Putting the £30k threshold under the microscope

News

posted on 25th February 2019 by Fergus Peace

If there’s one thing everybody knows about in the government’s Immigration White Paper, it’s the proposal to extend the existing £30,000 salary threshold to EU workers. The Cabinet is so divided over it that the White Paper was continually delayed, and still being edited the night before its release.

Reading between the lines of that dispute – or indeed just reading the briefings coming from across government – we can be pretty confident that £30,000 is Theresa May’s preferred threshold. Employers, in turn, have very clearly expressed their fears about the labour shortages it might create.

So why is the PM so keen on £30,000? Well, if you look across the White Paper for a justification of the idea, you’ll find just one attempt at an argument – and it’s pretty flimsy.

Here’s the extent of the government’s defence of the £30,000 level in the White Paper:

“The MAC noted … that £30,000 is the level of household income at which an average family of EEA migrants starts making a positive contribution to public finances.

We agree with the MAC’s view that the salary thresholds should ensure that migrants are raising the level of productivity in the UK, making a positive contribution to public finances and are not putting downward pressure on earnings. This salary threshold is an important control to ensure that we can manage migration at sustainable levels.”

The government is being quite misleading here, in two ways. One is the clearly intended implication that the government is just following the neutral advice of the MAC. But that’s not quite right: the level of the salary threshold is a decision for politicians, and it will be determined when the current row between politicians is settled. Just last month the Chancellor called on business to lobby for a lower threshold. This is plainly not a case of the government straightforwardly going along with expert advice.

Individual & household incomes

The second issue is that the White Paper is phrased to make it sound as though the salary threshold is needed to ensure migrants ‘make a positive contribution to the public finances’. The implication here is clear – if you earn under £30k you’re a drain on the state. That’s not true either.

The claim about making a net contribution to the budget bottom line comes from research which the MAC commissioned from Oxford Economics. The £30,000 figure comes from this graph, which compares what an average household pays in taxes to what it uses in public services at various income levels.

Oxford Economics chart of fiscal break-even points for different migrant groups

£30,000 is where the average EU household – the red line – crosses into positive territory. But this is a chart of household income, not an individual’s salary. So £30,000 as a threshold for one person’s salary makes sense only if you assume that nobody else in the household works. The White Paper itself, though, says that 58% of EU ‘dependants’ – those who come to the country mainly to accompany a working family member – work.

Of course when a migrant comes on a work visa, there are no rules requiring that their dependants also work. So imposing a £30,000 threshold on the main earner ensures that every migrant household, with or without dependants, has an income higher than the average break-even level.

That reflects an extreme conservatism about public finances which, I’d argue, isn’t that helpful a way to think about immigration. If somebody is doing important work in the UK – in, say, social care or the NHS – then it makes little sense to ignore that social contribution and fixate narrowly on their contribution to the budget bottom line instead.

And it’s particularly unwise when we consider that it’s not even fixating on their actual contribution to the budget, but instead on a broad average across a wide range of differently-composed households. Naturally there are big differences within that average: older people are much more likely to use the NHS or receive pensions; families with children also use more healthcare and benefit from government education funding.

Here’s another chart from Oxford Economics, showing how the break-even point varies hugely depending on the makeup of the household:

Oxford Economics analysis of the fiscal breakeven, varying by household composition

The line marked ‘HH1’ shows that a single, young migrant becomes a net contributor to the public finances at a salary far below £30,000 – it’s only a little more than a third of that threshold. That’s an extreme case. But even the line labelled ‘HH3’, representing a household with children who attend government-funded schools and use the NHS more, has a break-even of around £22,500 per adult if both are working.

We can’t assume that both parents will work, of course. But in my view that just further illustrates why the government shouldn’t try to protect the public finances using an overall average salary threshold, when there’s such huge variation between households and their fiscal contributions.

There’s no direct analysis of the impact that different salary thresholds (or different rules on dependants) would have on the budget. The best we have for the moment is analysis from the MAC that EU migrants who have come to the UK under free movement – that is, with no salary threshold at all – have been net fiscal contributors, and projections from the White Paper that imposing the threshold on EU nationals would worsen the budget position not improve it.

