Ukrainian displaced people - economic impact of migration: discussion paper

Illustrative modelling of the economic impact of Ukrainian displaced people

These figures are informed by an illustrative shock in the Scottish Government Computable General Equilibrium (CGE) model and only provide an indication of the economy-wide impact of a positive labour supply shock without accounting for changes in the age profile of new inflows or changes in the labour force over time. This illustrative scenario also does not account for any fiscal costs associated with attracting new inflows or fiscal framework implications. All cash figures are in 2021-22 financial year prices and estimated based on government revenues and gross domestic product reported in Government Expenditure and Revenue Scotland (GERS) 2021-22, excluding offshore production such as oil and gas.

Illustrative modelling of the long run economic impact of Ukrainian displaced people is done in the Scottish Government CGE model, which is a computable general equilibrium model of the Scottish economy. A CGE model consists of a series of equations based on economic theory which describe the behaviour of "agents" in an economy. These representative agents (including firms, households and government) buy and sell from each other, with prices and quantities adjusting until supply and demand are equal in all markets (equilibrium). This includes all goods markets (for different industries), investment markets and labour markets.  Analysis is based on the Single-Region version of this model, which models only the behavior of agents in Scotland. Activity across 19 economic sectors and a single labour market are simulated.

The CGE model simulates how agents will respond to a change imposed as a result of a policy change. In this illustrative exercise the policy shock is an increase in the labour supply. The effect of the policy is estimated by comparing an initial equilibrium based on economic data on Scotland, which is assumed to be a constant-over-time baseline, with a new equilibrium after the policy shock.

As with all economic models, a set of assumptions are made about how the economy adjusts to the shock applied. The key assumptions of the Single-Region CGE model are that:

• all labour is homogenous under a labour supply shock – this means new entrants in the labour market work the same number of hours and have the same productivity level and skill set as those already in the labour force
• wage bargaining takes place, where real wages are a decreasing function of unemployment levels
• the government aims to maintain a fixed fiscal balance such that any fluctuations in government revenue will be reflected in changes in government expenditure – as the tax base expands, more can be collected in revenue, increasing public sector expenditure. It should be noted that the exact impact on the Scottish budget position will be affected through the operation of Fiscal Framework which is not considered in the model
• agents (workers, firms, government) are forward looking, taking into account their future welfare and objectives
• changes in Scotland are too small to affect the behaviour of agents outside of Scotland, i.e., international behaviour is exogenous

Specific to this illustrative analysis, several assumptions must be made in order to model the potential impact of Ukrainian migrants:

• two illustrative labour force shocks are modelled, a low migration scenario (2,000 of economically active migrants or ~0.1% of labour force) and high migration scenario (over 10,000 of economically active migrants or ~0.5% of labour force)
• it is assumed that in the long run, Ukrainian displaced people can match the employment rate of existing migrants
• that a large number of Ukrainian displaced people choose to settle in Scotland long-term and do not return to Ukraine
• that the productivity and skillset of new inflows matches the Scottish population
• there is no change in migration from the rest of the UK or internationally beyond the baseline level