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Warning: Immigration Can Seriously Damage Your Wealth

Page 10 of 10

Appendix A

The Immigration Surplus

(reproduced from The New Americans, p. 139)

Figure 4.1: The immigration surplus

In the simple world portrayed by this diagram, we have two types of domestic workers: those that are perfect substitutes for immigrants (unskilled labour) and those that are complements (skilled labour).[†] Only one good is produced (GDP), and the numbers of unskilled and skilled domestic workers are fixed. Figure 4.1 plots the demand curve (CF) for domestic unskilled workers.

Before immigration, there are S domestic, unskilled workers, who are all paid a wage W0 (the wage that equates demand and supply), so that the total amount that domestic unskilled workers are paid is S times W0 or the area OBDG. Although we deal explicitly only with unskilled workers in this diagram, we can also determine how much skilled domestic workers are paid. To see this, note that the height at each point along the demand curve is the value of the extra national output produced by another unskilled worker. Therefore, total national output (GDP) is the area below the demand curve up to S unskilled workers (OCDG), so that the remainder (BCD) is the amount paid to domestic skilled workers.

Now, let new immigrants come into this country, increasing the supply of all unskilled labour in the workforce to S+I. The new wage that equates the demand and supply of unskilled labour falls to W01; that is, the wage of substitute domestic unskilled workers falls to W01. Unskilled domestic workers are clearly worse off. Since the total amount that all unskilled domestic workers are paid falls to OAKG, the domestic unskilled workers lose ABDK as a result of immigration. Unskilled immigrants are paid the same wage as domestic unskilled workers so, as a group, immigrants receive the area GKEH.

What about skilled domestic workers? Before immigration, they received the area BCD, but what do they get now? Once again, we can calculate their incomes as a residual. With these new immigrants added to the workforce, total national output (GDP) will rise, so that it now equals the area under the demand curve up to the total number of unskilled workers, S+I. Instead of their pre-immigration incomes of BCD, domestic skilled labour now receives the area ACE (everything that isn’t paid to either unskilled domestic workers or immigrants). Total GDP is now the area OCEH, so that the value of domestic output has increased by the area GDEH. But new immigrants get only the rectangle GKEH, so that, on net, domestic workers must gain by the size of the triangle KDE. Immigration thus raises national output and national output per domestic worker.

One way of seeing that the native born must gain from immigration in this simple model is to recognize that new immigrants help produce new goods and services, but they are paid less than the total value of these new goods and services. The rest goes to domestic residents, who collectively are better off than before, by the triangle KDE.

Figure 4.1 also illustrates that, although the net gain is positive domestically, some workers may lose and others may gain. In fact, although domestic unskilled workers lose ABDK, domestic skilled workers gain ABDE. The area in common is the rectangle ABDK, which is simultaneously (and equally) a loss to unskilled domestic workers and a gain to skilled domestic workers.

Therefore, although immigration yields a positive net gain to domestic workers, that gain is not spread equally: it harms workers who are substitutes for immigrants, and benefits workers who are complements to immigrants. Most economists believe that unskilled domestic workers are the substitutes, so their wages will fall, and skilled domestic workers are complements, so their wages will rise.

Appendix B

What should a migrant earn in the UK in 2007 to make a contribution to the economy?

Migration Watch calculates (Briefing Paper No. 1.11) that the required income ‘to make a positive contribution to GDP per capita’ is about £27,000 p.a. (2006). Migration Watch is to be congratulated on making an estimate, and this study has followed its methodology in part.

The Migration Watch estimate is calculated in three parts:

1. The amount of UK GDP classified by National Statistics as ‘compensation for employees’ in the year 2003 was £613 billion and there were 27.6 million workers. This gives average earnings per worker of £22,200. There is also earned income included in the category ‘mixed income’, but this is ignored for these rough calculations.

2. This is then increased to 2006 rates by allowing three years of wage inflation at 4 per cent per year, making roughly £24,850 p.a.

3. Migration Watch then allows a 10 per cent margin requirement for the costs of additional infrastructure at £2,485 p.a., making £27,335. (Migration Watch rounds this to £27,000 p.a.)

All the income calculations seem reasonable, but a 10 per cent margin for the costs of additional infrastructure is not realistic and there seems to be no basis for using this figure. (In these calculations I have ignored the supposed benefits of capital adjustment, because this implies a fall in the wages of native workers.)

This study shows that a worker requires instant wealth of £141,000 on arrival (2004 figures), so the question is to determine how many years should be allowed to pay this off and, second, the rate of interest that should be imposed.

For this exercise, we have taken an interest rate of 3 per cent and spread the cost of financing the instant wealth over a working life of, say, 35 years. These are, of course, assumptions only.

