Saturday, 2 July 2011

Time to auction work permits?

Once again the government is getting itself in a muddle over work permits and immigration. This week the Work and Pensions Secretary, Iain Duncan Smith, has been urging UK businesses to employ young Britons, rather than relying on foreign workers. This comes after a recent article by Frank Field MP for the Daily Telegraph highlighted that the majority of new jobs created in the UK both in the last year, and also over the last ten years, have gone to overseas workers. Yet such pleas from government ministers calling on business leaders to act are hardly likely to make much difference unless they are backed by legislation. After all, why should any business act against its own perceived interests in this way.

The usual response of employers to the immigration issue is that British workers 'lack skills' and have a 'poor work ethic'. They also claim that they are only employing foreign workers because they are looking to employ the very best international talent. The problem is that none of this is really true. It is difficult to argue that this country suffers from a shortage of talent when it has at least three of the top ten science-based universities in the world within its borders. It is also difficult to argue that there is a shortage of technical talent when the relative size of the industrial base in this country is so small compared to other top OECD countries. As for the question of work ethic, there is more than a suggestion that this is shorthand for people in this country being asked to work long hours for low pay. If this country needs to import talent, then surely it should be in the form of people with skills that are comparable to the best this country has to offer. Yet even in our universities you will struggle to find foreign academics from the best overseas universities such as Stanford, MIT, Caltech and the Ivy League. So we may be importing talent, but it is not generally world-class talent.

The problem with the current system is with the rules and how they are implemented. So if a government doesn't like the result that ensues then it should change the rules. Those rules were based on a points system linked to workers' skills. Now the government wants to cap numbers. Unfortunately both systems are flawed because neither is sufficiently based on quality, and neither places any incentive on the employer not to demand foreign workers over British ones. Nowhere is this more prevalent than in our university sector where there is an abundance of overseas graduates, but very few from the top ten research institutions in the world. However the same is true for much of industry. As there was no premium for a degree from a truly world-class institution under the points system, there was no incentive to import talent from those institutions in order to raise the average quality of talent in this country. As a result in many cases overseas graduates acquired a kudos that was undeserved and was used to displace domestic graduates from the UK jobs market.

Moreover the points system itself was deeply flawed. Not only did most university degrees from most countries carry more or less the same intrinsic points value, but additional points were added for existing earnings rather than for any future earnings from the intended UK-based job. For example, a Ph.D. graduate (worth 50 points under the points-based scheme) who was under 30 years of age (worth another 20 points) would only have to be currently earning over £25k under the old system to acquire the necessary 75 points for a Tier 1 visa. If they had a batchelor's degree (worth 30 points) and had previous UK experience (5 points) then they would need previous annual earnings of over £35k to qualify. Yet even this amount could be exaggerated by the 'uplift calculator' which artificially raised the earnings of applicants from low GDP per capita countries. The result of all this is that virtually any graduate qualified.

Nor is the capping system much better. Such a cap would also fail to distinguish between workers of different skill levels and quality. It would probably be implemented on a first-come-frst-served basis that would do little to improve the technical excellence of the UK. As a result places would end up going to hairdressers instead of nuclear physicists.

What is needed instead is a market system that is biased in favour of high quality talent over lower quality talent. One that forces employers to balance the cost of employing a foreign worker with the cost of not doing so. It also needs to be a system where the cost increases with demand in order to limit demand to the most valuable workers with the most valuable skills. The obvious solution is therefore one based on an auction mechanism where the quantity of work permits is constrained, but excess demand forces up the price so that they are only economically viable for the highest paid jobs. The question then is, who should pay? The worker or the employer?

In a recent article on the Institute of Economic Affairs (IEA) blog, Eamonn Butler of the Adam Smith Institute (ASI) suggested that work permits should be auctioned to the highest bidder. For once I agree with him. He also suggested that the immigrant employee should pay as they were the ones who were in line to benefit. That though is where he and I part company. The problem I have with many proposals that come out of both the IEA and the ASI is that they tend to place higher costs on the ordinary worker or citizen, while seeking to exempt the owners of business from similar costs.

The problem with asking the employee to pay for the work permit is two-fold. Firstly, in any free market the best workers will always migrate to countries with the highest incomes and the lowest cost of entry. If a country wishes to avail itself of the best talented labour from abroad, large immigration fees applied to those migrant workers would be self-defeating. They would drive the best talent elsewhere. After all, why would an immigrant worker be prepared to pay £30k or more to work in the UK, when they could get visas or work permits for similar jobs elsewhere in the EU and the USA for free?

The second problem with forcing the immigrant employee to pay is that it will not reduce immigration levels. If the price of the visa or work permit goes up then migration from richer countries will indeed go down. However it will almost certainly be replaced by migration from poorer countries (or less talented individuals from richer countries) where the wage differential with the UK is greater. Thus net migration will be unchanged, but the quality will be reduced.

Fundamentally though, this policy should be about internalising externalities. In this case the externalities are the adverse social costs that are currently passed on to the taxpayer and the State as a result of immigration. These can include higher unemployment, additional costs on public services (such as education and health), the lowering of domestic wage rates, and a reduction in workplace training.

The impact on workplace training is of particular importance. In this regard the UK’s record is lamentable, and immigration makes it even worse. It allows bad employers to undercut good employers by utilising low cost foreign labour instead of improving the skills of their existing employees. This lack of workplace training is not a new phenomenon in the UK. As Will Hutton pointed out in his book "The State We're In" back in 1994 (see p187), British employers in 1988 only invested about 0.15% of their turnover in training. Companies in Japan, France and Germany invested about ten times that amount. That was the main source of the UK skills shortage then, and it probably still is now.

The solution, therefore, should be to make employers pay more for immigrant labour than they would have to for retraining their existing UK workers. It is employers who should bid for these work permits in monthly auctions not the migrant workers. Perhaps then employers would be incentivised more to invest in their workforce instead of continually carping to government ministers about the supposed skills shortage in this country. To put it in simple terms, if migrant workers are really that essential to the well-being of the UK economy, then employers should be prepared to pay a premium for their services.

No doubt many employers will complain vigorously about this and claim it will make the UK uncompetitive. This is a poor argument, not least because most of the UK economy is based on services, and service industries in the UK cannot in general compete for custom against similar companies overseas. Their market is internal, and so their only competitors are internal. If higher wage costs push up their service costs then they are free to pass them on. Far from damaging the UK economy, such actions would increase GDP by increasing the spending power of the low paid, much as the minimum wage has done. Britain's future prosperity lies in being a high wage economy, not a low wage one. As for manufacturing, higher wage costs would be offset by a higher quality of employee and therefore a higher level of innovation and international competitiveness.

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