Written evidence submitted by the Institute of Directors

The Home Affairs Committee - Immigration: skill shortages inquiry

Dear Sir/Madam,

Thank you for giving the Institute of Directors (IoD) the opportunity to participate in this inquiry into the Tier 2 Skilled Workers system, published by the Home Affairs Committee, on the 22nd of July 2015. The topic of skilled migration has been a consistent concern for IoD members for many years, and we are very pleased to contribute to the current inquiry. This paper presents the IoD’s comments on some of the key issues raised by this review and presents the views of the IoD’s members on the future of skilled inward migration to the UK.

About the IoD

The IoD was founded in 1903 and obtained a Royal Charter in 1906. It is an independent, non-party political organisation of approximately 35,000 individual members. Its aim is to serve, support, represent and set standards for directors to enable them to fulfil their leadership responsibilities in creating wealth for the benefit of business and society as a whole. The membership is drawn from right across the business spectrum. 71% of FTSE 100 companies and 51% of FTSE 350 companies have IoD members on their boards, but the majority of members, some 70%, comprise directors of small and medium-sized enterprises (SMEs), ranging from long-established businesses to start-up companies. IoD members’ organisations are entrepreneurial and growth-orientated, and more than half (57%) export goods and services internationally.

Executive Summary

• The Institute of Directors has consistently raised concerns that the general thrust of policies and rhetoric coming from some corners of the British media and political establishment are damaging this country’s reputation as a place for skilled migrants to come and work, and as an economy that is open for business.
• Almost all IoD members say that migrant workers provide a vital boost to the UK economy. Just 5.5% of IoD members believe ‘The government is right to implement a firm cap on the number of immigrants entering the United Kingdom’. The IoD considers the proposal to further increase the minimum salary thresholds for Tier 2 to be an unnecessary constraint on employing skilled workers from abroad.
• Blaming employers who, because of skills shortages, need to look to the global talent pool to find the employees they need, is not the answer to gaining more home-grown talent. 65% of IoD members believe that the government should instead focus its efforts on improving our education system.
• The impact of the cap of 20,700 employer-sponsored skilled migration (Tier 2 general) visas has been acutely felt by IoD members. The refusal of so many applications left many employer members of the IoD short of vital skills. It also leaves a very negative perception of the UK in the minds of skilled individuals that employers want to attract and retain and has undermined the Government’s proclamations that “Britain is open for business”.
• The IoD has called call for a Comprehensive Immigration Review, to be led by the Migration Advisory Committee (MAC) and supported by the Home Affairs Select Committee. Our members want to help set out a sensible plan for managing inward migration in a way which supports our economy, works for our businesses and addresses public concerns.

The IoD’s position: The views of our members

1. In 2011 the coalition Government introduced an annual immigration cap of 20,700 visas for all new employer-sponsored skilled workers through the Tier 2 General route. The monthly allocation of Tier 2 General Certificates of Sponsorship for newly hired skilled workers is 1,650 per month, with any surplus allocation being carried over to the following month.

2. In June 2015, for the first time, the monthly immigration cap was reached, with approximately 1,300 applications consequently rejected and the applicants forced to re-submit. The cap has subsequently been reached in each consecutive month since June 2015. It is worth noting that a significant part of the surge in Tier 2 General requests for June 2015 came as a result of the seasonal accretion of new graduate workers. We have now entered the annual period when British businesses try to recruit and retain the best graduates, in so helping to ensure they can continue to stimulate growth in our economy. With the UK economy now recovering, reaching this cap will likely become a more frequent occurrence. The refusal of so many applications has left many British companies short of vital skills at a crucial time of year for their businesses. The refusal has also undermined the Conservative Party's pre-election proclamation that “Britain is open for business”.[1]

3. The IoD considers the proposal to further increase the minimum salary thresholds for Tier 2 to be an unnecessary constraint on employing skilled workers from abroad. This seems particularly inappropriate given how dependent the UK economy is on international skills and expertise. The prime minister is absolutely right to focus on providing opportunities for British workers, but there is no quick fix, and the current Tier 2 proposal is not the answer. The proposed approach appears misguided and risks harming the economy today in the hope of seeing results a decade down the line.

