Brexit Could Be Costly: The UK Economy Thrives on Multiculturalism

One idea that’s become associated with pro-Brexit sentiment is the notion that foreigners come into an area and take jobs or displace people who don’t have a lot of human capital. A number of people have looked long and hard at the data and the cost of migration, investigating this concern, and it is hard to find support for it. For example, if you look at the correlation between changes in unemployment and changes in migration in different areas of the UK, you don’t find any association, except at the very low end of the income distribution. The best work on this suggests immigration has a positive economic effect. It’s hard to find an economic rationale for the majority to have voted to essentially constrain migration; the reasons are all political.

Immigration has economic significance apart from the job market. My research suggests that if you accept migrants today, 30 years down the road, they will facilitate investment in their host country, particularly if their country of origin takes off economically. The social ties they create between their country of origin and their host country make that investment more likely.

The UK has already benefited from its rich mix of residents. London has a central position in the global social network. Lots of business done between Romania and the US, for example, goes through London. In a variety of ways, having an exchange of populations in the long run makes it much easier to interact economically. London is important in the world economy precisely because it has an ethnic mix. It’s one of the few places in the world where you can find a significant population from Bangladesh and a significant population from Romania, for example.

Overall, for the European economy, and the world economy, it’s going to be hard to substitute for London in that respect. There’s a lot of talk about Frankfurt and Paris benefiting significantly from this; we’ll see how that plays out, but London is a diverse place, and there’s really nothing similar in the rest of Europe, at least on that scale.

This idea of economic interaction also speaks to the dangers of the UK fragmenting as a result of Brexit. Putting a border somewhere is costly; we have plenty of research in economics that talks about the border effect. If you look at the amount of economic interaction between Seattle and San Francisco, for example, it’s orders-of-magnitude larger than the economic interaction between Seattle and Vancouver, Canada. All of that lack of economic interaction between Seattle and Vancouver means fewer jobs, fewer opportunities for people to do business, and fewer opportunities to create wealth for the economy. A breakup of the UK would be costly, both because of a long period of economic and political uncertainty, and because there will have to be a border somewhere.

For more from the Chicago Booth faculty on the fallout of the Brexit vote, visit our collection here.