It’s a challenge that governments across the world are facing and Dr Wessel Vermeulen, Lecturer in Economics at Newcastle University London, together with Michel Beine of the University of Luxembourg and Serge Coulombe of Ottawa
University, explores how policymakers can use labour mobility as a market mechanism to control economic performance.
He argues that a spike in income from production of natural resources, such as oil, gas or water, increases the size and value of this sector but has a negative effect on other parts of the economy. In other words, a boom in natural resources can trigger a slowdown in manufacturing and other areas of trade.
While governments can use policy levers to manage imbalances in the economy, such as raising or cutting interest rates or introducing subsidies for certain industries, Dr Vermeulen suggests that an inflow of workers can also be effective in ironing out these peaks and troughs.
To test the idea, he developed a theoretical model and applied it to 10 provinces in Canada over a 22-year period from 1987–2009. Three provinces were richly endowed with natural resource reserves; the other seven relied more on manufacturing for economic prosperity.
The research looked at the effect of three types of migration on the economies of each province: permanent immigrants who arrived in the country under a traditional points-based system; temporary foreign workers enrolled on programmes designed to boost business; and people who found work after moving from one Canadian province to another. It is the first in-depth study of the role of immigration as a mechanism for controlling ‘Dutch disease’, where increased production of natural resources leads to a fall in the competitiveness of the manufacturing sector.
Two key findings emerged from the research. Firstly, the size of Canada’s non-tradable sector – which includes public and business services, hotel accommodation, construction and real estate – increased over time and provided a greater share of economic wealth.
Secondly, the migration of workers into the three provinces experiencing a natural resources boom had a significant mitigating influence on Dutch disease.
Dr Vermeulen says: “We found that the expansion of the non-tradable sector was smaller if the labour supply increased due to an inflow of workers. However, this depended on the type of migration channel.
“While permanent international immigration had little effect, temporary foreign workers and interprovincial migration reduced the impact of Dutch disease – in this case, the squeeze on the manufacturing sector. This is probably because people in the last two groups tended to move to the area to find new work, whereas those in the first group may have just wanted a better overall quality of life rather than a change of job.”
The research can help policymakers use migration as a tool to manage imbalances in the economy.
“Migration is controlled by government,” says Dr Vermeulen. “Sometimes immigration and economic performance are seen as two separate issues but my research shows that they are linked.
“Ministers should be wary of placing too many restrictions on the movement of labour because it can have a detrimental effect on the manufacturing industry – and the economy as a whole. A productive manufacturing operation can help to rebalance the economy and better protect it from future financial shocks.
“Now that we have the data to analyse migration effects on different regions within a country, it could help national institutions exert greater control over economic performance.”
As well as benefiting policymakers, the research could also be useful for business groups that represent key trades such as engineering and manufacturing.
“These groups want to have a free migration regime,” says Dr Vermeulen. “The bigger the talent pool, the greater choice companies will have when it comes to building a skills base that can make them more competitive. Business groups will always represent the interests of their members and lobbying for the free movement of trade will be high on their agenda.”
From a UK perspective, the decision to leave the European Union could have a major impact on labour flows in the post-Brexit era. Some companies have expressed concern that tougher laws on immigration could damage industry, particularly the manufacturing sector which is already struggling to fill skills gaps in certain areas.
“UK industry would not have performed as well as it has in the last 15–20 years without the contribution of migrant workers,” says Dr Vermeulen. “My research, which can be applied to different countries, suggests that it could be a mistake to rely solely on homegrown talent.”
Dr Vermeulen’s study has laid the foundations for further research into the effect of migration on economic performance – for example, by looking at its impact on individual companies or particular groups of employers.
He says: “If we do this, we can gain more insight into how an economy is performing. Do we need more diversity within a particular sector, for instance? Are we seeing the birth of more small businesses or is the economy being driven by the growth of a few large companies?
“If governments knew the answers to these questions, they could adapt their policies accordingly.”
Ministers should be wary of placing too many restrictions on the movement of labour because it can have a detrimental effect on the manufacturing industry – and the economy as a whole.
Dr Wessel Vermeulen
Lecturer in Economics, Newcastle University London