The Home Office’s plan to cut the number of skilled overseas workers may cause inflation to increase and dent economic growth, according to senior economists.
Earlier this week, Home Secretary James Cleverly announced plans to slash the number of legal migrants arriving into the UK by raising the minimum salary they must earn in a skilled job by a third, to £38,700.
However, economists and businesses have raised concerns that this will make it harder for inflation to return to two per cent, a process that Andrew Bailey, the Governor of the Bank of England, last month said would “take a lot of hard work.”
The concerns centre around the prospect of employers being forced to push up wages, which then follow through to price increases. This could happen as a result of low unemployment meaning a lack of applicants for jobs.
Mr Cleverly has said that his immigration package will mean around 300,000 people who came to the UK last year “would now not be able to come”.
Keeping wage inflation down is a crucial part of the Bank of England’s strategy for tackling inflation, and for that to happen it needs unemployment to go up.
Michael McMahon, professor of economics at the University of Oxford told i: “Either employers will have to ensure their target candidates from abroad earn at least £38,700, or wages have to go up in some sectors as companies fight over eligible UK workers or those already settled.
“Given there are some sectors already facing skills shortages, such restriction of labour inflows is going to make matters worse for them. Then the mapping to price inflation follows if costs go up.”
Willem Buiter, ex-chief economist at Citibank and a former member of the Bank of England’s Monetary Policy Committee (MPC), said that real wages will increase as a result of the reforms, due to be launched next year.
“There will be a temporary boost to price and wage inflation. Its magnitude and duration will depend on how fast and how strong the monetary policy response is. Interest rates will increase temporarily.”
The comments follow similar warnings from business leaders earlier this week.
Alexandra Hall-Chen, a principal policy adviser at the Institute of Directors, said: “Without measures to increase domestic labour supply, policies designed to restrict businesses’ ability to hire overseas workers risk worsening inflation and holding down economic growth.”
Longer-term, experts have also warned that the policy could lead to lower economic growth, which can limit job opportunities and push down living standards.
Michael Saunders, a former member of the MPC, which sets interest rates, said of the policy: “It will reduce potential growth – through lower inward migration – but for the same reason will also reduce actual economic growth in the UK, through fewer migrants spending money here.
“This will tend to reinforce the MPC’s supply-side pessimism, and may lead the Office for Budget Responsibility to further downgrade their potential growth forecasts.”
Asked to respond to the economists’ concerns, the Home Office pointed to comments made by Mr Cleverly.
He said: “It is clear that net migration remains far too high. By leaving the European Union we gained control over who can come to the UK, but far more must be done to bring those numbers down so British workers are not undercut and our public services put under less strain.
“My plan will deliver the biggest ever reduction in net migration and will mean around 300,000 people who came to the UK last year would not have been able to do so. I am taking decisive action to halt the drastic rise in our work visa routes and crack down on those who seek to take advantage of our hospitality.”
In some sectors, large number of employees are born outside the UK. Two in five of those who work in the manufacturing of food products were born outside the UK, latest census figures show, as were nearly a quarter of those in the wholesale trade industry.