Don’t blame immigration for Britain’s low investment rates
16 July 2024
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Transport
Labour Market
Britain has experienced a period of relative economic stagnation since migration numbers have risen, despite the clear economic consensus in favour of liberal migration policies. It is understandable that migration sceptics would search for an explanation. Consensus does not imply correctness, so could immigration actually be bad for the economy?
One of the main economic arguments among British immigration-sceptics is that liberal immigration policy reduces capital investment. The logic is simple and certainly plausible:
In my recent review of the Centre for Policy Studies paper Taking Back Control, I explained why I think this argument mostly doesn’t pass muster. On one hand, I agree that increasing demand for resources like housing while the government blocks the expansion of supply has been a bad thing. But fundamentally, that is about government policies which would be causing economic damage even with zero immigration.
Likewise, I think it’s certainly possible that government planned sectors like healthcare are essentially subsidising some amount of immigration because the political incentives of central planning discourage investment in capital.
Nonetheless, when it comes to the private sector, the claim that a less restricted labour market is holding back productive capital investment necessarily implies one of two things (other things being equal):
The first scenario implies that immigration restrictions would not make us wealthier and the second is obviously ridiculous. Britain does have a serious problem with capital investment, but immigration is not the cause.
A third option is that certain government taxes and regulations have had a distortive effect and artificially propped up labour at the expense of capital investment. This is certainly possible, and those distortive policies should be reformed, regardless of net migration levels. If cutting harmful taxes on capital investment or cutting red tape which discourages capital-intensive projects unleashed more innovation and invention at the expense of foreign labour, nobody should have a problem with that.
But there is one particular flaw in the restrictionist argument which is worth restating in greater detail. It is the implied assumption that any kind of capital investment at any time is inherently positive.
Of course, it is true that capital investment, technological innovation and invention are responsible for a great deal of the unparalleled growth in human prosperity since the mid-19th Century. It is also true that high wages and subsequent capital investment were major drivers of the Industrial Revolution kicking off in Britain.
But the way in which high wages and capital investment occur matters much more than their mere existence. The government could very easily boost the wages of lorry drivers by capping their nationwide number to 100. Clearly, that would not stimulate capital investment and it would make everyone but those 100 lorry drivers worse off. It could also boost capital investment significantly by mandating that every company spend 50% of their net annual revenues on capital projects. But clearly that would also be a chronic misallocation of resources.
There is an optimal amount of economic resources devoted to labour and capital in the economy at any given time. We will never know what that balance is and even if we could, it changes too quickly for us to optimally allocate it. Even then, how would we be able to know what to invest the money in or whether new innovations and inventions would complement existing labour or replace it?
The best way to maximise our chances of getting it right, therefore, is to allow the market (a decentralised network of individuals and organisations throughout the economy) to make decisions about how to allocate the resources in their control.
Subject to the disciplines of competition, specialisation, real world resource constraints, and prices, they will always be better incentivised and informed in making such decisions than any central planner. That becomes all the more pressing when we’re talking about invention and innovation which are highly risky and evolutionary undertakings.
This is not some niche economic theory, it applies across markets and across civilisations throughout history. In a 2022 paper published by Hebrew University of Jerusalem’s Dr Shmuel San, we can see this problem playing out in the American agricultural labour market after a rapid decline in farm worker immigration.
San analyses the impact of the Bracero agreements between the US and Mexico ending in 1964. Starting in 1942 to aid the American war effort, the agreements created an extensive agricultural guest worker program for Mexicans who wanted to work in the United States. It continued after the war and its effects were significant as San describes:
“Approximately 200,000 Mexican legal workers entered the United States between 1948 and 1950…By June 1952, the Bracero system became a permanent component of US farm labor. During the period 1952-1959, on average, 335,000 Mexican workers were annually employed on US farms.”
Naturally, the expiry of the agreements in late 1964 created a significant labour supply shock. The impact was almost exactly as British immigration sceptics envision. Producers short of cheap labour turned to labour-replacing technology to solve their problem. The number of patents issued for technologies related to the most labour-intensive farming tasks (such as harvesting and cultivating) increased as labour supply decreased.
Nonetheless, the sector still suffered. Farms were adversely affected not just by the short-term costs of capital investment and a smaller labour pool but also in the long-run, demonstrating that the forced capital investment was not enough to make up for the lost labour. Investment and innovation related to less labour-intensive activities (such as soil working) ended up declining. To make it a triple whammy, the exclusion of Bracero workers did not raise the wages of the domestic and immigrant workers left behind.
San concludes:
“Taken together, one can conclude that Bracero exclusion made capital worse off while making labor no better off.”
As San’s paper clearly shows, neither capital nor labour are ends in themselves. It is the ways they interact and evolve to create economically optimal outcomes that matters. The economy is an infinitely complex and dynamic phenomenon, not a computer program. Central planners cannot simply adjust the inputs to perfect it and the labour market is no exception.
