RBA debunks immigration boosters

The media’s response to the reported slowing of Australia’s population growth on Thursday summoned the usual hysterical commentary from those concerned about skills shortages and the flow-on impacts to wages growth and inflation.

For instance, the usually reliable Tim Colebatch made the following comments in an article published yesterday in Fairfax [my emphasis]:

NET migration to Australia is in free fall. In two years, migration has plunged by almost half, intensifying the skills shortages that threaten to drive up interest rates.

Likewise, the Australian Financial Review was even more alarmist in an article entitled Migrant slide hits economy [my emphasis]:

The reduced migrant intake has helped compress the supply of workers, and the risk is that as mining-related investment accelerates the labour market will quickly tighten and push-up wages and prices.

Commsec chief economist Craig James criticised government policies that reduced the migrant intake and slowed population growth.

“The federal government must shoulder the blame… The Government wound back the intake, and the reduced number of migrants has contributed to upward pressure on wages and led to reduced demand for housing and slower retail sales”.

In order to cap wage growth, supply of labour has to keep pace with demand… The best way of ensuring this in the short-run is skilled migration“.

Both articles perpetuate the myth that high levels of immigration are required to keep inflation in check and to take the pressure off interest rates. Nothing could be further from the truth.

When an economy is experiencing housing and infrastructure capacity constraints, like in Australia, high levels of immigration causes inflation as prices tend to rise in order to: (1) ration supply to meet the increased demand; and (2) fund investments in new infrastructure – such as roads, hospitals, utilities, schools and housing – required to accommodate the extra population. The alternative to price increases is greater congestion and delays (think increased traffic on the existing road network), which lowers productivity and can also contribute to rising costs and inflation.

Paradoxically, the greater investments in infrastructure required to meet rising population in the cities also increases the demand for construction workers and engineers, thereby diverting these workers away from the mining industry, where they are currently needed for a range of start-up projects planned or already underway.

Put simply, the whole argument that immigration is required to reduce labour shortages is like a dog chasing its tail. More immigrants create the need for investment in infrastructure and housing, as well as greater demand for people-servicing industries (e.g. health and education). These industries then demand more migrants to fill labour shortages, which spurs further demand for these and other industries, and so on.

Interestingly, yesterday’s speech on inflation by Reserve Bank of Australia (RBA) Assistant Governor, Phillip Lowe, was silent on whether Australia’s labour costs had been lowered from the recent high levels of immigration. However, it did suggest that housing related costs – which are the single largest contributor to the consumer price index (CPI) measure of inflation – have been driven up by population growth [my emphasis].

Housing cost inflation:

Currently, housing-related costs – including rents, utilities and the cost of building new dwellings – account for around 20 per cent of the CPI, the largest share of any single group. Broadly speaking, the housing component of the CPI shows the same general pattern as that in underlying inflation, although the recent moderation is less pronounced (Graph 6).

A couple of factors are important in explaining this general pattern.

The first is that the large run-up in Australian house prices that was driven by the adjustment to low inflation ended in late 2003. When the housing boom came to an end, building cost inflation came down and growth in rents was subdued for a few years. These outcomes helped hold down overall inflation rates during this period. But by 2007, the cycle had again turned, with building costs rising more quickly and growth in rents accelerating. This faster growth in rents reflected the changing balance of demand and supply in the rental market, with strong population growth coinciding with relatively slow expansion of supply.

The second factor has been utilities prices. During the middle years of the 2000s utilities prices were increasing at an average rate of 4 per cent, which was slightly lower than that in the previous few years. Then from 2007, utilities price inflation accelerated sharply. The proximate cause was the regulatory decisions allowing double-digit price increases, partly to help fund infrastructure investment, particularly for the distribution of electricity. But a deeper cause was the low levels of investment in previous years, which meant that the capacity of the system to distribute electricity had not kept pace with the growth in demand, particularly during hot weather.

While these developments in rents and utilities do help explain the particular dynamics of inflation over the recent cycle, they also demonstrate that when the economy is operating up against supply constraints, all sorts of prices – and not just the price of labour – start rising more quickly.

A recent report by New Zealand’s Savings Working Group supports the notion that high levels of immigration tends to put upward pressure on inflation and interest rates:

A country with a rapidly growing population needs to devote resources to building more roads, schools, shops, houses, factories and so on than a country with a low rate of population growth. In a country with a relatively low national savings rate, rapid population growth will put sustained upward pressure on real interest rates and, in turn, the real exchange rate, making it harder to achieve the per capita income gains that people (and the government) aspire to…

Further, given the tight constraints applied to the supply of land for housing, less immigration might also have left New Zealand less exposed to the damaging house price booms experienced in the 1990s and the last decade.

