Why isn't higher migration resulting in a bigger workforce?

The latest Office for National Statistics (ONS) net migration figures have provided plenty of material for politicians of all stripes. Take a look at the chart below. One interpretation is that net migration is extremely high: 745,000 in the last calendar year. But another is that it is now falling significantly: provisional estimates suggest that in the year to June 2023, net migration was 672,000. It is hard to draw a coherent economic narrative from the numbers, too. After all, if net migration is so high, why are workers so scarce? 

According to Paul Dales, chief UK economist at Capital Economics, one explanation could be a mismatch between the skills of migrants arriving in the UK, and the skills that the vacant positions require. Since the pandemic, patterns of migration have changed significantly, with fewer arrivals from the EU and more from China, India and Nigeria. According to the ONS, changes to the immigration system have resulted in more people moving for jobs in the health and care sectors. But at the same time, more students are arriving – as are the family members of people with work and study visas. This means that higher net migration doesn’t map directly onto a bigger labour force. 

Dales thinks that the tight labour market could also be down to UK-born workers ‘dropping out’. The Office for Budget Responsibility (OBR) crunched some labour market data in the forecasts released alongside the Autumn Statement. The watchdog noted a trend towards a reduced working week and expects average weekly hours to fall to 31.7 by 2027. Demographics seem to be the driver here: as the share of workers aged under 24 and over 65 increases, so does the demand for part-time work. 

The watchdog also adjusted its net migration projections, and now forecasts that 70,000 more workers will be added to the labour force over the next five years than it expected in March. But crucially, it expects the trend towards reduced working hours to be significant enough to offset the boost to labour supply from both higher net migration and the measures announced in the Autumn Statement. Capital’s Dales thinks that “perhaps without strong net migration, the available pool of workers would have been even lower”.

As a result, the labour market could keep simmering – creating a headache for rate-setters. In the November monetary policy report, the Bank of England (BoE) warned that “second-round effects in domestic prices and wages are expected to take longer to unwind than they did to emerge”. Policymakers also suspect that the matching process between vacancies and job seekers has become less efficient over the past few years, making the labour market even tighter. 

Huw Pill, the BoE’s chief economist, thinks that the UK’s non-accelerating inflation rate of unemployment (NAIRU) might have risen as a consequence. This would essentially mean that the UK economy has to tolerate a higher rate of unemployment if we want to return to the inflation target. The BoE puts the figure at around 4.5 per cent, 0.3 percentage points higher than the current rate. 

But there is a lot that even rate-setters don’t feel confident about. Pill said in comments to the Financial Times that the tightness of the labour market after the pandemic was “a surprise” to the BoE, and left the economy more vulnerable to persistent inflationary pressures than policymakers anticipated. He added that the BoE needed to learn more about the behaviour of labour supply and the labour market – particularly the impact of early retirement and long-term sickness. 

Capital’s Dales thinks that despite higher migration, the supply of labour is still falling short of demand. Because of this: “Wage growth will ease only slowly and the Bank of England won’t cut interest rates as soon as most expect.”