The EU's free-movement scheme undermines national productivity

New research on the UK shows that only controlled immigration can boost a country's productivity. The findings have wide applicability.

Photo by Andreas Klassen on Unsplash

Productivity isn’t everything, but in the long run, it’s almost everything.

— Paul Krugman, Nobel Prize Laureate

It is pointless for a country to pursue an economic strategy that takes aggregate growth as its central referent.

— Stefan Legge, Swiss Economist

In March I published an essay on Trump’s tariffs, which was essentially a critique of orthodox economics. It started with the prediction that five to ten years from now, scores of economics professors would queue up to get onto the BBC, CNN, NBC, as well as some news outlets in Europe, to tell journalists what many non-economists had recognised for some time: that the free movement of labour, as well as putting a dent on prosperity, was fuelling populism in the West. Where once they had acted as the defenders of economic orthodoxy, so I predicted in that essay, these economists would soon insist that there was no alternative to controlling globalisation. What would cause this change, I surmised, was mostly fear of being perceived as irrelevant by politicians and the media.

What sustains orthodoxies is a lack of curiosity, a trait one wouldn’t expect from people who have been trained to make a contribution to knowledge. Where that curiosity is absent, an honest understanding of the complex yet explicable dynamics of labour markets is hard to attain. We are reminded of how much easier it is to deduce from the standard toolkit of economic theory than to visit businesses, talk to employers and employees, or to commuters on overcrowded trains. It is also far easier to claim that the available evidence is as yet inconclusive than to talk to people in job centres, or to analyse firms’ hiring practices.

Adam Smith did not have a degree in economics. He studied logic, metaphysics, mathematics, Newtonian physics, and moral philosophy at the University of Glasgow. As for his subsequent studies in literature at Oxford, he found the teaching at Balliol College to be uninspiring and the atmosphere at the university to be stifling. He left Oxford without graduating. Nor did the author of the Wealth of Nations have assistants whom he could ask to send out thousands of standard questionnaires. But he could rely on his gift of observation and his imagination. He was fond of historical examples, which he combined with observations from his extended daily walks and his travels across Scotland, England and Europe. Most of his important insights he owed to a combination of inductive ethnography and deductive philosophical reasoning. Had he not obsessed over the intricacies of pin manufacturing in his native Scotland, his theory about the division of labour might never have seen the light of day.

There is thus no good reason why economists, or any other students of human behaviour, should refrain from visiting factories or talking to employees to see how they perceive their own situation. If nothing else, such anthropological fieldwork might allow them to formulate interesting questions that might lead to some tentative answers. When it comes to the relationship between immigration and productivity, the following three questions might lend themselves to getting things under way:

• Do employers resort to hiring people from poorer countries (whose wage demands will presumably be lower than those of the established residents) when their firms are becoming uncompetitive due to slumping productivity? My own anecdotal evidence, distilled from lunchtime conversations with Swiss entrepreneurs, suggests that they do. Not because they are bad people, but because, thanks to the free movement agreement with the EU, they can.

• Do real-estate investors and professional landlords lobby politicians and governments to maintain high levels of immigration to boost demand for land, property and rented accommodation? Again, my conversational evidence suggests that that’s exactly what some of them devote a great deal of their time on. Not because they are immoral, but because the free-movement scheme with the EU enables them to pursue a highly lucrative form of rent-seeking, one that would collapse if the scheme was rescinded.

• How much evidence is there that employers in high-wage countries (e.g. Switzerland) are more concerned about educational certificates than about training talented candidates with a view to making them highly productive members of their workforce? Again, my cursory examination of advertisements for mid-ranking Swiss industry and service jobs suggests that many HR-departments focus more on credentials than on people. Many seem incapable of formulating, in a few clear sentences, what qualities they expect of a candidate. But they are peerless at producing endless lists of more or less essential qualities and qualifications.

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All three questions are inspired by the interest I take, as a citizen who happens to be a historian, in the relationship between immigration and productivity. Productivity is a measure of economic performance that compares the amount of goods and services produced (output) with the amount of inputs used to produce those goods and services. Productivity can be enhanced in three ways: by investment in machinery and equipment, “enabling workers to generate higher output with the same or fewer inputs” (capital stock); by improving “employee skills and competencies” (human capital): and by “increasing the efficiency of the interaction between capital and labour”.

