An idea for a post-Brexit immigration system: Cap and trade

“Let me be clear. We are not leaving the European Union only to give up control of immigration again.”

‘Theresa Maybe’ she may be, but one doesn’t need to be Sherlock to conclude from her public pronouncements and those of her three Brexiteers that freedom of movement from the EU is a goner.

Whether “taking back control” of immigration is desirable or not — especially given the implications for single market access — is moot.* It is going to happen. The real task now is to make the best of it — to design a system that captures as much of the economic benefit of immigration as possible while also responding to the very clear discomfort among the general public about its scale. It has to be said that the initial signs on this front are not promising— it’s hard to think of many policies more detrimental to the national interest than cracking down on international students.

What, then, might a better system look like?

My proposal is a ‘cap and trade’ mechanism for work permits, inspired by the well-known approach to limiting greenhouse gas emissions.

In broad terms, this might work as follows:

1. The government decides the number of economic migrants allowed to come to the UK each year

2. It then distributes permits summing to this total equally to all businesses in the UK (probably excluding sole traders). Each company would therefore start out with a small fraction of one permit

3. There would then be a marketplace for the buying and selling of permits. Companies wanting to hire foreign workers would need to buy up the associated number of permits from those who don’t want or need their ‘permit-shares’, with the price of a permit determined by the level of demand for migrant labour

Such a system would have a number of attractive characteristics:

  • There is a clear political appeal in that there is a defined limit on the number of people coming into the UK to work
  • It is a market-based approach, which most economists (in the environmental context at least) agree is less economically harmful than cruder ‘command and control’ alternatives
  • It would create a financial incentive to hire and train local workers, since the relative cost of foreign labour would increase
  • It would likely be economically redistributive from richer areas with high numbers of immigrants (like the City) which would buy up the permits, to poorer areas with few immigrants and which are typically the ‘losers’ from globalisation

That said, there are also serious challenges** which would need to be overcome:

  • Setting the level of cap will be tricky and involve a suboptimal level of central planning; any number the government chooses will be arbitrary, and driven as much by political as economic considerations. One possible solution would be a ‘soft’ cap, where additional permits could be purchased at a pre-determined (high) price. This would weaken the political force of the policy but reassure employers (for example, in financial services) that they will still be able to access migrant labour if they are willing to pay.***
  • There is a strong case for exempting certain professions — it would be perverse, for example, to make it more expensive for the NHS to hire doctors and nurses
  • Some sectors — most obviously agriculture — would argue that they cannot afford expensive permits but require seasonal surges in labour that cannot be met by local workers
  • The policy would not cover family members or other non-economic migrants. Other policies would be needed to govern these flows. The ‘cap’, therefore, does not in fact limit the total number of immigrants each year

One broader objection unites these points: a cap, even with the trading mechanism, is by definition a blunt instrument. Workarounds and exemptions are possible, but these weaken the most appealing feature of the policy: predictability about the number of people coming to the UK to work.

Even given these perfectly reasonable objections — and no doubt various others I haven’t thought of — I think this is an idea worth thinking about in more detail. I invite anyone with more expertise than me (which, frankly, doesn’t take much) to pick up and develop the idea — and/or tear it to pieces.

*For the record, my views on the subject closely resemble Vince Cable’s

**I ignore here broader objections to reducing immigration (demography, net fiscal contribution etc.) and focus only on the specific characteristics of the ‘cap and trade’ system

***In any case, over time — through trial and error and with the right consultation process — it is reasonable to expect the government’s ability to set the cap sensibly to improve