Will the U.K. Living Wage Increase EU Migration?

This article was originally published on The Conversation. Read the original article.

"The living wage is an excellent policy, but how will you stop it being a big pull factor for uncontrolled EU migration, given that it is far higher than minimum wages in other EU countries?" Boris Johnson speech from May 9

George Osborne's living wage announcement in July of last year substantially increased the national minimum wage from £6.70/hour for over-25s then to £7.20/hour since April, with a target of £9.00/hour by 2020.

Minimum wages are now in operation in 26 out of the 34 OECD countries, and 22 out of 28 EU member states. Germany only joined the list in January 2015 with a minimum wage of €8.50 (£6.69), while some of the EU members without one—that's Austria, Cyprus, Italy, Sweden, Finland and Denmark—have sector level collective agreements and wage floors.

You can see from the table below that the U.K.'s minimum wage is similar to the other major EU economies but higher than countries with lower levels of GDP per capita such as Bulgaria, Latvia and Romania. On the traditional minimum wage comparison as a proportion of median monthly earnings, however, the U,K, is broadly in line with most EU countries at about 50 percent.

This will rise to slightly over 55 percent with the £9/hour level in 2020 (factoring in forecast inflation). If that happens—note the target has already been pared back several times from an initial £9.35/hour—it would place the U.K. among the highest in the OECD.

Source: Eurostat

The migration effect

No one can predict with any certainty how this U.K. policy will affect migration levels, but several variables are at play. The minimum wages in other EU countries will also have risen through to 2020, so the differential will be less pronounced than it appears. Johnson's argument also assumes that wages are the primary driver of migration, but researchers have shown otherwise.

While low domestic wages encourage outward migration, there is no straightforward relationship between high minimum wages and inward migration. Otherwise there would be a wave of migrants heading to Luxembourg and Colombia, who have the highest minimum wages in the EU and OECD respectively. Many EU migrants are motivated by employment opportunities while other factors include personal networks with other migrants already in situ.

Wages also only tell part of the story. Housing costs tend to be highest in London and the south east, where most jobs are created in the U.K.'s service-driven economy, and this often largely offsets any benefit from additional wages.

Housing is the thing. Wikimedia

Even if we were to accept that having a relatively high minimum wage would still make the U.K. a bit more attractive to workers from elsewhere in the EU, there could be an important positive in this: Higher EU migration could improve the U.K.'s stock of human capital. Migrants tend to be younger and better educated than the average worker, so it could enhance the U.K.'s notoriously low productivity.

Indeed, the living wage policy is designed to improve this productivity gap by motivating companies to train up minimum wage staff to justify the extra salary. If this proves illusory and the policy instead leads to companies laying off workers to reduce costs, the result could be higher overall unemployment. Much lower youth unemployment in the U.K. relative to the likes of Spain and Greece is one of the main drivers of young people moving to the U.K. If U.K. unemployment rises, levels of EU migration could conceivably fall.

Alternatively, if businesses do lay off staff to cope with higher wages they may turn to illegal immigrants to avoid paying the living wage. If so, perhaps a negative impact on businesses from the policy could turn out to boost illegal migration by unscrupulous employers.

Verdict

Boris Johnson is wrong to say the U.K. minimum wage is far higher than other EU members, but it is higher than in Eastern Europe and will probably become relatively higher than most EU countries by 2020. Whether this will affect migration, we just don't know. That said, these debates are very reminiscent of when Tony Blair first introduced the U.K. minimum wage in April 1999. Many economists and commentators forecast it would be highly detrimental to the U.K.'s highly deregulated jobs market. This proved largely inaccurate and the same may be true this time.

Review

The author correctly states that although the U.K. living wage is more or less in line with minimum wages in other EU major economies, it is indeed higher than in some Eastern European countries. The first part of Boris Johnson's statement is therefore too bold, but the fact that it holds true for some EU countries makes it worth considering the effect on EU migration.

Yet as the author highlights, this claimed correlation is unfounded—the research evidence is scarce and inconclusive. And I would agree that wages are not the only important driver of migration. Employment opportunities, personal networks and other costs such as housing are key.

Above all, as the author again points out, the effect of the minimum wage on migration depends on how it affects employment. I agree that the empirical evidence is inconclusive here. There is no evidence from the research that a minimum wage increases unemployment. On the other hand, the Office for Budget Responsibility is predicting that the living wage will increase unemployment by 60,000.

What we do know is that European migrants tend to be younger and better educated than U.K. native workers. This suggests they might not benefit from the increased minimum wage, and that migration may actually be good for the U.K. economy, as it boosts productivity. Indeed recent research shows that EU immigration has not had significantly adverse effects on employment, wages, inequality or public services for people born in the U.K.

Ross Brown is a Lecturer in Entrepreneurship and Small Business at the University of St Andrews. Mireia Borrell-Porta is a Postdoctoral Research Officer in Family Policy, University of Oxford.