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The Economic Impact of Migration – Productivity Analysis for Spain and the UK

This project is funded by the European Commission, Research Directorate General as part of the 6th Framework Programme, Priority 8, “Policy Support and Anticipating Scientific and Technological Needs”

M. KANGASNIEMI (NIESR);

M. MAS (IVIE & U. VALENCIA);

C. ROBINSON (NIESR)

L. SERRANO (IVIE & U. VALENCIA)

Washington DC, May 14th 2008

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Objectives

• To analyze the impact of migration on productivity growth

• And compare two different experiences:• Spain: with a very recent presence of migrants• UK: traditional recipient of immigration flows

• We take three perspectives:• Impact on GDP through demography• Analysis through growth accounting• Analysis via econometric estimates

• Data• EUKLEMS data – augmented with• UK Labour Force Survey (ONS) data provided by the UK Data

Archive• Encuesta de Poblacion Activa (INE)

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Percentage of migrants in total employment. Spain & UK

GRAPH 1: Percentage of migrants¹ in total employment. United Kingdom vs. Spain

1984 1990 1995 2000 20050

2

4

6

8

10

12

14

United Kingdom Spain

Source : LFS (INE) and LFS (Office for National Statistics)

¹ Migrants classified according to country of origin

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GDP PER CAPITA DECOMPOSITION

Y = Real GDP

N = Total Population

WAP = Working Age Population

AP = Active Population

L = Employment

employment productivityGDPpc age activity

demography

Y WAP AP L Y

N N WAP AP L

Compare contributions in the actual economy with those in a virtual one where demographics are as for natives. Assuming Labour Productivity remains unchanged.

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Results

• GDP per capita growth in Spain has been fuelled by demographic changes, less so in the UK

• The impact of migrants through demographics minimal in the UK, significant in Spain

• Migrants increase GDP in Spain mainly through higher activity rates and to a smaller extent through age structure

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Difference between actual and virtual

GRAPH 4: Contributions to per capita Value added growth. Actual and virtual scenario(Percentages)

0

1

2

3

4

5

Age Activity Employment

0,0

0,1

0,2

0,3

0,4

0,5

0,6

0,7

-0,1

Age Activity Employment

a) Virtual. Non-migrants b) Actual-Virtual

UKUK

UK

S

S

S

UK UK UK

S

S

S

Source : EU KLEMS Database, March 2008, http://www.euklems.net, LFS (INE) and LFS (Office for National Statistics) and own calculations

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GROWTH ACCOUNTINGContribution of migrants to VA, H total hours, H* native hours split

into quality and quantity effects:• Quantity contribution

• Quality contribution

Contribution of migrants to labour productivity• Quantity effect: less capital per head

• Quality effect as in VA growth accounting

* *1 11 1ln ln ln ln

2 2t t t t

t t t t

W W W WH H H H

1 1 1

1

ln ln2 2

t t it it it it

i t t

W W H H

H H

* *1 11 11 ln ln 1 ln ln

2 2t t t t

t t t t

W W W WH H H H

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Growth accounting and labour productivity results

• Positive but small effect of migrants on overall productivity in the UK, mainly quantity contribution

• More significant effect in Spain, especially 2000-2005, negative quality contribution

• Significant variation across industries• The impact of migrants on LP growth in the UK

negligible, in Spain more sizable (and negative)

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Growth accounting, migrant contributions 1996-2005 UK SPAIN GVA growth 2.67 3.58 Quantity 0.26 0.72 Quality 0.03 -0.12 Total 0.29 0.60

UK Spain Quantity Quality Quantity Quality Agriculture 0.15 0.02 0.77 -0.13 Manufacturing 0.23 0.03 0.53 -0.09 Construction 0.12 0.02 1.58 -0.25 Trade 0.26 0.03 0.46 -0.08 Hotels and restaurants 0.65 0.08 1.65 -0.26 Finance, insurance, real state and business services 0.25 0.03

0.33

-0.06 Transport and comm 0.45 0.06 0.40 -0.07 Community, soc and pers services 0.26 0.03

0.82

-0.14

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Labour productivity, migrant contributions 1996-2005 UK SPAIN Labour productivity growth 1.83 0.48 Quantity effect -0.11 -0.43 Quality effect 0.03 -0.12 Total contribution -0.07 -0.55

UK Spain Quantity Quality Quantity Quality Agriculture -0.05 0.02 -0.95 -0.13 Manufacturing -0.06 0.03 -0.29 -0.09 Construction -0.02 0.02 -0.59 -0.25 Trade -0.11 0.03 -0.22 -0.08 Hotels and restaurants -0.19 0.08 -0.70 -0.26 Finance, insurance, real state and business services -0.20 0.03

-0.42

-0.06

Transport and communication -0.13 0.06

-0.39

-0.07

Community, social and personal services -0.03 0.03

-0.19

-0.14

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Econometric estimates of production functions

1) Cobb Douglas with migrant share as an additional regressor: OLS, FE, FD and GMM for a dynamic specification

2) Translog with migrant labour input as a separate input

• Calculate output elasticity and Allen Elasticity of Substitution from the estimates

The translog estimation allows for a more flexible production function, however it is more difficult to reliably interpret coefficients

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Results

• Higher migrant share related to lower productivity in Spain, for the UK no significant relationship

• Negative effects for Spain more significant in OLS and fixed effects specifications: changes in migrant share not strongly linked to negative changes in productivity

• GMM estimates for the dynamic specification do not improve the results and establishing causality is difficult

• Elasticities of substitution from Translog specification indicate small absolute values of elasticity, and complementarity in many industries

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Estimation results

UK Spain Variable OLS Fixed

effects First

differences

OLS Fixed effects

First difference

s ln(capital services)

0.428*** 0.571*** 0.328*** 0.365*** 0.333*** 0.531***

(0.057) (0.025) (0.040) (0.091) (0.10) (0.12) ln(labour services)

0.473*** -0.00520 0.157*** 0.576*** 0.333*** 0.106

(0.061) (0.031) (0.039) (0.085) (0.12) (0.11) ln(migrant share)

0.0782 0.0354 -0.00401 -0.0911*** -0.0113*** -0.00200

(0.13) (0.022) (0.0093) (0.029) (0.0033) (0.0024) Constant -1.376** 0.374** 0.0164* -1.960*** 0.0514 0.00580

(0.60) (0.18) (0.0085) (0.61) (0.61) (0.0097) Observati

ons 572 572 546 156 156 130

R-squared 0.92 0.76 0.32 0.92 0.53 0.26

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Distributions of elasticities of substitution (fixed effects)

Percentile UK Spain 1% -0.194 -8.774 5% -0.045 -0.353 10% -0.020 -0.157 25% -0.006 -0.061 50% -0.002 -0.016 75% 0.000 -0.001 90% 0.000 0.000 95% 0.000 0.001 99% 0.370 0.002

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Conclusions

• During the period studied, migration has had a profound impact on the Spanish economy through demographics, less so for the UK

• Migration has had minor impact on the UK productivity performance and labour productivity whereas in Spain it has fostered GVA growth but reduced labour productivity

• Econometric results indicate that in Spain use of migrant labour is linked to low productivity levels, but this is not the case in the UK.