In order to do the calculation, we must first bring our wealth figure for 2004 up to date for the end of 2006. (It will be noted that this figure was originally at 2003 prices in the National Statistics tables.) So, three years of inflation need to be added to bring the £141,000 up to 2006 prices. This can be estimated at 9 per cent, making the figure £153,600. There have also been two further years of capital additions, which, we will assume, were at the 2004 rate of 1.58 per cent of wealth. These additions add a further, say, 3 per cent, or £4,500, making total wealth per head at the end of 2006 around £158,000 in 2006 prices. We thus now have the total wealth at the end of 2006 in 2006 prices per worker.

Compound interest tables inform us that, to pay off £158,000 with an interest rate of 3 per cent over 35 years, there must be a yearly payment of capital and interest of £7,300. So, instead of the £2,485 p.a. estimated by Migration Watch, the real figure to be added to average earnings is £7,300. The income required to be earned by a migrant is, therefore, £22,200 (the average earnings in 2003) plus 12 per cent wage inflation of, say, £2,650 – which totals £24,850 – plus £7,300: this equals £32,150. Looking at Inland Revenue taxation figures for 2004/5, the latest year available, 5,769,000 out of the 27,020,000 taxpayers who paid tax on earned income from employment and self-employment earned over £30,000 per annum (or 21.35 per cent of taxpayers paying tax on earned income).[‡]

So the calculation is that an immigrant who makes no foreign remittances would have to be in the top 20 per cent of earners, with taxable earnings in 2006 of £32,150, for him to contribute to increasing the average per capita GDP of natives.

Should foreign remittances be made, these would have to be added to the above figure. We saw earlier that, in 2003, £3.8 billion was remitted abroad. This means the average remittance per immigrant worker is £1,247 p.a.; £32,150 plus £1,247 makes a grand total of £33,397.

When considering family migration, a family of four requires £282,000 (in 2004) of instant wealth in the original calculation. The answer to the question of what the income of an immigrant family of four should be, taking the above, up-to-date calculations: it should be £33,397 x 2 = £66,794, i.e. double what an individual worker requires.

These calculations leave out any fiscal costs, transitional costs and long-term national identity costs.

[*] ‘Skilled’ is defined here as ‘having skills better than the mean level of skill of natives’. Earnings are an approximation of skill, and mean average earnings are considerably higher than median average wages.

[†] In particular in this simple world, there is no capital, so that workers receive all the income produced by selling the single good.

[‡] Source: Table 3.6 of Income Tax & Personal Incomes, Inland Revenue Statistics for 2004/5.

Notes and references

[1] Migration Watch UK, ‘Economic contribution of A8 migrants’, Briefing Paper 1.12, available here

[2] The Ground of Justice – Draft Report of a Pastoral Research Enquiry into the Needs of Migrants in London’s Catholic Community,  Centre for the Study of Faith in Society, Von Hügel Institute, St Edmund’s College, University of Cambridge, available here

[3] Available at p. 42.

[4] Speaking at a press conference hosted by the Center for Immigration Studies, Washington, 17 December 2002.

[5] Speaking at the same press conference by the Center for Immigration Studies.

[6] Anthony Scholefield, ‘Britain’s demographic profile is changing at a bewildering rate’, Eurofacts, 15 December 2006, available here.

[7] Sir Digby Jones in the Sunday Telegraph, 20 August 2006.

[8] New Statesman, 11 September 2006.

[9] George J. Borjas, Heaven’s Door, Princeton, NJ: Princeton University Press, 1999, p. 212.

[10] National Research Council of the National Academy of Science, Commission on Behavioral and Social Sciences and Education (CBASSE), The New Americans: Economic, Demographic and Fiscal Effects of Immigration, Washington, DC: National Academies Press, 1997, p. 146.

[11] Ibid., p. 146.

[12] Ibid., p. 137.

[13] Ibid., p. 141.

[14] Ibid., p. 141.

[15] Ibid., p. 158.

[16] Luke Johnson in the Sunday Telegraph, 17 September 2006.

[17] NRC, The Immigration Debate; Studies on the Economic, Demographic and Fiscal Effects of Immigration, eds. James p. Smith and Barry Edmonston, Washington, DC: National Academies Press, 1998, p. 315.

[18] Borjas, Heaven’s Door, p. 88.

[19] NRC, The New Americans, p. 147.

[20] Borjas, Heaven’s Door, p. 87.

[21] The New Americans, p.158.

[22] Ibid., p. 158.

[23] Henry Hazlitt, Economics in One Lesson, San Francisco: Laissez Faire Books, 1996.

[24] National Statistics, Capital Stocks, Capital Consumption and Non-Financial Balance Sheets, 2005. All statistics from this publication. See in particular tables 2.1.1 and following. Available here

[25] CPB Netherlands Bureau for Economic Policy Analysis, ‘Immigration and the Dutch economy’, table 3.2, available at

[26] John Meadowcroft in the Journal of the Institute of Economic Affairs, March 2006.

[27] NRC, The Immigration Debate, p. 333.

[28] Ibid., p. 319.

[29] Ibid., p. 320.

[30] Borjas, Heaven’s Door, p. 96.

[31] Ibid., p. 96.

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