How migration shifts labour supply and, through spending, labour demand; flexible and immobile labour; how taxes, benefits and automation change work. Through the end of overseas care worker recruitment.
Since 22 July 2025, UK care providers cannot sponsor new care workers or senior care workers from overseas. People already in the UK on these visas can extend or switch until July 2028. In the years before, overseas recruitment had grown quickly and filled many care vacancies. The government said the aims were to cut net migration and to tackle the exploitation of overseas recruits.
What happens to the supply of care workers, and to their wages?
Source: Home Office, Statement of Changes to the Immigration Rules HC 997, July 2025.
Net migration is immigration minus emigration. In the labour market, migrants of working age are suppliers of labour: they add to the number of workers willing and able to work at each wage.
The model assumes: one occupation, a competitive labour market (many employers and workers, none able to set the wage), migrants qualified for that job, and everything else unchanged (ceteris paribus).
Whether migration is good or bad overall is a normative question: a value judgement. The model is positive economics. It predicts what happens to wages and employment, and that is what the exam asks you to explain.
A flexible labour market adjusts quickly to changes in demand and supply. Five kinds:
Immobility is the opposite. Occupational: workers lack the skills or qualifications for the vacancies. Geographical: housing costs, family ties or a lack of information about jobs elsewhere keep them where they are.
A cut in income tax raises the net wage: what workers keep from each hour.
High tax rates can therefore be a disincentive to work, if the substitution effect is stronger.
Benefits work the same way. A lower benefit, or one withdrawn more slowly as earnings rise, raises the gain from taking a job: a stronger incentive to work.
Automation can substitute for workers in routine tasks: demand for that labour shifts left. It can also complement skilled workers by raising their productivity: demand for them shifts right.
And cheaper production can lower prices and raise sales, so firms produce more. What happens to labour depends on both:
total hours = hours per unit × output
Care homes can no longer recruit new care workers from overseas.
Suppose care homes were free to set their own pay.
What is likely to happen to care workers’ wages?
Fewer recruits means less labour supplied at every wage: supply shifts left. With demand for care unchanged, care homes compete for scarce workers and bid the wage up. In practice councils fix many care fees, so pay often cannot rise and the result is vacancies instead.
Start with the market as it is, say for construction workers. Firms demand labour (D1); workers supply it (S1). The wage settles at W1, £16 an hour, with 12 thousand employed.
More workers are offered at every wage: supply shifts right from S1 to S2. At W1 there is now excess supply, more people want construction work than firms will hire, so the wage falls to W2, £14, and employment extends to 16 thousand.
Check: Qualified construction workers arrive from abroad. Which curve shifts?
More workers are willing and able to work at every wage, so the supply of labour increases.
But migrants are consumers too. They rent homes and buy food, transport and services, so demand for products rises, and labour demand is derived from it: D shifts right to D2. Here employment rises to 18 thousand and the wage returns to £16. A bigger demand shift would push it above W1; a smaller one would leave it below.
Check: Migrants also spend their wages, so demand for labour rises as well. Both D and S increase. What follows?
Both shifts push employment up. Supply pushes the wage down and demand pushes it up, so the net effect depends on which shift is bigger.
Now run it backwards, for care. Same model: fewer overseas recruits means less labour supplied at every wage, so supply shifts left from S1 to S3. In a free market the wage would rise to W4, £18, and employment would fall to 8 thousand.
Check: From July 2025, care homes cannot recruit new care workers from overseas. In a free market, the wage for care workers would:
Fewer recruits means less labour at every wage. With demand unchanged, firms compete for scarce workers and the wage rises.
But much care is paid for by councils and the NHS at fees they set, so many care homes cannot simply raise pay. If pay stays at £16, they want 12 thousand workers but only 6 thousand are offered: a shortage, like a maximum price.
Check: If care pay stays at £16, how many vacancies are there?
At £16, care homes want 12 thousand workers but only 6 thousand are willing to work on S3: 12 − 6 = 6 thousand vacancies.
Mobility works through supply, just like migration. Training lets workers move into a shortage occupation: its supply shifts right, the wage gap narrows and vacancies are filled. Immobility does the opposite: unemployment in one place or trade, unfilled vacancies in another. Match the policy to the barrier: training, job matching, housing and transport.
Check: A worker at a closed steelworks retrains as an electrician. This is an example of:
They move between occupations by gaining new skills.
If the substitution effect is stronger, a tax cut or benefit reform shifts labour supply right, the same picture as migration: more workers or hours at every wage. But the response is limited when childcare, transport costs or ill health stop people taking work, and more people looking for work does not guarantee there are vacancies for them.
Check: Income tax is cut. Which effect could make some people work fewer hours?
With a higher net wage, people can earn the same income in fewer hours and choose more leisure.
Here the output gain is too small, so total hours fall by 10%: the substituted workers’ demand curve shifts left, from D1 to D3, and both the wage and employment fall. For hours to stay the same, output would need to rise by a third: 1 ÷ 0.75 = 1.33.
Check: Hours per unit fall by 25% and output rises by 20%. What happens to total labour hours?
0.75 × 1.20 = 0.90 of the original hours: a fall of 10%.
Migrants add workers, so migration shifts the supply of labour right, not demand left. And migrants spend, so if anything demand shifts right. Treating jobs as a fixed number is the lump of labour fallacy.
Using a labour market diagram, explain the likely effect of net inward migration of qualified construction workers on wages in construction, and why the outcome might differ.
Inward migration of qualified construction workers increases the number of workers willing and able to work at each wage, so the supply of construction labour shifts right from S1 to S2.
[Diagram: wage rate against quantity of labour. D and S1 crossing at W1 and L1. S2 to the right of S1, crossing D at a lower wage W2 and higher employment L2.]
At the original wage W1 there is now excess supply: more people want construction work than firms will employ. Workers compete for jobs, so the wage falls to W2 and employment extends to L2.
However, the outcome might differ. Migrants also spend their wages on housing, food and services, so demand for products rises and the derived demand for labour shifts right. Employment rises further, and the wage may end up close to W1 or even above it, depending on the relative size of the shifts. If the migrants bring skills that complement local workers, demand for local labour may rise. If house building is booming, the wage may not fall at all.
Care worker visa change: Home Office, Statement of Changes HC 997 (July 2025). The diagram numbers are invented to show the model. Diagrams drawn with Rough.js and perfect-freehand, both MIT licensed. Your answers are saved only on this device.