How is the post-Brexit immigration system affecting the UK economy?

Under the UK’s new immigration system, migrants from the European Union face more restrictive rules than those from the rest of the world. The effects on overall migration numbers may be limited, but the skills and sectoral mix of migrants may look substantially different.

The UK introduced a new immigration system on 1 January 2021, ending free movement of people between the UK and European Union (EU), as well as the wider European Economic Area (EEA). The new rules came into force at the same time as the UK-EU Trade and Cooperation Agreement (Home Office, 2020).

The new system applies to all those moving to the UK for work, study or family reasons, with the exception of Irish citizens. Migrants from the rest of the world also face new rules post-Brexit, but these are considerably more liberal than those applied to workers and students from the EU.

EU (and EEA/Swiss) nationals already resident in the UK are able to apply to remain indefinitely under the ‘settled status’ scheme, and most have already done so. As of 31 March 2022, 6.5 million applications had been received by the UK government (Home Office, 2022).

What are the new rules?

The key provisions of the new system are that:

  • A skilled work visa is available for migrants coming to work in a job paying more than £25,600 or the lower quartile of the average salary, whichever is higher, and in an occupation requiring skills equivalent to at least A-levels (Regulated Qualifications Framework, RQF3).

  • There is a lower initial salary threshold for new entrants and for those in occupations where there is a shortage of workers. This means that for some occupations, the salary threshold may be as low as about £20,000. There is also a lower threshold for those with PhDs, especially in science, technology, engineering and mathematics (STEM) subjects.

  • The health and care visa provides a streamlined and cheaper process for those coming to work in the NHS and (from earlier this year) social care. For the latter, the skill threshold will no longer apply, and the minimum salary is about £20,500.

  • The new graduate visa allows international students graduating from UK visas to remain in the UK for two years after graduation, and to work in any job.

The new system represents a significant tightening of controls on EU migration compared with free movement. Migrants from EU countries coming to work in lower-skilled and lower-paid occupations will, in principle, no longer be able to gain entry. EU-origin migrants coming to the UK to study or for family reasons will have to qualify under the same rules as those from outside the EU.

Those who do qualify will still need their prospective employers to apply on their behalf. They will also have to pay significant fees and will, as is the case for non-EU migrants at present, have significantly fewer rights – for example, in terms of access to the benefit system.

For non-EU migrants coming to the UK to work, the new proposals represent a considerable liberalisation compared with the current system. There are now lower salary and skill thresholds and no overall cap on numbers.

Approximately 68% of UK employees work in occupations requiring RQF3 level skills or above. Given the requirement for new migrants to be paid at or above the lower quartile of earnings for occupations at that level, this implies at least half of all full-time jobs would, in principle, qualify an applicant for a visa (Portes, 2022).

This represents a substantial increase – perhaps a doubling compared with the previous system for non-EU nationals. In contrast, for most of the period between 2012 and 2019, migrants from outside the EU were subject to an overall quota and a resident labour market test.

These changes also mean that the new system is considerably more liberal with respect to non-European migrants than the rules in most EU member states or other advanced economies, which typically apply much more restrictive skill or salary thresholds, and often enforce a resident labour market test.

What will the new system mean for migration numbers?

Migration from the EU fell sharply between the Brexit referendum in June 2016 and the first emergence of Covid-19 in early 2020, while non-EU migration rose (Office for National Statistics, ONS, 2020). The pandemic further accelerated these trends. While it reduced both immigration and emigration overall, a significant number of EU citizens returned to their countries of origin, while non-EU migration was less affected (ONS, 2022). The new system, for the reasons set out above, was expected to accelerate these trends further. Estimates made before the pandemic suggested it would reduce EU migration by perhaps 60,000 a year, partly offset by a smaller increase in non-EU migration (Home Office, 2020).

While both effects have indeed materialised, the actual increase in non-EU migration may be larger than anticipated, which means that the overall impact on numbers may be relatively small. The latest data show that the number of work visas has risen significantly relative to pre-pandemic levels, even after taking account of the new requirements for EU nationals to obtain visas. Over the same period, student visas have risen even faster (Home Office, 2022).

The changes have also shifted the sectoral, skills mix and countries of origin of new migrants to the UK (Migration Observatory, 2021). The number of non-UK born people working in the accommodation and hospitality sector has fallen substantially, as EU-born migrants have left the sector and not been replaced by new arrivals.

By contrast, the health and information and communications technology sectors account for by far the largest proportion of skilled work visas issued under the new system. Reflecting this, there have been sharp rises in the numbers of migrants from India, Nigeria and the Philippines.

Although we have few data so far, the new system is also likely to affect the parts of the country to which migrants go. Those coming to work in the health sector are widely dispersed; those coming for private sector jobs are very concentrated in London, where higher average salaries mean that it is much easier to exceed the required salary. The evidence on the economic impact of migration to the UK suggests that migration boosts growth, by increasing the labour force. Yet it is less clear whether it boosts GDP per capita. This will depend on the impact on productivity, where there is some evidence for a positive effect, especially for more skilled migration (Migration Advisory Committee, 2018).