The last point – that immigration puts upward pressure on house prices when land supply is constrained (as it is in Australia via regulation) – is particularly important. The CPI measure of inflation adopted by the RBA (and most other central banks) explicitly excludes house price inflation, even though it is a genuine cost incurred by households. Had house prices been included in CPI, the inflationary impact of Australia’s immigration program would have been even more pronounced than that suggested by the RBA above.

To cut a long story short, the immigration boosters’ argument that a high level of immigration is required to put downward pressure on inflation and interest rates is inherently flawed as it completely ignores the inflationary impacts from a larger number of people pushing up against housing and infrastructure capacity constraints.

Further, the argument that immigration prevents wage cost inflation is spurious, since the immigrants themselves will increase the demand for labour in a wide range of industries.

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Comments

  1. Another insightful piece, thanks.
    It is obvious that increases in population must be matched with increases in services and infrastructure.
    What many do not understand, and which you have explained clearly, is that Aus accelerating immigration has been unfunded and poorly thought through by policy makers.
    Many Australians still believe inflation is like a gale force wind blowing across the landscape – cause unknown and nothing we can do about it.

    Recommendations:
    1. land inflation component be included in future calcs of CPI;
    2. further study* of true costs associated with immigration be done;
    3. population targets be set in accordance with environmental concerns and above funding constraints;
    4. Labor & Libs have a good think about tax cuts ahead of infrastructure spending.

    ACCESS Economics did a study* with some interesting results – “Migrants Fiscal Impact Model: 2008” (11 April 2008):

    1. Model of migrant impact extends out for 20 years, it is not a ‘life cycle’ model of migrants. Retirement / pension phase and associated costs are not included in calculations.
    2. Impact on Budget from any children of the migrant group born after arrival in Australia is also not considered.
    3. Expenditure on public goods or infrastructure funded by Commonwealth budget is not included in economic models.

    http://www.immi.gov.au/media/publications/research/_pdf/migrants-fiscal-impact-april-2008.pdf

    Would be good if immigration was funded properly – it should be mandatory.
    Increasing GDP and feathering the pockets of RE lobby, banks and other vested interests seems to be the main reason behind increasing immigration.
    More consumers, more debt, more sales, and more GST events.

    However, considering Germany has reducing population growth rate and has a very sound Current Account Balance, I do not see any nexus between Aus increased population and turning in a positive CAB (the sign of a healthy economy):
    http://en.wikipedia.org/wiki/List_of_countries_by_current_account_balance

  2. Leith – the capitalist system has its booms and busts as demand and supply fight each other, there will be winners and losers each time depending on when people buy and sell.

    … however, one has to watch out for major events that really knock about the normal ebbs and flow of boom and bust. There has been one already in our lifetime and there is another upon us as I type.

    I still haven’t seen you do a piece on the unavoidable impact of the medical breakthrough in the early 1960’s – the pill, overlaid by predictable lifecycle spending patterns, immigration adjusted.

    The period 1962 to 1975 of continual less births – the same rate down as we had the rate up into 1962 (roughly X Gen) is a massive hole in demand coming through as people hit peak spending at 47 years of age.

    The impact of contraception is now upon us (GDP in the western world will head down YOY), a 12 to 13 year period of contraction is coming through – (GDP).

    Of course, the event we have all experienced over the last 3 decades (the enormous period of expansion demanded by the people born 1933 to 1962), created the 30 year miracle we have been through as these people work their way to peak spending.

    For me, this is the single biggest contributor to supply and demand (the argument is adjusted for immigrants and in my view immigration will need to be adjusted up to help alleviate the impact … however right now the trend is the other way as research showed it was not an election winner for any party … and probably won’t be when the pressure of a depression grips the population??).

    The hole for the next decade (plus) is a problem that no living politician has ever experienced, hence no obvious answers/policies to deal with it.
    Could you cover this to show your readers how big the hole is in GDP this decade and perhaps discuss some the challenges in front of us all (with an ageing population of course).

    • Good point Phil.
      The medical pharmico-tech boom is going to have massive negative implications on world economies from here on in. Govt spending will not be able to keep up with demand without further heavy burdening of taxpayers – and probably at the expense of infrastruture to support the required increase in the taxpaying popn. The other thing about a popn curve shift to the right, is how it will skew voter preferences – a heavy bias toward govt policy in support of non-taxpayers. I doubt that healthcare rationing could ever be a vote-winner.

