The Corner

Shock: Imported Cheap Labor Hits Labor Productivity

The Economist, like so much of the British (and not just British – hullo Jeb Bush!) establishment, is forever hymning the supposed economic virtues of mass immigration, so some credit to it for publishing this piece on the Britain’s ‘cheap labor’ boom.

George Osborne can be forgiven a bit of global gloating when he delivers his final budget as chancellor of the exchequer on March 18th. Britain did, after all, grow faster than any other G7 country in 2014. Its job market is probably the fizziest in the EU. But Britain is also exceptional in a less desirable way. It has become an island of spectacularly cheap, if not terribly efficient, workers. There are now few better affluent countries in which to hire….

Productivity slowed almost everywhere after the financial crisis. But the picture is especially dismal in Britain. Output per hour worked is still 2% below its pre-crisis peak; in the rest of the G7 group of rich countries it is 5% higher. The French could take Friday off and still produce more than Britons do in a week. Confounding stereotypes, Italians are 9% more productive.

Britain’s workers are a bargain all the same, because their pay is so pitiful. Of the 15 initial members of the EU, only Greece and Portugal now have lower hourly wages. A British employee produces a fifth less than a French one, but he or she is more than a third cheaper to hire.

For firms, this is wonderful. Unlike real wages, which remain 8% below their 2007 peak, company profits are almost back at their pre-crisis level (and for service companies they have never been higher)….

When people are cheap, firms would rather hire than invest in machines or technology. So productivity is held down. That tendency is stronger when banks do not lend much—as in the aftermath of the financial crisis—because cash-poor firms struggle to finance new investment. A shift from capital to labour seems to have happened in Britain: growth in the capital stock has fallen along with productivity.

Pause for a moment on the implications of this for the US agricultural sector. The argument is often made that the US has to import agricultural labor or “the crops won’t get picked”, a dishonest but convenient excuse for employers unwilling to invest in higher wages or more efficient machinery, but one that they can only get away with in a society where fresh supplies of cheap labor keep coming in.

Back to The Economist:

The ready supply of cheap labour in continental Europe further encourages hiring. In 2012 Britain absorbed eight immigrants per 1,000 inhabitants—more than twice the EU average. Half a million more EU migrants are employed in Britain than in 2010, accounting for roughly a third of the country’s employment boom. Those kept out of work by burdensome regulation on the continent may find a job with ease in a country with weak unions and flexible work rules, perhaps on a zero-hours or part-time contract. Three-quarters of people moving to Britain from recent EU joiners do so to work; 70% of those who succeed end up in low-skilled jobs. Britain draws labour from Western Europe, too: since 2010 net migration from the 15 early members of the EU amounts to more than 200,000 people.

Oddly (not), The Economist, a reliably europhile publication, identifies one elephant in the room, but leaves out another. It omits to mention that part of the reason that these migrants from elsewhere in the EU are able to take low-skilled jobs at such low rates is the way that the EU’s principle of  ’freedom of movement’ has combined with UK tax and benefit rules to help miserly employers out.

In a paper from November, 2014 the think-tank, Open Europe, explained…

EU migrants are far less likely to claim unemployment benefits than UK natives.  As of February 2014, only 2.5% of the total unemployment benefits claimants were EU migrants.

But then there is the question of ‘in-work’ benefits, including tax credits, housing benefit, access to social housing and the National Health Service:

Unlike the vast majority of EU countries, these benefits are non-contributory and universal…. EU migrants are slightly more likely to claim in-work benefits than UK nationals. EU migrants make up 5.56% of the UK workforce, but families with at least one EU migrant make up 7.7% of in-work tax credit claims.

This matters because having to make these in-work benefits immediately available to EU migrants effectively acts as an incentive or ‘subsidy’ for EU migrants to perform low-paid jobs in the UK, which does not exist to the same extent in France and Germany. It also prevents the UK from deploying tax credits specifically as an active employment policy targeted at facilitating the re-integration of unemployed UK natives back into the labour market, as was their original intention.

As Open Europe explains, the consequences can be dramatic. A single worker earning the minimum wage in Spain coming to the UK to work on the minimum wage would see his income boosted by a third under the current rules, a Pole would see his increase by 155% (or 72.4% if adjusted for purchasing power differences between the UK and Poland).

Open Europe likes to pretend that this problem can be resolved within the EU. It will not be, but at least the think-tank recognizes that the issue exists.

The Economist meanwhile concludes with a series of ‘remedies’ (more broadband!) designed to cure Britain’s productivity woes without suggesting anything that might disturb the magazine’s stale pro-immigration orthodoxy.

Oh yes, it adds this:

It would help, too, if foreign students were encouraged to stay in Britain after graduating.

No. The opposite is true.

Meanwhile, and while we are on the topic of immigration, check out this Washington Examiner article by Byron York:

The Eric Schmidt pleading for more foreign workers is the same Eric Schmidt who boasts of turning away thousands upon thousands of job seekers who apply for a few prized positions at Google…

Other tech leaders join Schmidt in calling for more foreign workers. Some companies are actually lobbying for more H-1Bs and laying off American staff at the same time. For example, last year Microsoft announced the layoff of 18,000 people at the very moment it was pushing Congress for more guest worker visas.

After all, it beats creating the market conditions that would support investment in people who are already here.

And it is so much cheaper for employers….

Oh yes, The Economist has also favored expanding the H-1B program.  What a surprise. 

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