Do we need more immigrants and babies

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Do we need more immigrants and babies?

• Adair Turner

London School of Economics 28th November 2007
2

• Dependency ratio arguments greatly overstated
• A shortage of workers
• Quantity arguments of little value
• Price and income effects small
• Wider welfare consequences of population growth
• The moral case for immigration gains to
  immigrants

3

• Population ageing or population growth what
  should we worry about?
• World Demographic Association, September 2007
• www.wdassociation.org

4
UK total fertility rate 1960-2050
Source ONS, GAD 2003 Based Principal Projection
5
Male cohort life expectancy at 65
Source GAD UK
6
Net immigration to UK 1990-2002 and forecast in
2003
000s
Source GAD 2003 Based Projections, Principal
Projection
7
UK total population 2003 based principal
projection
Millions
Source UK Government Actuaries Department
8
Defining a combined replacement rate
9
UK total population 2003 based and 2006 based
projections
Millions
Source GAD Principal Projections
10
Male cohort life expectancy at 65
Principal 2006-based
Source GAD UK
11
Combined replacement rate in 2003 and 2006
projections
12
UK population in 2006 based scenarios
Principal projection
CRR 2.28
Impact of migration
Zero migration
CRR TFR 1.84
Zero migration and no mortality improvement
Source UK Government Actuarys Department (GAD)
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This evenings questions

• Is latest CRR of 2.28 better or worse than 2.08?
  Would still lower CRR be better or worse?
• Do we need at least a minimum level of CRR?

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From pyramids to columns
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UK population pyramid 1965
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Distribution of the UK Population, by age 2002
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Ratio of 65 20-64 year olds a.k.a. old age
dependency ratio
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The mechanistic calculation UK example
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The need for immigrants
IMMIGRANTS Your country needs them By Philippe
Legrain
Ageing UK needs 7 million immigrants to
survive Observer, 13th May 2007
Europe must relax its immigration controls and
open the door to an extra 20 million workers
during the next two decades Franco Frettini,
European Justice Commissioner, 12th September 2007
20
People aged over State Pension Age to those aged
20-SPA
2003 Based Principal Projection
Note Smoothed version
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People aged over SPA to those aged 20-SPA
2006 Based Principal Projection
22
Trends in mean age of retirement
Source Pensions Commission estimates
23
Percentage of adult male life spent in retirement
Source Pensions Commission estimates from 1990
onwards
24
Distribution of labour market activity by pension
type
Men aged 60 - 64
Source ELSA, 2002, England
25
Trends in mean age of retirement
Source Pensions Commission estimates
26
Old-age dependency ratio in UK 2003 Based
Principal Projection
Under silly policies
Under sensible policies
Note Sensible policies sets the standard State
Pension Age so as to maintain expected years post
SPA over expected years post 20 at 27.5. This
entails taking the SPA from 65 in 2005 to 68.5 in
2050 and 70.2 in 2070.
Source UK Government Actuaries Principal
Projection
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Share of UK GDP devoted to state pensions
Assuming state pensions rising in line with
earnings

Source Pensions Commission
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UK old age, youth and total dependency ratio
2005 2050
Total dependency
Old age dependency correct measure
Youth dependency
Source UK Government Actuaries 2003 Based
Principal Projection
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Capital inheritance benefit of low fertility
Generation 2 inherits greater capital stock per
capita
Lower savings rate required to achieve any given
K/L ratio
Consumption impact of higher PAYG contributions
offset by lower savings

• Macro

Average person inherits greater share of existing
houses

• Either
• Reduced need to purchase housing more
  financial saving possible
• Inherited asset available to support retirement
  less financial saving needed

Micro
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• The greater the per capita inheritance of
  housing or other assets, the lower is the
  replacement rate as a percentage of earnings
  which pension policy should seek to achieve
  through the combination of the PAYG and the
  compulsory or encouraged funded elements of the
  system

31
Dependency ratio arguments Pros cons of a
higher CRR
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After the First World War, laws were passed
severely limiting immigration. Only a trickle of
immigrants has been admitted since then By
keeping the labour supply down, immigration
policy tends to keep wages up Paul Samuelson,
Economics, 1964
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US immigration as of population 1890 2000
Per decade
Source US Yearbook of Immigration Statistics,
2005
34
Gross operating surplus as share of GDP US
1970 - 2005

Gross operating surplus plus gross mixed income
Source US Bureau of Economic Analysis
35
Changes in real family income by quintile US
1978 2005
Source US Census Bureau
36
Labour price effects the US debate

• Region/city analysis
• e.g. David Card

• Minimal adverse impact on wages of unskilled
  native workers
• E.g. 10 increase in immigrants,
• 1 fall in native unskilled wages

National based analysis e.g. George Borjas

• The labor demand curve is downward slopping
• 10 increase in labour supply reduces wages by
  3-4

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What theory suggests 1
Three factor model Capital, skilled labour,
unskilled labour

• More labour in same skilled/unskilled mix
• More unskilled labour
• All factors increase proportionally

Capital gains Labour loses
Unskilled labour loses Capital and skilled labour
gain
No change to relative prices Economy gets bigger
38
What theory suggests 2 Comparative advantage
benefits of free trade

• If start with two countries with different factor
  mixes and different relative prices (of factors
  and end products/services)
• Then free trade produces
• Comparative advantage benefit to both countries
• Changes in relative prices and resulting
  distributional effects

39
What theory suggests 3 Immigration impact
depends on skill mix and capital mobility
Immigrants in balanced skill mix, capital
immobile internationally
Immigrants skewed to unskilled, capital
mobile
Immigrants in balanced mix, capital mobile
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What theory suggests 4 Can we discern
immigration effects from region of country
analysis?

