New report shows how the UK can reform immigration after Brexit, be responsive to business needs and pay for public services.

• UK must set out post-Brexit immigration system by year-end
• Immigration has been a net positive to the UK’s fiscal position, with little impact on unemployment or wages of low-skilled workers
• Reducing high-skilled immigration would hit businesses and UK competitiveness
• Points-based systems attract workers who look good “on paper” but are not necessarily the best fit for employers
• A more business friendly approach would be to auction work visas to employers
• Auctioning visas would promote economic growth and allow government to raise funds to spend on addressing concerns about pressures on public services and low-skilled wages

With just over one year to go until Britain leaves the European Union, the country must design an immigration system that can win popular support. Building on the work of Nobel Prize winning economist Gary Becker, labour economists Pia Orrenius and Madeline Zavodny argue that auctioning employer permits to hire foreign workers, provided security checks are met,  would maximize the economic benefits of immigration and increase government revenue. The Adam Smith Institute’s new report comes at a time that the UK has to decide on how it will manage immigration. It’s time to kick-start a mature debate on how we organise this system. 

At present the UK has two migration systems. The first, for non-EU migrants, has five tiers for work- and study-based visas as well as additional channels for family migration and humanitarian migrants. The second is the free movement regime that the UK has with the European Union, which grants EU citizens preferential access. As we prepare to leave the EU, the government has made clear it is seeking to control numbers, the skill level of migrants, their length of stay and the benefits they receive. 

It might be easy for the UK government to simply fold the EU into the existing skills-based tiered system. While doing so might enable the Conservatives to hit their goal of reducing annual net inflows to the tens of thousands, it would come at considerable economic cost with businesses hit by labour shortages and consumers facing higher prices for goods and services, the report suggests. Points-based immigration systems, as used by Canada and Australia, tend to attract workers who look good “on paper” but are not necessarily the best fit for employers. 

Instead, the UK should consider auctioning employment visas to employers. Auctions are a flexible alternative to complex points-based systems and replace central planning with employers’ bottom-up knowledge. By allocating visas to the firms that value migrant labour the most the policy has the potential to boost economic growth and government revenues.

Visas purchased by companies could be resold, while foreign workers would be allowed to move across employers with a visa, to ensure workers’ rights are protected. With the Migration Advisory Committee providing advice or setting a target number of visas up for auction, it would be responsive to changes in UK economic conditions and the demand for foreign workers. Changes in permit prices would act as a signal to increase or reduce the numbers of permits available in auctions in future years.

The UK should consider separate auctions for high- and low-skilled permits, with low-skilled permits reserved for foreign workers who will earn less than a certain amount or work in certain occupations or industries. Creating another separate auction of short-term permits for seasonal foreign  workers, such as those working in agricultural jobs or at holiday  resorts, might also be advisable.

Visas as currently constructed are not free. At present a typical Tier 1 exceptional talent applicant pays ₤585 to apply, while a typical Tier 2 general applicant for a three-year visa pays between ₤587 and ₤1267 (although less if in a shortage occupation). Sponsoring employers of Tier 2 and Tier 5 workers also pay an Immigration Skills Charge of up to ₤1476. Thousands more are paid in legal fees to lawyers as applicants and employers attempt to prove need and skills. An auction system would allow the government to streamline the process, make it more responsive to business requirements, and capture funds currently spent on legal costs.

In 2014, Professor Sir David Metcalf, who chaired the Government’s Migration Advisory Committee until 2016, proposed using auctions to allocate investor visas. 

The paper also draws on extensive research to conclude that immigration has had negligible effects on employment, unemployment, or the earnings of people born in the UK. However, some research suggests that low-skilled immigration slightly lowers the earnings of low-paid workers, with the most-negative effects on wages felt among other immigrants.

Immigrants to the UK contribute more to taxes than they consume in terms of public benefits and services. Immigrants from countries that joined the EU in 2004, including Poland, Hungary and Lithuania, are strongly net positive contributors to the UK government’s coffers. 

Immigration responds to and generates more economic activity, the report suggests, with the economy especially able to absorb higher migrant rates during times of expansion. Extensive research finds migration leads to greater levels of trade, innovation, and productivity gains. Report authors Zavodny and Orrenius report that migration increases patent activity and productivity, and in the UK has been instrumental in retaining the City of London’s pre-eminent position at the centre of global finance. 

Immigration was named by 73% of those who voted leave as a concern in the British Social Attitude survey immediately after the EU referendum. But instead of using Brexit as a means toward reducing immigration from the EU, the UK government should seize it as an opportunity to design an immigration system that best strengthens the country’s economy. Creating an auction system would be a bold move that would maximize the economic benefits from immigration while possibly bolstering public support for immigration.

Madeline Zavodny, author of the report and Professor of Economics at University of North Florida, said:

“The UK has a unique opportunity to replace its immigration system with one that would benefit the economy and increase support for immigration. Auctioning visas to employers is the best way to bring in talented workers who contribute to the economy while minimizing any harms to UK natives. It would also generate funds that could be used to achieve other public goals.”

Sam Dumitriu, Head of Research at the Adam Smith Institute, said:

“It is vital that the UK’s post-Brexit immigration policy is informed by evidence. This important report by two distinguished economists reviews extensive empirical research to develop the framework for a innovative immigration policy that meets the UK’s specific economic requirements and improves the public’s support for immigration.”

About the authors:

Madeline S. Zavodny is a Professor of Economics at the University of North Florida. She is also a Research Fellow at the Institute of Labor Economics (IZA), a Fellow at the Global Labor Organization, and an Adjunct Scholar at the American Enterprise Institute. Much of her research focuses on economic issues related to immigration, including Beside the Golden Door: U.S. Immigration Reform in a New Era of Globalization (AEI Press, 2010) and The Economics of Immigration (Routledge, 2015). Her research on immigration has also been published in the Journal of Labor Economics, Industrial and Labor Relations Review, the Journal of Policy Analysis and Management and Demography, among others. Before joining UNF she was a professor of economics at Agnes Scott College and Occidental College and an economist with the Federal Reserve Bank of Atlanta and the Federal Reserve Bank of Dallas.

Pia M. Orrenius is Vice President and Senior Economist at the Federal Reserve Bank of Dallas where she works on regional economic growth and demographic change. She manages the regional and microeconomics group in the Dallas Fed Research Department. Her academic research focuses on the labor market impacts of immigration, unauthorized immigration and U.S. immigration policy. She is coauthor of the book Beside the Golden Door: U.S. Immigration Reform in a New Era of Globalization (2010, AEI Press). She is research fellow at the Tower Center for Political Studies at Southern Methodist University and at the IZA Institute of Labor in Bonn, Germany, as well as adjunct scholar at the American Enterprise Institute. Orrenius is also adjunct professor at Baylor University (Dallas campus), where she teaches in the executive MBA program. Orrenius was senior economist on the Council of Economic Advisers in the Executive Office of the President, Washington D.C., in 2004–05, where she advised the Bush administration on labor, health and immigration issues. She holds a PhD in economics from the University of California at Los Angeles and bachelor degrees in economics and Spanish from the University of Illinois at Urbana—Champaign.

PLEASE NOTE: The views expressed here are solely those of the authors and do not reflect those of the Federal Reserve Bank of Dallas or the Federal Reserve System.   

Notes to editors:

For further comments or to arrange an interview, contact Matt Kilcoyne, Head of Communications, matt@adamsmith.org | 07584 778207. 

You can read the full report here.

The Adam Smith Institute is a free market, neoliberal think tank based in London. It advocates classically liberal public policies to create a richer, freer world.