4. There is agreement amongst almost all IoD members that migrant workers provide a vital boost to the UK economy. Barriers to employing the right labour and the best talent are detrimental to the UK economy and hinder British businesses whose expansion plans are already hampered by a lack of suitably qualified domestic workers. Our members have serious doubts about the Government’s performance over immigration policy.  Just 5% of IoD members are happy with the current ‘ease of filling out forms’ for the UK visa system, and less than 5% are happy with the ‘Amount of information required (bank account records/official documents etc.),’ or the ‘speed’ of processing visa applications. A mere 3% of our members are happy with the current ‘cost of obtaining/extending a visa’.

5. While IoD members, and UK businesses more generally, cannot have a deaf ear to the public’s concerns on immigration, focusing on the supposedly lower cost of migrant labour is a red herring. Among the 50% of IoD members who hire from abroad, just 4% say that the cost of labour has anything to do with it.[2] The fundamental concern is about finding people with the skills needed by employers.

6. These IoD survey results come at the same time as UK unemployment has fallen to its lowest level since the global financial crisis while wages are growing at their fastest rate in four years. The employment rate for women is at an all-time high and the actual employment rate is also at its highest level since records began. Despite minor setbacks on recent Office for National Statistics (ONS) Labour Market Statistics, the UK is now approaching full employment. At 792,400, the claimant count (the number of people claiming unemployment-related benefits or Universal Credit) is also at its lowest rate since 1975. Given this, the Tier 2 proposals are likely to lead to a far less business-friendly immigration policy at a time when the strength of the UK economy means British businesses are in an unprecedented period of growth and expansion and when the supply of suitable domestic workers is reaching its limit.[3]

7. No employer sets out to favour migrant labour. 65% of IoD members surveyed agree that ‘It would be better to invest more in the UK skills system than to employ migrants’. Nevertheless, our members report that their non-UK workers are hired overwhelmingly because their qualifications, experience, and productivity levels meant they were ‘the best person for the job’.

8. Despite popular misconceptions, concerns about the impact of immigration on jobs and wages are not borne out by the evidence. Since the 1980s numerous academic studies have found essentially no association between immigration and employment rates or wage depreciation for native born workers.[4] This evidence is supported by the IoD’s own survey results.

9. Migrant workers are also proportionately more entrepreneurial than native born people. ONS figures show that 17.2% of non-UK nationals have started their own business, compared to just 10.4% of UK nationals. There are 456,073 migrant entrepreneurs in the UK today who, together, are founder directors of 464,527 businesses. 215,000 of these entrepreneurs come from outside the EU, EEA and Switzerland[5] and, as such, many would be subject to the proposed Tier 2 reforms.[6] Migrant founded companies account for 14.5%, or one in seven, of all companies in the UK and employ at least 1.16 million people around the country.[7]

10. The chief logical mistake of the Tier 2 policy is what economists call the Lump of Labour Fallacy. That is, the erroneous belief that there are only so many jobs to go around and that no immigrant can get a job without taking that job from someone else. This appears an understandable assumption. After all, with other types of market transactions when the supply goes up, the price goes down. If there were suddenly a lot more widgets for sale, we would expect the price of widgets to fall. It might seem intuitive, therefore, that when there is an increase in the supply of workers, workers who were already in the UK will make less money or lose their jobs. Yet that is not the case. For starters, newcomers are often not like-for-like substitutes – migrants have different skills and aptitudes. More to the point, migrant workers don’t just increase the supply of labour, they simultaneously increase demand for it as well by using the wages they earn to, for example, rent apartments, eat food, go to the cinema, and buy cars. That creates more jobs building apartments, cooking food, selling cinema tickets, and making cars etc. Migrant workers increase the size of the overall population, which means they increase the size of the economy. Logically, if migrant workers were ‘stealing’ jobs so too would every school leaver or graduate entering the job market. In reality, of course, the opposite is the case. As the Prime Minister has rightly said, “it’s crude and wrong to say immigrants come to Britain to take all our jobs.”[8] The idea that migrant workers reduce opportunities or wages for native workers is wrong. Government policy should not be based on it.

