while groups with higher benefit eligibility can be net recipients.
- Separating “recent” from earlier cohorts captures that initial migrant cohorts may differ in labour market integration and benefit use.
15.4 Human capital transfer channel
The slide highlights a major mechanism: immigrants’ education is financed by origin countries, yet the destination gains from the resulting human capital. The lecture quantifies this as about £49bn that would have been required to produce similar human capital through the UK education system.
Economic intuition
- This is a fiscal externality in the UK’s favour: it receives skilled workers without paying the full education cost.
- It also links back to positive selection: if immigrants are more educated on average, fiscal impacts tend to look better, holding employment constant.
Exam insight
- Always mention both flows (taxes and benefits) and stocks (human capital endowment).
- Fiscal impacts are not the same as wage impacts, though they can be related through employment and earnings.
16. Other effects of migration beyond wages
The lecture emphasises that immigration can affect inflation, housing, and institutions, expanding the analysis from labour economics into macro and political economy.
16.1 Inflation and non-traded goods
The slides report that in the US a 10 percent increase in low-skilled immigrants reduces wages of other low-skilled immigrants substantially and reduces wages of low-skilled natives slightly, with implications for prices of non-traded goods and services. The mechanism is:
- wages are a key cost component in non-tradables
- lower wage growth can translate into lower inflation in services where productivity growth is slow
Economic intuition
- Immigration can act as a supply-side dampener on service-sector inflation if it expands labour supply in those sectors.
16.2 Housing prices
The lecture reports evidence for the Marielitos: an increase in low-quality apartment prices (8 percent) with no effect for high-quality apartments. This is consistent with migrants disproportionately demanding lower-quality housing, shifting demand most in that segment.
16.3 Institutions and social norms
The lecture notes fears that immigrants may import different social capital, potentially affecting institutions, framed as part of the political economy of migration, referencing Alesina and Tabellini (2024).
Exam insight
- Treat “institutions” as a channel that may shape long-run outcomes and political reactions, even if it is harder to quantify than wages and fiscal effects.
17. Refugees: labour market integration differs from economic migration
17.1 Why refugees are different (Brell et al., 2020)
The lecture distinguishes refugees from economic migrants:
- forced or unexpected migration
- traumatic experiences
- limited ability to choose destination
- less locally applicable human capital (language, job skills)
- lower initial wages and employability
This implies that refugee outcomes cannot be inferred from standard “self-selection” logic used for economic migrants.
17.2 After arrival: incentives to invest and the role of uncertainty
This slide stresses a key dynamic: lower initial human capital can imply high returns to investment (so potentially rapid assimilation), but uncertainty about asylum and possible return reduces incentives to invest in language and networks. Economically, this is an incentives and horizon problem: if the expected duration in the host country is uncertain, the present value of investing in host-country human capital falls.
17.3 Typical assimilation path: slow catching up
The figure summarises the empirical regularity: lower employment rates and wages on arrival, with slow catch-up. The key interpretation is that integration is a medium-term process shaped by policy choices that affect uncertainty, access to work, and health constraints.
17.4 Policy levers: integration measures
The slide lists three measures:
- keep the asylum process short (reduce uncertainty, raise incentives to assimilate)
- support to address health issues
- facilitate early access to the labour market
Economic logic
- Shorter processing times increase expected duration and reduce option value of waiting, encouraging language investment.
- Early labour market access builds local experience and signals employability, improving longer-run outcomes.
18. Pulling the lecture together: what to say in an exam
18.1 Big picture conclusions (from the lecture)
- The UK is a net recipient of immigrants.
- Immigrants are self-selected.
- Short-run substitution can reduce wages of natives with similar skills.
- Long-run wage effects attenuate as capital stock adjusts.
- Complementarity can raise wages of natives with different, complementary skills.
- Evidence suggests limited local wage effects but potentially broader national effects, with explanations including fast assimilation and native mobility.
- Immigrants can contribute positively, including fiscally.
18.2 A robust exam structure
A strong answer typically follows this template:
- Define the channel (substitution vs complementarity; short run vs long run).
- Use the diagram to show the mechanism (supply shift, demand shift, capital adjustment).
- Discuss identification (endogeneity, open labour markets, natural experiments).
- Use evidence (Mariel, Israel, France, UK wage distribution results).
- Add fiscal and wider channels (revenues vs expenditures, human capital transfer, inflation and housing).
- Conclude with nuance (aggregate vs distributional effects; differences between economic migrants and refugees).
Harvard-style bibliography
Alesina, A. and Tabellini, M. (2024) ‘The political effects of immigration: Culture or economics?’, Journal of Economic Literature, 62(1), pp. 5–46.
Borjas, G.J. (1987) ‘Self-selection and the earnings of immigrants’, (as cited in lecture slides).
Borjas, G.J. (1994) ‘The economics of immigration’, Journal of Economic Literature, 32(4), pp. 1667–1717.
Brell, C., Dustmann, C. and Preston, I. (2020) ‘The labor market integration of refugee migrants in high-income countries’, Journal of Economic Perspectives, 34(1), pp. 94–121.
Carliner, G. (1980) ‘Wages, earnings and hours of first, second and third generation American males’, Economic Inquiry, 18(1), pp. 87–102.
Card, D. (1991) ‘The impact of the Mariel boatlift on the Miami labor market’, Industrial and Labor Relations Review, 43(2), pp. 245–257.
Card, D. and Krueger, A. (n.d.) Minimum wage natural experiment example (as cited in lecture slides).
Chiswick, B.R. (1978) ‘The effect of Americanization on the earnings of foreign-born men’, Journal of Political Economy, 86(5), pp. 897–921.
Chiquiar, D. and Hanson, G.H. (2005) ‘International migration, self-selection, and the distribution of wages: Evidence from Mexico and the United States’, Journal of Political Economy, 113(2), pp. 239–281.
Dustmann, C. and Frattini, T. (2014) ‘The fiscal effects of immigration in the UK’, The Economic Journal, 124(580), pp. F593–F643.
Dustmann, C., Fabbri, F. and Preston, I. (2005) Evidence on composition and labour market effects in the UK (as cited in lecture slides).
Dustmann, C., Fabbri, F. and Preston, I. (2008) Evidence on composition and labour market effects in the UK (as cited in lecture slides).
Feliciano, C. (2005) ‘Does selective migration matter? Explaining ethnic disparities in educational attainment among immigrants’ children’, International Migration Review, 39(4), pp. 841–871.
Friedberg, R.M. (2001) Evidence on mass migration to Israel (as cited in lecture slides).
Gould, E.D. and Moav, O. (2016) ‘Does high inequality attract high skilled immigrants?’, The Economic Journal, 126(593), pp. 1055–1091.
Grogger, J. and Hanson, G.H. (2011) ‘Income maximization and the selection and sorting of international migrants’, Journal of Development Economics, 95, pp. 42–57.
Hunt, J. (1992) ‘The impact of the 1962 repatriates from Algeria on the French labor market’, Industrial and Labor Relations Review, 45(3), pp. 556–572.
Manacorda, M., Manning, A. and Wadsworth, J. (2010) Evidence on impacts on previous immigrants and returns to education in the UK (as cited in lecture slides).
Office for National Statistics (ONS) (n.d.) Migration statistics quarterly report. Available at: ONS website (as linked in lecture slides).
Ottaviano, G.I.P. and Peri, G. (2012) Evidence on wage impact of immigrants in the US (as cited in lecture slides).