Alan Manning: ‘Achieving growth by just having more people is not what we should aim for’

This is part of a series, ‘Economists Exchange’, featuring conversations between top FT commentators and leading economists

Two years ago, Britain embarked on an experiment: what happens when a country puts a virtual stop to immigration by low-paid workers? After Brexit led to the end of EU freedom of movement, the UK decided (with a few exceptions) that it would not give work visas to people below a certain salary and education level. Supporters of the idea said it would force employers who had previously relied on low-paid migrants from the EU to boost productivity and try harder to attract locals. Opponents said it would hamstring the economy by depriving sectors such as hospitality of the staff they need.

How is it going so far? One economist with a particular interest in the answer is Alan Manning, a professor at the London School of Economics who specialises in the labour market. In 2018, he was the chair of the government’s independent migration advisory committee, which was asked to make recommendations on what the UK’s post-Brexit work immigration policy should look like. The MAC argued Britain should become more open to higher-paid migrants but much less open to immigration by the lower-paid, with the exception of seasonal field workers.

In this interview, Manning explains why he thought that was the best policy for the UK, and what has happened since it was implemented in January 2021. He also discusses “monopsony power” in the labour market — a topic he has been working on for decades which has recently become popular among young economists. And he explores what recent breakthroughs in artificial intelligence might mean for people’s jobs.

Sarah O’Connor: It has been a couple of years now since the UK changed its immigration policy quite dramatically, and effectively stopped most lower-paid migrants from coming in. Do you think we’ve learnt anything yet about whether that was the right decision?

Alan Manning: I wouldn’t say that we know whether it was the right decision. But my view is that something along those lines was the right decision. The strength of somewhere like the UK is based primarily on its people, we’re always looking to upskill our local population. We think it’s a good thing if they get more qualifications and more skills. To have an immigration policy that goes against that in some way isn’t the right thing. You want policies to be aligned.

And lower-skilled migration tends to be in lower-wage, lower-productivity jobs, so it tends to be a drag on the productivity level in the UK. Not a very big effect, but we know the UK’s got a very big problem with that. There are then questions about what sort of welfare benefits they’re eligible for and so on. If they’re not eligible for many, you end up with people who are part of our society, but are the poorest in our society, and the most disadvantaged. So you increase inequality a lot. And if they are eligible, then you begin to run into the problem that the effect of that immigration on the public finances begins to be negative.

We should still be very much monitoring what is happening. But I think the knee-jerk reactions that you see, saying, for example, ‘There are reports of shortages, we must have immigration’ or, ‘Immigration is good for the economic growth that we should be aiming for’ — I think those views are wrong.

SO’C: That’s what businesses say — that actually, you’re in some sense holding the economy back if you don’t have enough people to pick fruit, or if you don’t have enough people to drive HGV lorries. Of course, all countries have had labour shortages since the pandemic began, but there is an argument the UK’s immigration policy since Brexit has made the shortages worse and contributed to our poor economic growth.

AM: If we take the question of immigration and growth, yes, more immigration means more people, that means higher GDP. So in that sense it clearly leads to more growth. But the growth we should be aiming for is growth in GDP per capita. Just growth by having more people is not what we should be aiming for. And then it’s much more debatable whether immigration does or not improve GDP per capita. There are some sorts of immigration that clearly do. And others where it’s much less clear.

You do have to pay attention to whether the shortages are strategic — something like drivers, that’s a strategic issue. If you have a shortage of them, that has consequences throughout the economy. If you talk about shortages, say, of wait staff in restaurants or bar staff, that doesn’t have the same sort of strategic consequences for the economy. So, you’ve got to be very pragmatic on this.

Fundamentally, in the sectors that are reporting shortages, those shortages exist not because there aren’t people in the UK who can do those jobs, it’s because they don’t want to do those jobs. And for different reasons and in different ways, those jobs are just not appealing to people.

If we had a firm that says, ‘I’m struggling to sell my product’, we’d be inclined to say, ‘Well, perhaps your product is priced wrongly. Or it’s not a very good product.’ But somehow when employers complain that ‘nobody wants to take my jobs’, they expect us to say, ‘Oh well, we’ll provide you with some workers who will do it under the terms and conditions you view as appropriate’.

And there may be reasons why sometimes you say, well, okay, this sector just can’t compete for workers in the open labour market, but we think this sector is really important, so we’re going to give them a dedicated ringfenced supply of workers — migrant workers, almost certainly. But just be very clear that that’s what you’re doing. You will cause that sector to become totally dependent on that source of labour.

SO’C: Because it detaches from the rest of the labour market?

AM: Exactly. That’s why I’d be very cautious about responding to short-run stresses and strains with a policy which would almost certainly be a permanent policy.