Which is to say that, if the government wants to make sure that immigration from Europe has a positive fiscal effect, it doesn’t need a £30,000 salary threshold. It doesn’t need to change current policy at all.

Salary progression

There are a number of other nuances which give reason to be sceptical about the White Paper’s discussion of the salary threshold. For example, since most EU migrants are quite young their salaries are likely to increase over time. In fact international evidence suggests that migrants’ salaries actually increase faster than locals’ because of a wage penalty they suffer on first arriving. This is the rationale in the existing system for the lower, ‘new entrant’ salary threshold for migrants under 26 or those transferring from a student visa: graduates may not be highly paid initially but can see rapid progression.

Global Future analysis of salary progression

The chart above, which we featured in our report, shows earnings data from the Annual Population Survey’s pooled dataset for 2015-2017. The salary progression pattern is clear, though there is an important caveat: this data shows a cross-section of all migrants’ earnings at the time of the survey, not the over-time change in salaries for one group. So the chart may also reflect cohort effects: for example, higher salaries in the ‘20+ years’ group are at least partly due to the fact that this group is overwhelmingly from western European countries and, so, more likely to be in higher-skilled professions than more recent arrivals from new EU member states. But it does illustrate, particularly for the more recent groups where cohort change is less of an issue, the largely undisputed fact that migrant earnings increase over time.

The result of this kind of salary progression is that even if an EU migrant doesn’t pay more than they receive initially, they’re quite likely to within a few years. A strict £30,000 threshold keeps out many people who could make substantial contributions to the public finances over time, given that 80% of European migrants stay in the UK for three years or more. The ‘new entrant’ threshold recognises this point, but it doesn’t only apply to very young migrants. In combination with the broader issue about household composition, this effect means that a £30,000 threshold excludes many people who would be net contributors to the budget bottom line.

Why else?

The budget is not the only thing in the world, and there could be other reasons that the government wants to impose such a strict salary rule. Go back to what the White Paper says:

“We agree with the MAC’s view that the salary thresholds should ensure that migrants are raising the level of productivity in the UK, making a positive contribution to public finances and are not putting downward pressure on earnings.”

None of this, either, gives any reason to impose the salary threshold on EU migrants. The MAC’s report last year found that EU migration under free movement rules has not reduced the earnings of the UK-born population. Nor has it reduced their productivity (though the evidence here is more uncertain.)* There is, in short, almost no reason to think that tighter salary rules are needed to avoid harms to UK workers. To the extent that the White Paper implies they are – and suggests that this analysis originates with the MAC – it is deeply misleading.

One important caveat is that the White Paper also contains proposals which should allow more non-EU migrants to come to the UK – notably, by abolishing the cap on how many Tier 2 visas are issued each year – but doesn’t give any detailed analysis of their effects. We just don’t know what the likely wages or household compositions of these new migrants will be, or how they might affect the budget, wages or productivity.

This is a major unknown at the heart of the White Paper, which could significantly influence the effect of different salary thresholds. The government is currently consulting with employers about the appropriate level for any salary threshold; it would be helpful if it also produced more detailed analysis – ideally through the independent MAC – about how different thresholds would affect the economy and budget.

Absent more detailed evidence on that front, the White Paper offers just one more justification for imposing salary requirements on EU migrants:

“This salary threshold is an important control to ensure that we can manage migration at sustainable levels.”

‘Sustainable levels’, of course, is just the government’s code for the notorious “tens of thousands” target that the new Home Secretary mysteriously no longer wants to mention. Whatever words he chooses, though, it’s clear that after nine years, ministers making immigration policy are still being driven not by the evidence but by a crude desire to slash immigration at almost any cost.

 


* There is a ‘batting average’ effect from recent immigration from A8 and A2 countries, because they tend to work in lower-wage, lower-productivity sectors of the economy. Overall average earnings and productivity are thus slightly lower than otherwise – but the evidence does not support the idea that UK-born workers’ wage have been affected. This purely arithmetic effect is not the kind of consequence implied by the White Paper’s language of “downward pressure on earnings”, and in our view should not be a particularly important consideration for policymakers.