Stagnant wages? Carney enters the migration debate

http://www.theguardian.com/uk-news/2015/may/14/stagnant-wages-dont-blame-migrants-blame-britons

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Mark Carney, the governor of the Bank of England, being lightly grilled by John Humphrys this morning on the Radio 4 Today programme, was keen to play down the idea that migrants to the UK have depressed productivity – and wages.

His own arrival from Canada, on a total remuneration package of £874,000 a year, certainly did little to reduce pay rates. But after the longest decline in living standards in a generation, the Bank’s latest quarterly inflation report, published on Wednesday, conceded that higher than expected migration may have been one factor constraining productivity – and wages – over the past five years.

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As Carney stressed, there were other factors at work, too: “compositional” effects, driven by the growing prevalence of low-skilled jobs in the workforce, for example.

The growing number of older workers, and employees’ willingness to take on more hours, also seems to have increased the amount of slack in the labour market – and therefore made it easier for firms to increase output without having to bid up wages.

The latest jobs data certainly seems to suggest that foreign workers – in particular migrants from the EU – act as a kind of reverse safety valve, arriving in large numbers when there is work available. This chart from Michael O’Connor, who blogs at strongerinnumbers, makes it clear

Carney played down the effects, pointing out that net migration has been only 50,000 a year higher than expected. The Bank’s monetary policy committee is also expecting the impact of migration to fade over time.

But it’s also worth bearing in mind that the MPC is deeply divided about how much slack there is in the labour market – and there’s a strand of thought that says relatively high inward migration may have structurally weakened British workers’ bargaining power.

Andy Haldane, the Bank’s chief economist, mused about the subject in a recent speech entilted Drag and Drop, and a key sentence in the inflation report warned: “It is possible that there is more slack than in the central view. That would be consistent with weaker wage growth recently. And the potential for net inward migration could mimic the effects of slack in terms of its impact on wage pressures.”

In other words, more rapid migration may have been holding down wages. If Labour wants to win back the voters that deserted it in droves for Ukip, they need to think hard about this once-taboo idea.