• YES if factors are to a degree immobile within
  an economy
• NO if
• Native labour moves out when immigrant labour
  moves in
• Capital and complementary labour (e.g. skilled to
  match unskilled) is mobile within a country

OR
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What theory suggests 5 Impact of immigration
depends on extent of other liberalisations

• Immigration in era of capital controls and
  protectionism
• Immigration in era of trade and capital
  globalisation

Major impact
Impact difficult to distinguish from wider
liberalisation/globalisation
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US empirical findings compatible with theory?
Capital/skilled labour significantly mobile
within US but not entirely
Region based analysis
Small (but not nil) impact
Capital not entirely mobile internationally but
increasingly so?
More significant impact
National based analysis

• But contribution of immigration to widening
  inequality still small. Other factors dominate
• Wider globalisation?
• Technology change?
• Institutional change?

Return to high immigration alongside wider trade
liberalisation and globalisation
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The impact of recent migration in UK Empirical
analyses
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Comparative advantage and distributional
consequences over the long-term
Long-term tendencies

• International capital flows to even out K/L
  variations

• Immigration may be (and policy may make it) less
  skewed to unskilled

Comparative advantage benefits and distributional
consequences for the native population tend to
zero?

• Unskilled immigrants may acquire skills (or
  move to jobs in line with already high skills)

• Increasing liberalisation and globalisation of
  trade

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Dependency ratio effects on income/consumption

• Slight fall in GDP per capita if old age
  dependency effect dominates

• Rise in (adjusted) old age dependency

• Additional fall in consumption per capita of
  working population if old age dependents more
  costly than youth dependents

Fall in youth dependency
Increased capital inheritance

• Offsetting fall in required savings rate
• boosting consumption per capita

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Trade effects of immigrants on income/consumption
Short-term
Comparative advantage
Slight boost to aggregate income per capita of
native workers
Tend to zero in long-term?

• Distributional effect

Good for some workers, bad for others. Sums to
zero
Compositional effect
Reduces total GDP per capita but not income per
capita of native workers
Tends to zero in long-term?
Fiscal transfer effect (between natives and
immigrants)
Mildly beneficial to native workers since
immigrants have fewer dependents
Tends to zero in long-term?
47
Potential impact of A 8 immigration on GDP per
capita

Source S. Kirby, J. Mitchell and R. Riley,
Evidence to the House of Lords Select Committee
on Economics Affairs, September 2007
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Income and happiness
Source R. Layard Happiness
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Population density 2000
000s per sq. Km
NY New York PA Pennsylvania CT Connecticut
MT Massachusetts NJ New Jersey
Source United Nations, UK GAD
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Adverse welfare consequences of increasing
population

• Land use competition housing
• Transport mobility vs environmental quality
• Crowding of amenity space

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Who pays the welfare consequences of increasing
density?

• Full compensation

More expensive infrastructure development
Inadequate compensation
Rational and legitimate nimbyism
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Monday November 26 2007

• The prime minister will reveal that legislation
  will be unveiled tomorrow to streamline Britains
  notoriously cumbersome planning system in an
  attempt to mirror Frances success in quickly
  delivering big infrastructure projects

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Our results suggest that modern day emigrants
forsake their home country because of the poor
quality of the perceived public domain and that
they long for what Dutch consider the Good Life
nature, space and less populated
surroundings. Van Dalen and Henkens,
Population and Development Review, March 2007
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Four factors of production not three?

• Unskilled labour
• Skilled labour
• Capital

• Potentially mobile internationally
• Creatable via
• Training
• Capital accumulation

• Land/environmental quality

• Not mobile internationally
• Close to fixed supply

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Housing supply and demand in UK
Ratio of lower quartile house prices to lower
quartile earnings 2001 2026 projected
Demand for housing, driven by economic and
population growth, is simply outstripping
available supply. National Housing and Planning
Advice Unit, 2007
Source Affordability Matters, National Housing
and Planning Advice Unit, 2007
56
Number of households England 2004 2029
Source Housing and Planning Key Factors,
Communities and Local Government, October 2007
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Arguments for ignoring wider welfare detriment?

• Coded racism
• Irrational failure to took at the facts
• Lots of space left
• I love New York/London
• Real economics is about measured GDP, not
  environmental fluff

58
Global population 2000 2100
UN medium variant 2004 projection
Source World Population to 2300, United
Nations, 2004
59
UK carbon emission target with without
population growth

• 60 cut by 2050

80 cut by 2050
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Immigration more effective than trade and capital
liberalisation?

• Economists calculate that removing immigration
  controls could more than double the size of the
  world economy
• Philippe Legrain

Estimates of the potential global benefit of
total global trade liberalisation 0.3 3.0 of
global GDP
VS
Legrains sources are 1) C. Hamilton and J.
Whalley Efficiency and distributional
implications of global restrictions on labour
mobility , Journal of Development Economics
(1984) 2) J. Moses and B. Letnes The economic
cost to international labour restrictions, World
Development (2004)
See e.g. A. Bouët, How much will trade
liberalisation help the poor?, IFPRI, Research
Brief No. 5. K. Anderson, Subsidies and Trade
Barriers, Copenhagen Consensus Challenge Paper,
2004
61
Fifth factor of production key to immigrant gains?

• Unskilled labour
• Skilled labour
• Capital
• Land/environmental quality
• Social and institutional capital accumulated
  know how

Relatively small comparative advantage and
distributional effects

• Immobile and close to fixed supply
• Adverse impact of population density

• Somewhat immobile internationally
• Costlessly extendable within country (up to some
  point)
• Large income benefit to immigrants

62
Three good arguments for favouring/accepting
immigration?

• Welfare of asylum seekers
• Significant immigration cannot be prevented
• Wider geopolitical benefits
• Expansion of European Union