Immigration, Demand, Supply and Sectoral Heterogeneity in the UK Labor Market: A Time Series Approach

Should we think of immigration as an exogenous shock to labor supply in the receiving economy? The time series of the share of migrant labor is `Granger caused' by that of total hours worked and the average real wage in the UK economy. This suggests that immigration is, in part, determined by demand and supply effects in the labor market. In this paper we model, for the first time, immigration, wages and hours worked, as responding to demand, supply and immigration shocks at the aggregate and sectoral levels. The labor market is therefore modelled as being subject to multiple shocks at any one time, with individual shocks reinforcing and offsetting each other. We use a vector autoregression (VAR) on a time series of UK labor market variables from 2001-2019 for 35 different sectors. We find, across different identification techniques taken from the macroeconomics literature, that a fundamental component of the estimated time series process has a negative association between immigration and native wages. This shock, which can be interpreted as an `immigration shock', plays a significant role in the determination of wage growth, although its influence varies across sectors and identification methods. Indeed, immigration itself is also determined, in part, by aggregate demand and supply shocks.