One of the main economic arguments among British immigration-sceptics is that liberal immigration policy reduces capital investment. The logic is simple and certainly plausible:
- Immigration into Britain has hit record levels over the past two decades, while capital investment (particularly in labour-saving machinery) lags compared to peer countries.
- High labour supply reduces the incentive to invest in capital which would reduce the need for immigration and boost medium and long-run productivity.
- Reducing immigration could benefit the economy by reducing the labour supply and boosting those incentives.
In my recent review of the Centre for Policy Studies paper Taking Back Control, I explained why I think this argument mostly doesn’t pass muster. On one hand, I agree that increasing demand for resources like housing while the government blocks the expansion of supply has been a bad thing. But fundamentally, that is about government policies which would be causing economic damage even with zero immigration.
Likewise, I think it’s certainly possible that government planned sectors like healthcare are essentially subsidising some amount of immigration because the political incentives of central planning discourage investment in capital.
Nonetheless, when it comes to the private sector, the claim that a less restricted labour market is holding back productive capital investment necessarily implies one of two things (other things being equal):
- The desired capital investment is less productive than the migrant labour current employed or;
- Profit-seeking companies hate profit and employ people en masse out of the kindness of their hearts.
The first scenario implies that immigration restrictions would not make us wealthier and the second is obviously ridiculous. Britain does have a serious problem with capital investment, but immigration is not the cause.
A third option is that certain government taxes and regulations have had a distortive effect and artificially propped up labour at the expense of capital investment. This is certainly possible, and those distortive policies should be reformed, regardless of net migration levels. If cutting harmful taxes on capital investment or cutting red tape which discourages capital-intensive projects unleashed more innovation and invention at the expense of foreign labour, nobody should have a problem with that.
But there is one particular flaw in the restrictionist argument which is worth restating in greater detail. It is the implied assumption that any kind of capital investment at any time is inherently positive.
Of course, it is true that capital investment, technological innovation and invention are responsible for a great deal of the unparalleled growth in human prosperity since the mid-19th Century. It is also true that high wages and subsequent capital investment were major drivers of the Industrial Revolution kicking off in Britain.
But the way in which high wages and capital investment occur matters much more than their mere existence. The government could very easily boost the wages of lorry drivers by capping their nationwide number to 100. Clearly, that would not stimulate capital investment and it would make everyone but those 100 lorry drivers worse off. It could also boost capital investment significantly by mandating that every company spend 50% of their net annual revenues on capital projects. But clearly that would also be a chronic misallocation of resources.
There is an optimal amount of economic resources devoted to labour and capital in the economy at any given time. We will never know what that balance is and even if we could, it changes too quickly for us to optimally allocate it. Even then, how would we be able to know what to invest the money in or whether new innovations and inventions would complement existing labour or replace it?
The best way to maximise our chances of getting it right, therefore, is to allow the market (a decentralised network of individuals and organisations throughout the economy) to make decisions about how to allocate the resources in their control.
Subject to the disciplines of competition, specialisation, real world resource constraints, and prices, they will always be better incentivised and informed in making such decisions than any central planner. That becomes all the more pressing when we’re talking about invention and innovation which are highly risky and evolutionary undertakings.
This is not some niche economic theory, it applies across markets and across civilisations throughout history. In a 2022 paper published by Hebrew University of Jerusalem’s Dr Shmuel San, we can see this problem playing out in the American agricultural labour market after a rapid decline in farm worker immigration.
San analyses the impact of the Bracero agreements between the US and Mexico ending in 1964. Starting in 1942 to aid the American war effort, the agreements created an extensive agricultural guest worker program for Mexicans who wanted to work in the United States. It continued after the war and its effects were significant as San describes:
“Approximately 200,000 Mexican legal workers entered the United States between 1948 and 1950…By June 1952, the Bracero system became a permanent component of US farm labor. During the period 1952-1959, on average, 335,000 Mexican workers were annually employed on US farms.”
Naturally, the expiry of the agreements in late 1964 created a significant labour supply shock. The impact was almost exactly as British immigration sceptics envision. Producers short of cheap labour turned to labour-replacing technology to solve their problem. The number of patents issued for technologies related to the most labour-intensive farming tasks (such as harvesting and cultivating) increased as labour supply decreased.
Nonetheless, the sector still suffered. Farms were adversely affected not just by the short-term costs of capital investment and a smaller labour pool but also in the long-run, demonstrating that the forced capital investment was not enough to make up for the lost labour. Investment and innovation related to less labour-intensive activities (such as soil working) ended up declining. To make it a triple whammy, the exclusion of Bracero workers did not raise the wages of the domestic and immigrant workers left behind.
San concludes:
“Taken together, one can conclude that Bracero exclusion made capital worse off while making labor no better off.”
As San’s paper clearly shows, neither capital nor labour are ends in themselves. It is the ways they interact and evolve to create economically optimal outcomes that matters. The economy is an infinitely complex and dynamic phenomenon, not a computer program. Central planners cannot simply adjust the inputs to perfect it and the labour market is no exception.
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