11. Furthermore, as Madeleine Sumption, director of the University of Oxford’s Migration Observatory has pointed out, while the current proposals will have a big impact on businesses, the impact on net immigration figures is likely to be small. In 2014, non-EU work migration comprised only about 13% of total non-British immigration.[9] A third of those counted in the migration figures are students[10] despite the fact that only 22% of the public think that international students should count as migrants.[11] This view is reflected by the IoD’s members, just 5.5% of whom believe ‘The government is right to implement a firm cap on the number of immigrants entering the United Kingdom’.

12. While the general business climate in the UK is good, problems filling skills gaps pose a threat to the continued success of UK businesses. Despite this, the UK’s immigration policy has, in recent years, become much less welcoming to the high-skilled migrant workers that our economy needs. The Institute of Directors has consistently raised concerns that the general thrust of policies and rhetoric coming from some corners of the British media and political establishment are damaging this country’s reputation as a place for skilled migrants to come and work, and as an economy that is open for business. There is also a danger that the crude catch-all term ‘immigration’ fails to distinguish between the very different categories of unskilled and undocumented ‘illegal’ migrants; and the, skilled, documented, and talented migrants that our business and our economy needs.

13. The UK has a dynamic, globalised and world leading economy. One of the astounding features of the UK job market is the way in which immigrants have boosted productivity. The UK has been fortunate enough to receive large numbers of young, highly motivated and well qualified migrant workers who rather than being a drain on the UK’s finances, have made substantial net contributions. As a recent study by the Department for Business, Innovation & Skills has shown, through their foreign learned skills and experience migrant workers enable the cross-fertilisation of ideas, bringing new approaches and innovative practices which improve the competitiveness of British businesses. They bring knowledge of, and connections with, the markets of their home countries, reducing communication and trade costs, and thus increasing export opportunities for British firms, and, by filling gaps in the workforce that would otherwise remain empty foreign born workers help drive up labour productivity (and hence prosperity and GDP per capita),[12] a point recently repeated by the Bank of England’s Governor Mark Carney.[13]

14. Penalising employers who, because of skills shortages, need to look to the global talent pool to find the employees they need, is not the answer to gaining more home-grown talent. It should also be recognised that efforts to reduce migration in this manner will not only affect those businesses and organisations that rely on skilled migration they will affect the general population who rely on those businesses and organisations to provide vital services. The government should instead focus its efforts on boosting our education system, not burdening businesses.

15. Improving the skills of British workers is the right goal for business and the government but it won't happen overnight. It takes time to train school-leavers and graduates in the skills for which the UK economy is currently experiencing a shortage. British employers who seek to recruit non-EU skilled employees do so because the skills are not available locally. The bar for the Tier 2 visa system is already very high – would-be migrants need to have a degree level qualification and a definite job offer, and the company that wants to hire them need to achieve accredited sponsors status, advertise (non-shortage) roles for 28 days in the UK first, and meet salary thresholds for the role. For all these reasons, cutting off the supply of global talent is short-sighted and will fail to get British people into jobs.

The IoD’s response to specific questions posed in this inquiry:

Q1. What impact has the cap of 20,700 employer-sponsored skilled migration (Tier 2 general) visas had upon employers?

