Immigration has key role in economic growth

The immigration debate can be an informed one, says Colm Keena, Public Affairs Correspondent

The debate on immigration invited by the Fine Gael leader Enda Kenny can be reasonably informed in the case of its effect on the economy.

Work carried out by the Economic and Social Research Institute (ESRI) points to the key role the phenomenon has had, not just on rates of economic growth, but also on earnings equality within the economy.

Research professor at the institute John FitzGerald believes that immigration rates are set to ease in the years ahead, leading in turn to an easing of economic growth rates.

He says long-term economic policies pursued by successive governments over the years caused the market to deliver the economic growth of recent times.

The market delivered an economy that brought about, firstly, full employment, and subsequently net immigration.

He says that the institute had for some time in the 1990s been predicting a slowing of economic growth by 1999, for demographic reasons. However, the surprising amount of immigration into Ireland in the past number of years allowed the high levels of economic growth to persist.

In a paper published in 2002 by Prof FitzGerald and his colleagues Alan Barrett and Brian Nolan (1), the authors outlined findings that might come as a surprise to many.

They noted that increased earnings inequality had been a feature of the US and UK labour markets in recent times, probably reflecting increased demand for highly-skilled labour. In their study they found that earnings inequality in Ireland increased between 1987 and 1994.

However, during the period of very strong economic growth between 1994 and 1997, they found that the increase in inequality slowed dramatically. A model they produced for the study indicated that this slowing down was due to immigration.

The key to this was the highly- skilled, highly-educated nature of the immigrants coming to Ireland.

Because their skills were above average for Ireland, the immigrants increased the productivity of the Irish economy. Many of these immigrants were returning migrants.

Also, according to Prof Fitz- Gerald, the immigrants, by introducing increased competition into the labour market for highly-skilled people, suppressed wages growth in that market.

At the same time, the increased economic activity created increased demand for low- skilled workers and their wages, therefore, grew disproportionately.

A paper last year by Mr Barrett, Adele Bergin and David Duffy (2) found that the effect of the immigrants who arrived between 1993 and 2003 increased Gross National Product (GNP) by between 3 and 3.7 per cent, largely by lowering skilled wages by about 6 per cent and increasing Ireland's competitiveness.

The difference in estimate between 3 and 3.7 per cent was the difference between assuming the immigrants took up jobs commensurate with their skills or below their skill levels.

Wage rates for unskilled labour continued to rise at a disproportionately high rate up to approximately 2000.

However, around this time there was a shift to more non-English speaking people coming to Ireland. Many of these people ended up taking low-skilled jobs, jobs that were not commensurate with their skills or education. This led to a softening in wage growth in low-skilled jobs.

Recent studies, however, indicate that within a few years, that people in this group who stay, tend to make their way up to jobs that are commensurate with the level of education and skill. Unfortunately, there is not much data on how many immigrants tend to stay for long periods.

The net benefit to the economy is lessened for the period that that skilled immigrants are working below their skills levels.

In a way that is similar to the Irish experience in the 1980s, it seems it is the better educated and more able that emigrate. Poorly educated Polish people, for instance, seem to recognise that they are better off at home than sleeping rough in Dublin.

The ESRI, in conjunction with other similar institutes abroad, are monitoring labour movement in the EU. Migration may have a self-limiting aspect. Prof Fitzgerald says the effect of emigration from Poland on the Polish labour market is likely to lead to less immigration into Ireland.

The number of highly-skilled people in the emigration age cohort who came to Ireland and the UK in the period since Poland joined the EU may be equal to 5 per cent of that cohort.

This in turn has led to wage level increases for skilled labour in Poland, to the detriment of that economy and its unskilled labour.

Increased wage rates for skilled Polish people in Poland, allied to the rising costs of living in Ireland, is likely to lead to a lowering of immigration into Ireland, and a resultant slowing of economic growth here. This may be a good thing.

For obvious reasons, growth in GNP does not directly translate into an improvement in the welfare of the people in a situation of rapid population growth. A better measurement is growth in GNP per capita.

Prof FitzGerald believes economic growth over the period of the National Development Plan will be around 5 per cent per annum up to 2010, and then be less than 4 per cent per annum thereafter.

"The reason being that immigration is likely to ease off." Because the latter, more normal European rate of economic growth will be occurring at a lower population growth rate, the actual increase in wealth or welfare for the people living here, may be just as high as it has been in recent years, under higher GNP growth rates. There would also, of course, be less strain on infrastructure if population growth eased.

The ESRI studies quoted above contrasted the Irish experience with that of the US, where low- skilled workers from Central and South America have had a depressing effect on the wage rates of the low skilled.

This has benefited high-skilled workers and the US economy, but increased earnings inequality. This sort of immigration also, Prof FitzGerald says, makes the maintenance of a non-discriminatory social welfare system impossible.

(1) Earnings Inequality, Returns to Education, and Immigration into Ireland, Labour Economics, Vol 9, No 5.

(2) The Labour Market Characteristics and Labour Market Impacts of Immigrants in Ireland. Economic and Social Review, Vol 37, No 1.