I am in favour, for example, of the Seasonal Worker Scheme. But there needs to be much more enforcement. The cost of the visa should be on the employers, not the workers. There should be guaranteed earnings over the season. And we need to pay much more attention to the way in which they’re recruited in the source country.

But there’s an important difference between seasonal agricultural work and, say, care work, where there are also shortages. Because agricultural work is seasonal, and you need a whole load of workers in this field at this particular time and not really the rest of the year, it is hard to provide labour for that sector from a settled labour force that you’re hoping to offer permanent work to. Whereas care is the exact opposite of that. It is year-round and very stable.

So, that’s why I would be very cautious about responding to demands for sectoral-based migration schemes. If you were going to be really worried about it, I would much prefer something like a Youth Mobility Scheme with the EU, ideally multilateral but possibly unilateral. Saying, ‘Well, there are some groups of people who can come here, with freedom to work wherever, for a limited period. I’m generally in favour of that for cultural reasons, as a way we build bridges with Europe. But you might also argue that it would help with some of those shortages.

SO’C: There’s quite a lot of polling data to suggest that the public is more positive about immigration than they were a few years ago, even though the overall level of net migration is quite high [because UK policy has become simultaneously more welcoming to higher-paid immigrants from outside the EU]. Do you find that interesting?

AM: Yes. There’s clearly a long-run trend towards people having more favourable views. I’m not sure that most of those polls came after we had the news that net migration is half a million, when the previous record was 331,000. So, it is interesting but I feel some people exaggerate it a bit.

If you look at 1997 when the Labour government came in, for 15 years there were only a few months in which the fraction of people saying immigration was the most important issue facing Britain was more than about 5 per cent. For 15 years. And my view is, I’m not quite sure this is true, but my impression is they came in with a certain degree of complacency that Britain had changed, that immigration could never be a major political issue again. And that was a mistake.

That instinctively makes me cautious — maybe too cautious, I don’t know. So, this is good, but I would move incrementally rather than radically.

SO’C: Can we talk a bit about one of your other areas of work: monopsony power? It’s a concept that is having a real moment in the economics world now, but you have been writing about it for decades. Could you explain what economists mean by monopsony power in the labour market?

AM: Yes. It’s basically a complicated way of saying that employers have some degree of market power over their workers. If an employer cuts wages they find it harder to recruit workers, harder to retain workers, but that effect is not so strong that cutting wages below the market wage is impossible. Which is what the economist’s go-to model of perfect competition would say.

And that, to me, has always aligned with people’s experience. If you ask people just open-ended questions about what happened in your life last year, the most common things they talk about are births, marriages, divorces, deaths. And after that, it’s about jobs. ‘I got a job, I lost a job, I got a promotion’ and so on. Nobody says, ‘Well, I used to shop at Tesco and now I shop at Sainsbury’s’ as a major life event. So jobs are very big things for people. And we know it’s hard to get good jobs. And the way in which economists were thinking about the labour market simply didn’t reflect that fact.

SO’C: How did economists used to think about it?

AM: Their go-to model would be perfect competition in which there are loads of employers essentially offering the job, so if you lose your job today, well, there’s another employer just down the street who’s going to immediately offer you a job at the same wage, essentially the same job.

What we’d seen in the 1980s was deregulation of the labour market, the weakening of trade unions, getting rid of wages councils (the UK’s former system for minimum wages), getting rid of other labour market regulations. And that was based around the view that essentially the labour market was competitive enough to protect the interests of workers. It wasn’t possible for employers to take advantage of workers because if you treated your workers badly they just got one of these other jobs that’s down the street. And I had the view that that was wrong.

SO’C: And if you believe that employers do have power in the real world that is different to what an economic model might assume, what are the policy implications?

AM: So then you’re thinking there’s an imbalance of power and you’re trying to rebalance. That can be in terms of top-down policies, you’re legislating for the minimum wage and so on. The minimum wage is important, but it’s only going to affect a certain segment of the labour market. And this may be a more pervasive problem than that. Then you might be regulating what’s allowed in employment contracts. And then you might also be thinking about trying to empower workers in a way from the bottom-up, which would be through trade unions or other forms of worker voice.

SO’C: When you first started talking about this, were you a voice in the wilderness? And do you feel like things have changed? It seems to me now that a lot of economists, particularly young economists, are really interested in this idea.

AM: I’m a professor at the LSE, I’m not really in any kind of wilderness, I don’t expect anyone to feel very sorry for me! But it’s certainly true that young people in particular are much more interested in this now. There was a period in which these deregulated markets seemed to do well. We had a period of quite long steady growth without any major crisis, so what was wrong with the way things were?