The impact of the cap of 20,700 employer-sponsored skilled migration (Tier 2 general) visas upon employer members of the IoD was most acutely felt in June 2015 when, for the first time, the monthly immigration cap was reached, with approximately 1,300 applications consequently rejected and the applicants forced to re-submit. The cap has subsequently been reached in every consecutive month since June 2015. It is worth noting that a significant part of the surge in Tier 2 General requests for June 2015 came as a result of the seasonal accretion of new graduate workers. June marks the beginning of the annual period when British businesses try to recruit and retain the best graduates, in so helping to ensure they can continue to stimulate growth in our economy. With the UK economy now recovering, reaching this cap will likely become a more frequent occurrence. The refusal of so many applications left many employer members of the IoD short of vital skills at a crucial time of year for their businesses. In the longer term, the refusal of so many applications has left many businesses in a very difficult position but also it leaves a very negative perception of the UK in the minds of skilled individuals that we want to attract and retain in the UK and has undermined the Government’s proclamations that “Britain is open for business”.

Q2. Which sectors have been particularly affected?

It is easy to see how these reforms could impact on the services, sectors and small businesses who rely on skilled workers from abroad notably the health and care sectors, and the hospitality industry. Another key area of concern is in science and technology. The UK has a dire shortage of STEM (Science, Technology, Engineering, Maths) skills. According to the UK Commission for Employment and Skills (UKCES) report for July 2015, five million people are employed in high level STEM (Science, Technology, Engineering, and Maths) roles, making these skills crucial to the success of our economy, in terms of jobs, productivity, innovation and competitiveness. But 43% of STEM vacancies are hard to fill, due to skills shortages, compared to a UK average of 24% for other difficult to fill roles[14]. When asked the question “Which of the following factors, if any, are having a negative impact on your business?”, from a list of 13 options including UK economic conditions, global economic conditions, government regulations, taxes etc. 38% of IoD members in our May 2015 members poll cited ‘a lack of STEM  skills’ as their number one concern. The STEM skills shortages was the number one issue cited[15]. UKCES estimate that 3.5 million STEM jobs will be created in the UK economy by 2025. However, because of the shortage of STEM graduates, on current trends, this will result in a ‘skills gap’ shortage of 2 million suitable workers from the UK to fill these vacancies[16]. To meet this shortage, the government has set a target of creating three million apprenticeship starts by 2020. While this objective is timely and welcome, two-thirds of those who started an apprenticeship under the last (coalition) government did so via an existing in-work training programme, with the scheme being used largely to accredit existing skills rather than counter the growing skills shortage. 60% of all new apprentices are currently studying for “intermediate” level qualifications worth no more than five GCSE passes, while less than 3% of new apprenticeships were at the “higher level” – equivalent to a foundation degree. So far this year, there have been only 220 new science and maths apprenticeships created at any level. Last year (2013-14), out of more than 250,000 apprenticeships just 140 were in science and maths.[17] The IoD actively promotes the benefits of apprenticeships. We have a long history of supporting vocational education and believe it is vital to help nurture people at the beginning of their careers, so that we can build up the business leaders of the future. Nevertheless, it is clear from these figures that switching the focus of this policy from Tier 2 recruits to apprentices will not fill the current skill gap. Even if the numbers taking higher level STEM related apprenticeships were greater, it is important to note that Tier 2 recruits and apprentices are not like-for-like. Tier 2 migrants are of a much higher skill level than apprentices so the supposed purpose of the government’s approach will not resolve the UK’s STEM skills shortage. Without a monumental increase in the number of UK graduates qualified to a high level in STEM subjects the STEM sector, and the UK economy at large, is headed for difficulties unless employers are able to continue to recruit high skilled workers from abroad.

Q3. If a cap on Tier 2 skilled workers remains, what is the best way to meet the needs of the UK economy while maintaining control of the number of skilled workers coming to the UK from outside the EEA?

UK firms have done an excellent job to get our economy back on track after the crisis of 2008. Shutting the door to highly skilled international workers will only hinder business at a time when our economy needs them most. Blaming employers who, because of skills shortages, need to look to the global talent pool to find the employees they need, is not the answer to gaining more home-grown talent. The government should instead focus its efforts on improving our education system. Improving the skills of British workers is the right goal for business and the government but it won't happen overnight. It takes time to train school-leavers and graduates in the skills for which the UK economy is currently experiencing a shortage. In the meantime, it is important that both the private and public sector are able to bring in the required workers from across the world.

