Tony Danker, the director general of the Confederation of British Industry, said last week that the Government should allow more immigration to relieve shortages of labour in key sectors of the economy.
This runs counter to the professed thinking of the Government. Sir Keir Starmer, Labour’s leader, has also apparently rejected it. But does Mr Danker have a case?
He is undoubtedly right that some industries are suffering from an acute shortage of labour, especially agriculture and hospitality. Many bars and restaurants are either shut or open only part of the week - not because of a lack of business, but because they cannot get the requisite staff. Perhaps temporary visas for workers in hard-pressed companies could be part of the solution?
For once, some of the problem is related to Brexit as large numbers of workers from Eastern Europe have returned home.
But Brexit is only a part of the story. Covid is another major explanatory factor for the exodus. Meanwhile, overall immigration has not fallen.
Reduced numbers of people from Eastern Europe have been offset by increased arrivals from the rest of the world. These people, however, are not a perfect substitute for those from Eastern Europe as they do not have the same skills, education or work experience.
This is about as far as Mr Danker’s case can be sustained. The underlying assumption of his argument is that the needs of “business” trump everything else.
While I would not go as far as a recent Prime Minister who famously said “f--- business”, this puts the cart before the horse. Business is there to serve society and not the other way round. And society has a legitimate concern about immigration. A large number of its members are very worried about it.
There is no doubt that immigrants can bring a huge amount to the country. You have only to look at the composition of the current government to see that. But this is not the same as saying the more immigrants, the better.
Admittedly, other things equal, more immigrants means a greater labour supply and that should boost the total level of GDP. Potentially, this has a couple of favourable effects. For a start, it could improve the public finances – provided that the taxes received from new immigrants exceed the extra public expenditure incurred to provide them with benefits and public services.
Moreover, the larger our GDP, then the weightier the UK is in the world.
Yet the increased size of our economy does not make us richer as individuals – at least not directly. That is all about GDP per capita. Some forms of immigration may increase the GDP per capita of the host population and some may diminish it. The best working assumption is probably that immigration leaves GDP per capita unchanged.
And in a small island with limited spare space, cramming in more people gives rise to congestion costs in everything from roads and public spaces to the provision of public services.
Admittedly, in due course, the supply of the latter could be increased to meet this higher demand, partly by drawing on the labour of the new immigrants. But it takes time.
The greatest pressure is felt in the housing market. Unless the supply of housing can be greatly increased – and we all know from bitter experience the barriers against this – a higher population will lead to increased real house prices and a lower quantity and quality of living accommodation.
And then there are the wider, societal effects. There is a limit to the number of immigrants who can be successfully absorbed and integrated into the home country. This goes beyond mere economics and speaks to the essence of what holds a society together.
So what is the alternative solution to Mr Danker’s narrowly economic problem, namely the shortage of labour? There are several. First, the outstanding feature of the labour market over the last three years has been the fall in the number of workers. About half a million people have left the workforce since before the pandemic. Policy needs to focus on getting them back.
Second, business needs to invest more in training indigenous workers.
Third, business needs to invest more in capital equipment, including robots and AI. Mr Danker was pretty dismissive of the ability to replace labour this way and yet there is widespread anxiety about jobs disappearing through automation.
As I argued in my book, “The AI Economy”, although it is not going to happen overnight, the world of employment will be transformed by artificial intelligence. The task of business is to anticipate this and embrace it, not to ignore it and rely on an endless supply of labour from abroad.
Of course, there will be some industries where it is still difficult to get sufficient workers and where AI will be of limited help. Hospitality is a leading example. In this case, businesses will have to pay more for their staff - undoubtedly meaning higher prices to customers, who will surely react by reducing demand.
There may be scope to alleviate the pressure through a different tax treatment. But if we end up with a somewhat smaller hospitality industry despite this, it would not be a disaster.
There is also another large source of untapped labour – our huge student population. We have grossly over-expanded tertiary education, which needs to be seriously pruned. Simultaneously, more needs to be invested in technical education - but not in pursuit of three-year “degrees” and not necessarily at residential institutions called universities.
Much expanded technical education may not increase the number of baristas or waiters but it should increase the number of workers with valuable skills in everything from IT to plumbing and building. That is the way to improve both the workings of the economy and the lives of millions of people.
Roger Bootle is chairman of Capital Economics roger.bootle@capitaleconomics.com
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