Some figures out today suggest that immigration controls are a bad idea.
I?m referring to the productivity numbers. These show that output per worker hour is lower now than it was at the start of 2006. This is not because of a lack of productivity growth in the public sector; these figures refer to the market� sector, which excludes most government activity.
We cannot blame this solely upon the labour hoarding that occurred in the recession. For one thing, productivity growth was slowing before the recession: output per worker grew just 1.4 per cent in the year to 2007Q4. And for another, you?d expect labour hoarding to be reversed in the upturn. But so far, it hasn?t been; productivity rose a feeble 0.3 per cent in the year to 2010Q4.
It?s possible, then, that we have a deep-seated structural problem here. And one thing at least suggests it might continue. This is that large amounts of productivity growth comes from firms entering and leaving the market. But with companies unable or unwilling to raise finance, the effect of firm entry upon productivity is likely to be weak in the near future at least.
Which raises the question: what happens if low productivity growth is here to stay?
It does not mean we are doomed to low GDP growth. It just means that, if GDP is to grow, firms will have to take on more workers.
This, though, is potentially inflationary. If higher output requires more workers, it means higher costs, which in turn mean higher prices.
In this context, the shape of the labour supply curve is crucial. If this is significantly upward-sloping then a firm wishing to increase output must increase wages for everyone, which is a big cost. This would either deter the firm from expanding at all, or would cause it to raise prices.
If, though, the labour supply curve is flat, the firm?s marginal cost is much lower. A non-inflationary expansion is therefore more possible.
And here, of course, is where immigration comes in. If firms can hire workers from abroad, then the labour supply curve is obviously flatter than if it has look only in the UK.
Free migration is, in a sense, a substitute for productivity growth. If we don?t have the latter, then non-inflationary economic growth requires more migration.
Now, you might reply here that the upward-sloping labour supply curve that we get with immigration controls is good for native workers. I?m� not sure. For one thing, if it deters firms from expanding, no-one benefits. And for another thing, some - albeit higher-skilled - UK workers are complements for immigrant workers, and so would actually benefit from immigration.
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