Immigration demand, supply and sectoral heterogeneity in the UK labour market

Should immigration be regarded as an exogenous shock? If so, what is its effect on native wages? Might any effect differ across different sectors of the economy? In this paper we answer these questions by applying macroeconomic time series methods to UK labour market variables from 2001-2019 for 35 different sectors. The paper uses a VAR approach to model, for the first time, immigration, native wages and hours worked, as responding to demand, supply and immigration shocks at both aggregate and sectoral levels. The labour market is thereby subject to multiple shocks at any one time, with individual shocks reinforcing or offsetting each other. We find that the share of migrant labour is 'Granger caused' by other labour market variables which suggests that immigration is, in part, endogenously determined by aggregate demand and supply. However, it also retains a component which has a negative association between immigration and native wages. This component, which may be thought of as a 'migration shock', accounts for most of the change in migration share over the sample period and plays a significant negative role in the determination of native wage growth, particularly in unskilled sectors such as retail and hospitality. However other contemporaneous shocks have offsetting positive associations between immigration and native wages within the same sector. These effects also differ substantially across sectors.