How Might Migration Affect Growth and Steady-State of an Economy?

Introduction

Solow growth model is a long-term economic growth model that shows how saving, and investment affect a nation in the long run growth (Durlauf, Kourtellos, & Minkin, 2001). The model notes that saving rate affects economic growth in the short run but has no effect on the growth of the economy in the long term due to depreciation and the changing steady state capital. The model holds that technological growth has a significant impact on sustained economic growth and sustaining living standards (Durlauf et al., 2001). The model is based on the assumption that the economy produces a single good and all the producers have equal access to the factors of production (Sims, 2012). This essay will use the Solow framework to assess the impact of migration on the growth and steady state of the United Kingdom economy in the face of Brexit.

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Save 25%

Solow Growth Model

In the Solow model of economic growth, the saving fraction is constant of the income, and the rest is consumed. In this case, there is no distinction between labor incomes and capital income in the economy (Sims, 2012). The marginal product of the additional units of capital decline which pushes the economy in a long run growth trajectory in which the gross domestic product grows at the same rate with the workforce and technology which reflect the improvement in productivity (Sims, 2012). Based on the model, the steady-state growth path is achieved when the capital, output, and labor are growing at the same rate which makes the production and capital for every worker constant.

Brexit Impact on Immigration

Brexit will have a significant impact on the overall migration policies which will change the number of Britons working in EU countries as well as the number of EU members moving to work in the United Kingdom (Taggart & Szczerbiak, 2018). The United Kingdom under the EU is subject to the free movement of people required for all the members and leaving the union will enable the country to chart a new set of regulations for its immigration policies. Currently, approximately 3 million European nationals live and work in the United Kingdom whereas 1 million British citizens are in European Unions (Taggart & Szczerbiak, 2018). With the development of two divergent immigration policy approaches between the EU and the UK, the country seeks to restrict migration from mainland Europe using work and residence criteria on European Union citizens which is similar to the system the UK is using on non-EU countries (Outhwaite, 2019). In the new approach, qualification for the European Union nationals to work in the United Kingdom will be dependent on their skills with the low skills getting temporary permits without eligibility for residential status while the highly skilled EU nationals will get a five year work permit and future consideration for residency after application (Ahlstrom-Vij, Rolfe, Hudson-Sharp, & Runge, 2018). This system means that fewer people will be able to migrate and work in the United Kingdom. On the contrary, the European Union operates a Blue Card system that allows non-EU college graduates to work in Europe a rule that in terms of generosity is very friendly. The United Kingdom will lose significantly due to the nation's overreliance on EU labor (Taggart & Szczerbiak, 2018). Currently, there is panic from the private sector with many essential organizations planning to exit the United Kingdom operational bases to set up camp in other European countries with more friendly labor laws which will make it possible to acquire cheap labor.

Solow Model Key Concepts and Assumptions

According to the Solow's model professional change/productivity growth is key to the long run growth of the per capita income and output. The accumulation of capital will lead to long-run growth which embodies the improvement of technology (Sims, 2012). The model assumes an artificial situation of constant population and technology and then allow the population to grow and the technology to improve. The economy grows at the same rate as the population growth and in the steady state, refer to the point in growth where the diminishing returns to factor kicks in and weakens the economic growth in per capita terms even when capital is added to the economy and at this state the per capita output is constant. This is due to depreciation in the capital accumulation which means that the more the capital available, the higher the reduction to be expected.

Solow Framework Application to UK Economic Growth

Reduction in Labor in the Short Run and Diminishing Capital Productivity

The new immigration policies that the United Kingdom will introduce after the Brexit will have a significant impact on the organization overall growth, in the long run, will be reduced output due to a fixed stock of labor (Whyman & Petrescu, 2017). The new laws will limit the availability of surplus labor which will hurt the overall labor productivity. In Solow's model, higher saving and investment will have no impact on the rate of growth of the United Kingdom in the long run (Scarpello & Ritelli, 2003). Labor and capital employment have a significant effect on the overall productivity in the long term. Any capital that will be produced or employed after Brexit will result in diminishing returns in which the wealth produced will go towards compensating for the capital lost through depreciation. Currently, most of the United Kingdom labor comes from the EU nationals migrating to the nation for the available employment opportunities. In such a situation, most of the corporations operating in the United Kingdom will move to other EU countries where there is enough surplus of the affordable labor force. The reduced productivity of the capital due to the decline of labor will significantly hurt the United Kingdom economy in the long run. The zero rate of the labor growth in the short term after Brexit will make the United Kingdom economy into a steady state which refers to a no economic growth per capita period due to the diminishing returns forcing the economy to converge. These findings are validated by the decline in the population growth in the long run which will also affect the growth of the economy with the reduction in capital productivity, and the steady state will also fall.

