Post-Brexit shift in immigration may mean higher wages and more self-sufficient UK economy | Larry Elliott

Immigration played a key role in the UK’s decision in 2016 to leave the EU. Opinion polls showed strong support among leave voters for an end to free movement and for Westminster to decide who should be allowed to enter the country for work. That’s what the slogan “take back control” was largely about.

Since the Brexit vote, the mood has changed. There is still a feeling ministers need to do more to stop people in small boats crossing the Channel. But legal immigration has ceased to be such a hot political issue. Other issues – such as the cost of living and rising interest rates – rank as more important.

The more relaxed mood is certainly not the result of Britain pulling up the drawbridge to immigrants in the past seven years. On the contrary, net migration – the number of people arriving less the number leaving – rose to a record 606,000 in 2022.

There were some one-off factors last year – the arrival of refugees from Afghanistan and Ukraine, for example – which won’t be repeated in the future. But even ignoring the people fleeing wars and persecution, the number of non-UK nationals either working or looking for a job rose by 257,000 in 2022. As Samuel Tombs, a UK economist at Pantheon Macroeconomics, has pointed out, immigration accounted for almost all the 0.9% increase in the size of the workforce in the year to the second quarter of 2023. Foreign-born workers have plugged the gap left by a shortage of domestic candidates and so helped ease supply shortages.

There has been a marked shift in where the new foreign-born workers are coming from. Before Brexit, free movement under the rules of the single market meant the vast majority arrived from EU countries. Under the points-based system, workers can arrive from anywhere in the world, provided they meet certain criteria. These include having a job offer of a certain skill level, that they can speak English and that they will be paid more than £26,200 a year.

The latest data shows that the four countries that secured the most work visas were India, Nigeria, Zimbabwe and the Philippines, with about half plugging gaps in the health and social care sector. Britain’s gain, inevitably, comes at the expense of poorer countries losing some of their brightest and best workers, even if they send a chunk of the money they earn home through remittances.

Some “red wall” Conservative MPs have called for much tougher immigration controls, including raising the minimum salary required for a skilled overseas worker to £38,000. This would certainly give companies a compelling reason to substitute capital for labour but with considerable short-term costs. In a globalised world, companies can easily find skilled people from overseas to fill vacancies, whereas it will take time to recruit and train domestic employees.

Mixed signals are being sent out by the government. Tombs says the decision to raise the minimum salary an overseas citizen must earn to get a skilled workers visa by 2.3% this year – well below the 8%-plus jump in annual private sector earnings – suggests ministers are loosening the immigration rules by stealth.

At the same time, though, the annual fee migrants pay to use the NHS has been raised from £624 to £1,035, and Rishi Sunak is making clear his reluctance to relax immigration rules to secure a bilateral trade deal with India.

That makes the chances of an immediate breakthrough slim. Sunak would love an agreement with the world’s fastest-growing major emerging economy – but not at any price. India has a reputation for fighting its own corner relentlessly in trade negotiations conducted by the World Trade Organization, and its key demand in the bilateral talks – more visas for Indian students and workers – is one that makes life difficult for Sunak.

It is a tough call for the prime minister, who needs to show voters that the economy can benefit from better-calibrated migration. There is certainly evidence the geographical shift in immigration is positive for the UK. Data from Oxford University’s migration observatory shows migrants from India and sub-Saharan Africa are more likely to be employed in high-skilled jobs and command higher salaries than those from eastern Europe. In 2020, the average salary for a non-EU-born worker was £31,400 – £3,000 higher than for an EU-born worker.

There have been problems for certain sectors – such as hospitality – which in the past relied heavily on well-educated migrant workers from the EU to fill vacancies. But if the idea was to craft a migration system that would enable the economy to become less dependent on low-skill, low-wage, low-productivity jobs, then the shift to a points-based system makes sense. If the supply of cheap workers is restricted and the cost of employing people rises, firms will have a greater incentive to boost spending on new labour-saving equipment.

There are tentative signs of this happening. Kallum Pickering, a UK economist at Berenberg bank, points out that UK business investment has increased by 35% since the low point reached during the spring 2020 Covid lockdown and is now 6% above its pre-Brexit vote high. In part, this is the result of an end to the uncertainty that deterred investment in the years after 2016 but it is also a case of “needs must”. For the past 30 years, he says, the UK has relied on two things to grow its economy – cheap foreign labour and low-cost imports – both of which are becoming harder to secure.

In other words, the upshot of deglobalisation and a changed immigration system may well be more expensive labour, higher levels of investment and a more self-sufficient economy. All would certainly be welcome.