Some argue that immigration may reduce businesses’ incentives to invest in productivity-enhancing technology or training, although the evidence does not support this (Campo et al, 2018).

Overall, the effects on the labour market are relatively small, with little or no direct impact on unemployment or average wages. But research indicates that migration may have some relatively small effect of decreasing wages for lower-paid workers (Portes, 2018).

Migration also appears to bring overall fiscal benefits: migrants pay somewhat more in taxes – directly and indirectly – than they ‘cost’ in public services and benefits, at least relative to natives. This appears to apply both in the short and long term, although the fiscal impacts of individual migrants, like those of individual natives, vary hugely (Oxford Economics, 2018).

Overall, then, the impact of migration is broadly positive, but there are likely to be distributional implications – in other words, the effects will be felt differently by those on higher or lower incomes. In addition, the longer-term effects on growth and productivity are harder to assess.

Macroeconomic and fiscal impacts

Pre-pandemic analysis of the new system suggested that if it led to a substantial reduction in migration, this would, in turn, reduce growth and worsen the fiscal position – the balance between public spending and tax revenue raised. This would be partially offset by an improved skill mix among new migrants.

Most studies suggested that the direct impact on per capita GDP would be close to zero (Portes, 2022). Since the overall numbers appear to be only modestly affected, the impact may be more positive, with a smaller – or no – negative impact on growth and a greater positive one on GDP per capita.

Overall, a relatively liberal system for work-related migration, based on a salary threshold, is expected to be positive for growth. But this is conditional on the government committing to this broad approach and not micromanaging the system in response to short-term changes in demand for workers.

Counterbalancing this, the end of free movement – and the imposition of bureaucratic costs and barriers on migrants from nearby countries – is likely to reduce the flexibility of the UK labour market and economy, and hence impose some economic costs.

Effects on wages

The distributional impacts are also of interest. In particular, there has long been concern that migration, especially migration to work in lower-skilled and lower-paid jobs under free movement, depressed the wages of resident UK workers.

As a result, one of the stated policy goals of the new system was to reverse this. The existing evidence, suggesting that migration had depressed wages in lower-skilled jobs in the service sector (by perhaps 1-1.5% over a decade) appears to support that argument, while at the same time implying that any impact would be relatively marginal (Nickell and Salaheen, 2017).

As set out above, the new system appears to be achieving its objective of shifting the balance towards higher-paid migrants, working in higher-skill occupations. Partly as a result, vacancies are high in some relatively low-paid sectors and occupations, including accommodation and hospitality.

As yet, this does not appear to be having a substantial impact on relative wages. Indeed, compared with the period immediately before the pandemic and the introduction of the new immigration system, wages appear to have risen most in finance, information and communications technology and professional services, rather than in low-paid sectors with high migrant penetration. Concurrently, wages have risen most for the top 1% of the earning distribution (Xu, 2022).

Effects on different sectors

The end of free movement has led to substantial sectoral shifts in migration flows, with particularly sharp falls in the number of migrants coming to the UK to work in the accommodation and hospitality sector, and possibly in less-skilled and lower-paid administrative jobs.

This has led to sharp rises in vacancies in these sectors, although there are also high vacancy rates in other sectors, for example, health and social care.

Over time, employers will have to adjust to the new system. This could be through any or all of the following mechanisms (Sumption, 2022 forthcoming):

  • By increasing wages, or improving working conditions in other ways, so as to attract more resident workers.

  • By improving productivity, for example, through automation, ‘upskilling’ the existing workforce or switching to less labour-intensive goods and services.

  • By reducing output.

As noted above, there is little evidence of the first mechanism at work so far. It is also important to note that if employers’ response is simply to increase nominal wages without increasing productivity, this is unlikely to lead to increased (real) wages across the whole economy. Since prices will also have to rise, this will mean changes in relative wages, with workers in sectors where migrant competition has lessened gaining and those in other sectors losing (Portes, 2021).

The social care sector is of particular interest as there have been long-running staff shortages resulting from lack of government funding, exacerbated by the decline in EU migration since the Brexit referendum.

Although lower-paid jobs in the care sector were originally not eligible for the health and care visa, the government extended eligibility in early 2022. This suggests that in this sector at least, it does not regard any of the mechanisms above as feasible or affordable.

Effects on universities

The new system is also likely to have major impacts on the university sector. The graduate visa has made the UK considerably more attractive to international students, especially from India, Nigeria and Pakistan.

At the same time, the requirement to pay international rather than domestic fees makes the UK less attractive to EU students. But this does make those students more lucrative for universities.

Combined with the sharp squeeze in real terms on domestic tuition fees, government policy provides a very strong incentive to increase the number of international students, while limiting growth in domestic student numbers (Public Accounts Committee, 2022).

While this may have some short-term economic benefits – international student fees contribute to UK service exports – it may also have some longer-term negative consequences if the result is a reduced supply of UK-origin graduates.