But then the financial crisis punctured that view. There was much more of a focus again on market failures in general. And then particularly in the US, we have seen this decoupling of wage growth from productivity growth. So this view provides some intellectual underpinnings for saying, ‘Yes, it is a problem’ and exploring what you might do about it.

SO’C: What are the really interesting bits of research that are going on now in this area?

AM: There’s been a lot of good work on non-compete clauses in employment contracts, saying that this has the effect of reducing competition in a way that’s bad for workers. And even more than that, even though the justification for non-competes is to encourage firms to invest in their workers and knowledge, that actually, it has a chilling effect on that. Silicon Valley grew up in a state where non-competes are illegal.

SO’C: Speaking of Silicon Valley, artificial intelligence is making big leaps forward. Do you feel like we’re on the cusp of something important in terms of the impact of technology on the world of work? And is that something you feel apprehensive about, or optimistic about?

AM: I must admit, I’m just generally positive about it. All the fears around it, which there have been throughout history, have come and gone. And they always have the same form. Even though the technology is very different. Those are misplaced. If we take the current episode which started 10 years ago, there was a study that said something like 40 per cent of jobs in the US were highly vulnerable to automation over a decade or two. Now we’re halfway through that.

AM: My view is that if we look back in history about the mistakes people made in thinking about the impact of technology, people make the exact same mistakes. There are often losers from technological change. If you have a very specific skill that your livelihood depends on and suddenly a machine can do it better and cheaper than you, then that causes you a problem.

But normally that’s been adopted because it’s a cheaper way of doing things. So, if our markets work well, that gets passed through in the form of lower prices and makes all the rest of us better off. And over a period of time, people no longer go into that profession. They go into something else. So, that’s why we are drawn towards the losers who are often very visible. And their losses may be large. And the winners are much more diffuse and harder to identify. But of course, I think we do need to think about the losers and perhaps do something to soften that.

The counterargument is that there is no guarantee the future will be like the past. And that’s perfectly true. Of course it’s possible that this time is different. But I don’t really see the signs of this in our labour market at the moment.

SO’C: I’ll tell you why I think some people feel that this time is different. Generative AI feels like it’s getting at skills that hitherto we thought of as fundamentally human. Creativity. Being able to connect with people and join dots. Ten years ago, people used to write quite glib articles — I was probably among them — saying certain kinds of skills are going to be automated, but great human qualities like creativity will continue to be in demand in the jobs of the future. And now we’re starting to think, ‘Oh heck, AI is coming for the creatives first’.

Is that a real difference? Or is it just that there’s a different group of people who are worried who weren’t expecting to be worried?

AM: These things are just trawling through everything, all knowledge that is out there, and putting it together. It’s doing that much better than we can as humans. But I’m not sure I’d call that creativity. But the work that it does challenge is the professional notion of expertise and judgment. One example would be doctors’ diagnosis of illness. It’s going to turn out that with a battery of tests and some data on medical history, some kind of AI is going to be much more effective than doctors in doing that. But that is an entirely positive development.

Or let’s take the example of ChatGPT. Universities rely a lot on personal statements on university applications. And ChatGPT can write good ones. But actually, that’s just levelling the playing field. Because previously, there was a subset of students that had access to professional help to write really good personal statements. And now there’s this free source of good personal statements. So I wouldn’t see that as a negative. We had an unequal system before and it’s levelled the playing field there. Maybe making the whole personal statement thing pretty useless. But the notion that it was really good and effective before was a mistake.

SO’C: As an academic, do you think things like ChatGPT will affect the way you teach? Does it mean that you can’t set essays any more because you won’t know if the students really wrote them themselves?

AM: The ability to use things like ChatGPT effectively is actually going to be a skill we should be developing in the students. Because this is a way of summarising knowledge in a way that is beyond our individual capabilities of doing it. But you then need to be able to evaluate that. There are examples of ChatGPT coming up with very plausible sounding answers that are totally wrong. So you’ve still got to have your students learn the stuff. We need to go with it, rather than fight against it. I’m not quite sure how to do that, but that’s my feeling.

SO’C: Selfishly, do you think journalists should be worried for their jobs?

AM: If you’re collating information and putting it out, yes. But that part of your job isn’t the most interesting part, is it? When you’re out discovering and documenting abuse of migrant workers, we’re a long way from a drone being sent in to see what’s going on. So there is always going to be change, and some of that is net positive. Because it allows us to do things that we couldn’t do before. But technology can be used for good and for bad. And it is the job of policy to make sure that it’s generally used for good.

The above transcript has been edited for brevity and clarity Alan Manning: ‘Achieving growth by just having more people is not what we should aim for’

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