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Mass immigration has made Britain a lee competitive economy

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Mass immigration has made Britain a lee competitive economy

Post  Panda on Tue 3 Sep - 10:19

Mass immigration has made Britain a less competitive economy
When Mark Carney went to Nottingham last week to make his first speech as Governor of the Bank of England, media attention focused, naturally enough, on his reference to Jake Bugg, who we are told is a pop singer of some sort. Amazingly, Mr Carney had been to one of his gigs.

On the whole, business leaders tend to support an open door immigration policy Photo: PA
By Jeremy Warner
9:00PM BST 02 Sep 2013
Yet Mr Carneyís more serious point was that UK productivity, which has been trailing other major advanced economies for decades, is no higher today than it was in 2005, when Mr Bugg got his first guitar. This appears to be the longest period of stagnation in UK productivity growth on record. Economists have widely described this phenomenon as a ďpuzzleĒ, a word they tend to use for any trend that breaks with past norms.

To most of us, however, it doesnít seem in the least bit mysterious Ė itís basically about the triumph in public policy of demand management over serious supply side reform. Unfortunately, this has got worse since the financial crisis began, not better.

Demand stimulus through monetary and fiscal policy is the politically easy option when an economy hits the buffers and perhaps vital in preventing a contraction turning into a depression but, as Britainís nascent recovery gathers pace, it is worth reiterating that it doesnít of itself lead to sustainable long-term growth or to rising living standards. These require more difficult choices.

An OECD assessment of the UK economy earlier this year attributed Britainís poor productivity record since the crisis began to a number of factors, all of which are no doubt part of the explanation. To an extent, itís plainly linked to the UKís still impaired banking system, which, as Ben Broadbent, a member of the Bank of Englandís Monetary Policy Committee, has argued, hampers the reallocation of capital across sectors.

Recessions normally weed out weaker companies and industries, allowing stronger, more productive ones to thrive more effectively. Reluctance to recognise bad debts, for fear of what this might do to banking solvency, has got in the way of this process. Easy monetary policy has also supported the overstretched, which again disrupts the Darwinian disciplines of market forces.

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As we now know, trend growth ahead of the crisis wasnít in any case as good as Labour made out; a lot of it was down simply to financial and housing market froth, now blown away by the banking implosion.

Hoarding of skilled labour, declines in North Sea oil production and statistical omissions in capturing the growth in Britainís digital economy, may also have played their part.

Yet none of these things adequately explains Britainís dismal long-term productivity performance.

In the search for answers, I want to highlight two other aspects of the problem Ė the negative impact of mass immigration on productivity and the failure to address simple supply side deficiencies in planning, education, infrastructure, public sector efficiency, the tax system and a perennially weak export performance.

On the whole, business leaders tend to support an open door immigration policy, which helps address skills shortages in key industries. But, more particularly, it also puts downward pressure on wage costs. The effect is similar to having permanently high levels of unemployment, since it creates an inexhaustible supply of cheap labour.

This may or may not be good for corporate profits but it is certainly not good either for productivity or for living standards among low and middle income earners. By making labour cheap, it removes a powerful incentive to productivity gain.

To see why this is the case, look at whatís happened since the crisis began six years ago. During this period, more than 1m private sector jobs have been created, a remarkable achievement given the collapse in output. This has helped keep unemployment much lower than it would otherwise be, which is plainly to be applauded, but it has come at the expense of real incomes.

Much of the job creation has been in low-income or part-time employment. Real incomes have experienced their worst squeeze since the 1920s. Yet this is not just a recent phenomenon. The squeeze on real incomes, particularly at the lower end of the scale, pre-dates the crisis.

Foreign competition, both in the form of immigration and imported goods and services, has been a big constraint on wage growth. This, in turn, has limited the incentive for efficiency gain. Cheap labour has become a substitute for investment in plant, machinery, training and research and development.

When the last administration boasted of the umpteenth successive quarter of successive growth, it neglected to say that this was largely the result of population growth. Income per head was becoming progressively becalmed.

Britain is an open economy that certainly needs to be in the market for top international talent. Yet high levels of low-end immigration have been, at best, a zero sum game and, by holding back necessary investment in the future, possibly quite a negative economic influence.

No free market liberal would argue the case for preventing employers from hiring foreign labour but there are other forms of state intervention that might indeed be appropriate were it not for the fact that the European Union makes them unlawful Ė for instance, imposing levies on use of cheap foreign labour.

By making low skill employment more expensive, the levy system would provide a powerful incentive for productivity gain in construction, retail, social care and other largely domestically bound industries. These levies could then be channelled back into tax incentives for training and other forms of business investment.

In any case, if living standards are to start growing again, employers must relearn the virtues of doing more with fewer workers. Productivity gain can only properly occur if more efficient and innovative companies are allowed to put poorly performing ones out of business. Relying on population growth, and the falling unit labour costs it brings about, to stay competitive is a road to nowhere.

The second issue with productivity is that of an economy which has become unduly reliant on domestic demand. Why chase foreign markets, which require world class levels of competitiveness, when there is the easy option of credit-fuelled domestic demand to fall back on?

Time and again, the UK has ducked difficult supply side reform in favour of the palliative of demand stimulus. Such measures were plainly important in the early stages of the crisis, when they helped prevent a depression from becoming entrenched, but their continuation five years after the event is now very likely doing more harm than good.

The Juncker curse (after the Luxembourg prime minister) has it that Western politicians know what needs to be done, they just donít know how to get re-elected after doing it.

By the same token, everyone knows that productivity-led growth is the only form of growth worth having, they just canít seem to make the long term decisions necessary to achieve it.
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