05 January 2017

VoxEU: The economic impact of Brexit-induced reductions in migration to the UK

In a central scenario, we assume that, over the period between now and 2020, the combination of policy changes and the psychological impact of the Brexit vote is equivalent to reversing half of the impact of introducing free movement in the first place.  In a more extreme – ‘hard Brexit’ – scenario, we assume the impact is completely reversed.

The resulting falls are quite large; in the central scenario, National Insurance number (NINo) registrations average about 443,000 over the 2016-20 period, falling to 327,000 by 2020 while in the extreme scenario they average about 350,000 falling to 140,000 by the end of the period. While this may seem implausibly steep, recall that as recently as 2003 NINo registrations for EU nationals totalled about 100,000, even with free movement in place for the EU15. [...]

Assuming that falls in NINo registrations translate into a fall into net migration on a proportional basis, our scenarios imply that net EU migration to the UK could fall by up to 91,000 on the central scenario, and up to 150,000 on a more extreme scenario. This is comparable to other estimates that employ different methodologies (Vargas-Silva 2016, Migration Watch 2016).

In order to translate these scenarios of the impact of Brexit on migration flows into impacts on economic variables, we use the existing empirical evidence. A recent literature uses cross-country evidence to estimate the impact of migration on growth and productivity in advanced economies. Boubtane et al. (2015) find that migration in general boosts productivity in advanced economies, but by varying amounts; for the UK, the estimated impact is that a 1 percentage point in the migrant share of the working age population leads to a 0.4-0.5% increase in productivity.  Jaumotte et al. (2016) find that a 1% increase in the migrant share of the adult population results in an increase in GDP per capita and productivity of approximately 2%.  Perhaps surprisingly, the estimated aggregate impact of high- and low-skilled migration are not significantly different (although the distributional implications are). One possible, partial explanation is that low-skilled migration appears to increase labour force participation among native women (a result also found in individual country studies, see Barone and Mocetti 2011).  This is one example of the type of complementarity or spillover effect by which migrants working in low-skilled occupations might indirectly increase productivity and output and is likely to be relevant to the UK.

We use these coefficients to estimate the possible impact of falls in EU migration on GDP and GDP per capita growth between now and 2020, compared to a counterfactual where EU migration remains constant. In our central scenario, the impact would be to reduce GDP by between about 0.63% to 1.19%, while GDP per capita would be reduced by between about 0.22% and 0.78%. In the more extreme scenario, the hit to GDP per capita would be up to 1.16%. [...]

In order to facilitate comparison with the estimates produced by the Treasury and others of the long-term impacts of Brexit, we also calculate the impact on GDP per capita out to 2030, assuming that migration remains flat at these reduced levels after 2020. Here the impact on GDP per capita ranges from a fall of 0.92% to 3.38% under the central scenario, and from 1.53% to 5.36% under the extreme scenario. This compares to the Treasury’s central estimate of a reduction in GDP from Brexit of 6%. [...]

Full analysis on VoxEU

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