Q4. If the cap on Tier 2 did not remain, what would replace it?

There is a sensible and mature debate to be had about the costs and benefits of immigration. At the moment, however, the whole issue is being poisoned by the government’s adherence to their bizarre and unachievable net migration target. Responding to each new set of ONS immigration figures with new ad-hoc policies is no way to give British businesses the stable environment they need. Combined with Ministers’ increasingly strong rhetoric on immigration, the UK’s reputation as an open, competitive economy is under threat. As evidence of this, the IoD has over the course of the last several months been contacted by a number of foreign diplomatic embassies, business membership organisations, and representative groups from around the world expressing concern at the impact British government policy and rhetoric is having on investment in and trade with the UK. Half of all IoD members employ somebody from outside the UK. That is overwhelmingly because they value the different skills people from around the world bring to their business. This can help them enter new markets, expand global connections or just bring a fresh point of view to the table. It is not about undercutting wages or bringing in cheap staff - only 4% of IoD members say that cost had anything to do with their decision to hire from abroad. Employers recognise the public’s concerns over immigration and on the pressure it can place on local communities, schools, housing and public services. To a large extent this concerns reflect issues of integration. The UK workforce is amongst the most diverse in the world and the workplace is the ideal arena to bring people together and facilitate mutual understanding. The government needs to broaden its message beyond a narrow focus on the net migration figures in order to help facilitate better integration and greater cultural understanding. Employers can play a leading role in helping immigrants to integrate better into British society. It is imperative that the government develops a more balanced agenda in that regard and considers not just immigration but integration. However, by announcing policies on the hoof every time figures are released, the government betrays its lack of a long term plan on migration. Instead, the IoD has called call for a Comprehensive Immigration Review, based on evidence and expert advice. The Prime Minister and Home Secretary should task the Migration Advisory Committee (MAC), the expert body, with setting out the best possible plans and their likely impacts. These should then be put to the general public through town-hall meeting across the country and a ‘citizens’ jury’ to reflect public opinion. The MAC should also work the Home Affairs Select Committee and hold public hearings to interrogate a range of responses, engaging important stakeholders such as major employers, pro- and anti-immigration pressure groups, the NHS and universities. Our members want to help set out a sensible plan for managing inward migration in a way which supports our economy, works for our businesses and addresses public concerns. At the moment, however, while everything is clouded under these arbitrary migration targets and attempts at ad-hoc reforms to existing procedures, that is not possible.

Conclusion

We need to keep improving the skills of the UK population, but given the prime importance of having a diverse workforce with a global outlook, we must also continue attracting the best and brightest global labour. Foreign workers bring their skills and ideas to this country, pay taxes here, and in so doing help boost growth – that must be allowed to continue. IoD members are very supportive of encouraging immigration into the UK in order to alleviate skills shortages for employers. Our members understand the public’s concerns around immigration, but limiting highly-skilled workers from coming to the UK is not a solution. Migrant workers make a significant positive contribution to the UK economy. Discriminating against them would damage Britain’s growth prospects just as the economy is starting to take off. What is needed is continuing urgent reform to Britain’s education system, not barriers to employing the right labour and people with the skills the UK economy needs to succeed.

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Thank you once again for giving the IoD the opportunity to participate in this inquiry. We hope you find our comments useful and look forward to seeing the Home Affairs Committee’s final report and to further engagement on ensuing policy changes. If we can provide further information on any of the issues discussed, please do not hesitate to contact me.

Yours faithfully,

Seamus Nevin

Head of Employment and Skills Policy

Institute of Directors
116 Pall Mall
London
SW1Y 5ED

Website: www.iod.com /policy