The Decline of Capital in the Long Run

Saving and investment have a significant role in economic growth in the short run. As such, the plight of corporations from the United Kingdom will result in reduced investment which will reduce the capital productivity as the depreciation rate rises (Wadsworth, Dhingra, Ottaviano, & Van Reenen, 2016). Most of the organizations that have invested in the United Kingdom will halt their investment and expansion a factor that directly affects the exploitation of labor and capital productivity (Van Reenen, 2016). The decline in investment will result in diminishing returns which will affect labor growth as more migrants will move to other EU nations where investment will increase, and job creation will also rise (Gudgin, Coutts, Gibson, & Buchanan, 2018). In this case, technical growth cannot be the driver of growth in the long run because most investors are already planning to exit the market. Another factor for consideration in the case of Brexit is the decline in the capital in the long run due to diminishing returns and high depreciation.

Conclusion

The Solow model is an excellent framework to explain the changes that will take place after Brexit especially because the changes are in the form of the labor force and capital investment. The success of an economy, in the long run, is dependent on the growth of capital, labor or technology which increases the capital-output and raises the steady state. Brexit will lead to the introduction of new immigration policies that will tighten the current immigration regulations and lead to the loss of immigrant labor in the UK. Most corporations operating in the United Kingdom viewed the nation as a potential investment opportunity due to the surplus of immigrant labor and potential growth in the labor force, especially from the new EU member nations. Using Solow model of economic growth, the United Kingdom after Brexit will experience a decline in economic growth in the short run due to the reduction in labor force and in the long term due to the diminishing returns as the capital gains that will be made will go towards compensating for the rising depreciation of the existing capital. The overreliance of the UK on EU nationals for labor is the major cause of its current economic predicaments of growth decline in the short run and the long term.

References

Ahlstrom-Vij, K., Rolfe, H., Hudson-Sharp, N., & Runge, J. (2018). Post-Brexit immigration policy: reconciling public perceptions with economic evidence. National Institute of Economic and Social Research. Retrieved from https://www.niesr.ac.uk/sites/default/files/publications/FINAL%20Leverhulme%20report%20FINAL.pdf

Durlauf, S. N., Kourtellos, A., & Minkin, A. (2001). The local Solow growth model. European Economic Review, 45(4-6), 928-940. Retrieved from http://home.uchicago.edu/sdurlauf/includes/pdf/The%20local%20Solow%20growth%20model.pdf

Gudgin, G., Coutts, K., Gibson, N., & Buchanan, J. (2018). The macro-economic impact of Brexit: using the CBR macro-economic model of the UK economy (UKMOD). Journal of Self-Governance and Management Economics, 6(2), 7-49. Retrieved from https://www.cbr.cam.ac.uk/fileadmin/user_upload/centre-for-business-research/downloads/working-papers/wp483revised.pdf

Outhwaite, W. (2019). Migration Crisis and "Brexit." The Oxford Handbook of Migration Crises, 93. Retrieved from http://www.oxfordhandbooks.com/view/10.1093/oxfordhb/9780190856908.001.0001/oxfordhb-9780190856908-e-7

Scarpello, G. M., & Ritelli, D. (2003). The Solow model improved through the logistic manpower growth law. Annali dell'Universita di Ferrara, 49(1), 73-83.

Sims, E. (2012). Intermediate Macroeconomics: Economic Growth and the Solow Model. The University of Notre Dame. Retrieved from https://www3.nd.edu/~esims1/solow_model.pdf

Taggart, P., & Szczerbiak, A. (2018). Putting Brexit into perspective: the effect of the Eurozone and migration crises and Brexit on Euroscepticism in European states. Journal of European Public Policy, 25(8), 1194-1214. Retrieved from https://www.tandfonline.com/doi/full/10.1080/13501763.2018.1467955

Van Reenen, J. (2016). Brexit's long-run effects on the UK economy. Brookings papers on economic activity, 367-383. Retrieved from https://www.brookings.edu/wp-content/uploads/2017/02/brexits-long-run-effects-john-van-reenen.pdf

Wadsworth, J., Dhingra, S., Ottaviano, G., & Van Reenen, J. (2016). Brexit and the Impact of Immigration on the UK. CEP Brexit Analysis, 5, 34-53. Retrieved from https://cep.lse.ac.uk/pubs/download/brexit05.pdf

Whyman, P. B., & Petrescu, A. I. (2017). The economics of Brexit: A cost-benefit analysis of the UK's economic relationship with the EU. Springer.