Productivity is of central importance for long-term prosperity, which in turn determines how much a country can invest in schools and universities, in advanced vocational education, in infrastructure and social services. It also determines how much money individuals can spend on their further education, health and personal enjoyment. Prosperity also plays an important role in maintaining a country’s social cohesiveness. Where a decline in prosperity is compounded by a rent-seeking class at the top of the income or wealth pyramid, societies can drift into civil unrest or worse (see Peter Turchin’s work on the “wealth pump” and on “immiseration”).

Yet here too, economics as a discipline finds itself behind the curve. Most economists keep insisting that immigration enhances productivity. The dogmas of zero-tariffs and of open borders still carry much weight in a profession that has long prided itself on its universalist worldview. This explains why most economists are loath to discuss the burden immigration places on infrastructure (e.g. transport and health), or how it increases prices for scarce resources, particularly land, property and accommodation. Admittedly, these costs affect the middle and lower strata more than they do the top five to ten percent of the population. Yet even economists should realise that congested roads and overcrowded trains are set to compound a country’s productivity problems.

On the ideological plane, an alliance has been forming between individualist libertarians on the right and egalitarians on the socialist left of the political spectrum. While the apostles of free market orthodoxy idealise a world without borders on economic grounds, the socialist egalitarians embrace the same utopia on ethical grounds. What unites them is their negative view of the nation-state. While the left considers the nation a perilous fiction invented by capitalists to fill their own coffers, libertarian free-marketeers view the nation as incompatible with their cosmopolitan pretensions. This explains, among other things, why the self-professed liberal establishment will always prefer a left-wing historian or political scientist to one whose liberal convictions are grounded in conservative principles.

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But now, at last, matters appear to be moving onto a terrain where that kind of vanity has lost much of its former purchasing power. The evidence that uncontrolled immigration is bad for productivity is mounting. New research by Hoseong Nam and Jonathan Portes on the UK clearly points in that direction. In particular, the two economists see a “positive association between non-EU origin migrants and productivity, and the reverse for EU-origin migrants.” While they regard their evidence for the positive effect of (skilled) non-EU migration as sound, they describe their analysis of EU-origin migration as merely suggestive.

Their qualification notwithstanding, I found one of their observations particularly striking. Nam and Porter conclude that EU-origin migration had had, at best, “a null effect overall” on UK productivity. Given that they do not even begin to consider the cost of EU migration — e.g. the burden it places on the UK’s (health and transport) infrastructure, or how it makes property and rents unaffordable for a large segment of the population — the revelation of a null effect should raise eyebrows.

How do Nam and Porter explain the difference between non-EU origin and EU-origin migration with regard to productivity? Let me quote them on this:

“The differential impacts of EU and non-EU migration could perhaps be most directly ascribed to the heterogenous skillsets and sectoral distributions between the two migrant groups, shaped by the different nationality-based entry requirements to the UK during 2014-2019. In this period, EU-origin migrants could enter and work in the UK under the free movement system, while non-EU origin migrants moving to work had to qualify under a relatively restrictive system, which generally required a job offer paying significantly more than average earnings in a relatively highly skilled occupation.”

Concerning the logic defining labour productivity, my favourite example comes from a 2024 report published by the Centre of Policy Studies (CPS), a conservative think tank founded by Keith Joseph and Margareth Thatcher. Intriguingly, the authors’ focus is on the washing of cars. We used to wash our cars by hand, and some, for whatever reason, continue to prefer this method. But automated car washing sites have been popular for nearly half a century. At least in Britain, however, the EU’s extension to Eastern Europe turned out to be bad news for the owners of automated car washing sites. Here the CPS report offers the sort of evidence that Adam Smith would have happily included in his reflections on the dynamics of modern market economies. Let me cite the relevant passage from the report:

“Automatic car wash sites plummeted as poorly regulated and sometimes even forced labour flooded the market in the 2000s and 2010s. The number of automated washes more than halved from 9,000 in 2000 to 4,200 by 2015. This was not part of some broader global trend. Elsewhere, automatic car washed remain a growth industry.”