    • You also cannot ignore that increases in medical technology has also caused prolonged lifespan. Would be interesting if someone could also do an analysis of this.

  3. Sandgroper Sceptic

    Great piece. Gives me some ammunition to beat up the permagrowth, high immigration boosters.

    I think the key issue is the permagrowth model that we have in place…ie more growth is good, less growth is bad. What most of us actually want is a higher quality of life, less stress, more means, less traffic, less pollution, better health and education services etc. Growing the population seems to make the key metrics people care about worse.

    • Without growth there is no hope of improving lifestyle IMO.

      I can’t think of an example in modern history where living style has improved without economic growth. Is that good or bad for the planet?????

      I’d go as far as saying don’t look at the current generation for the next major breakthroughs to improve things.

      The innovators of the last big step forward were the generation born 1933 to 1962. These people pioneered the computer/information age. We are now taking full advantage of those innovations.

      One can only wonder what the western world can come up with to get ahead again. It would be fair to say our “allies” are best positioned to make such breakthroughs as the education system, albeit expensive, is still intact, providing the seeds for innovation.

      Maybe the Russians with their resources will rise to military power? And make their own breakthroughs once again??

      I can’t see the Middle East being a big threat as they are so exposed to western inflation (a lot of people spend over 40% of their disposable income on food alone, in the USA the figure is 9%, here in Australia around 12%) … and even more interesting fertility rates in the ME are converging on 2.2 per fertile female!!

      India probably has a major role to play – by weight of numbers, plus their demographics will yield a rise in living standard, however it will take a number of decades for them to get to where the western world is.

      This little black duck is just going to keep his head down and bum up and improve his own lot in life!

      • Economic growth does not equal population growth or else Bangladesh would be the wealthiest nation on Earth and people would be clamouring to immigrate there, yet it is a basket case. Countries with the youngest demographics are all African and all basket cases also. And besides, growth for growths sake is the vefry definition of cancer.

  4. Good article UE,

    “The CPI measure of inflation adopted by the RBA (and most other central banks) explicitly excludes house price inflation.”

    Add to this the tweaking of the ‘basket of goods’ by substituting cheaper alternatives, and as I keep telling people, the real level of inflation is closer to double.

    My question, is the RBA knowingly involved in deceptive conduct – are Australians being deliberately misled?

    It would seem the RBA has put the interests of the international financiers and currency speculators before that of the Australian people. Higher local interest rates, allegedly justified by the CPI, makes it easier for our local banks to borrow from international financiers who receive loans at ‘mates rates’ from the US Federal Reserve. Major currency speculators are in the same ‘Club’.

    If they ever get cold feet, they’ll drop this country financially like a rock! Therefore the balancing act is crucial – as interest rates cannot be either too high or too low. The currently high Aussie dollar is cushioning the costs of imports and at the same time gives the ‘Club’ members ‘better bang for their buck’. But a finger pointing diversion is needed – in Australia’s case it’s now mining – switched from housing.

    Without the mining sector Australia would be effectively stuffed – as most of us here know. My biggest gripe about this sector is that we’ve been exploited by off-shoring the most lucrative component – the refining process.

    It’s also obvious to most of us here that the RBA is using the positives of the mining boom as a bogeyman to justify it’s so called ‘tightening’ argument when in actual fact main street, manufacturing and exports are bleeding.

    How long can this charade go on for? Until the next trigger event – whether local or international.

    This is my perspective on some of the gobblygoop about interest rates and the CPI we read in the RBA statements.

    BTW Phil, +1 on your population argument. It goes to show that the more westernised the society, the lower the birth rate.

    • MontagueCapulet

      “How long can this charade go on for?”

      See my comments under “SocGen on China’s construction bubble”.

      I think iron ore demand will remain strong for another 2-3 years then suffer a dramatic setback when the Chinese construction bubble ends.
      It’s often taken as a given that Chinese demand will remain strong for decades as urbanisation continues. But at the current rate they will build all the apartments required to complete the urbanisation process within the next 3 years. Dito for rail, highways, airports, stadiums etc.

      I’m tipping volume demand will plateau until sometime in 2013-2014 before declining, but prices should gradually decline from now as rising supply meets flat demand. This probably won’t be dramatic enough to change the paradigm until demand actually drops in 2-3 years, then the charade will be over.

      So far as demographics goes, it is worth mentioning that China is the sweet spot for the dependency ration right now, and their peak birth year was 1964, so their boomers are in their high earning years now. Their echo boomers just hit their early twenties, so from here the supply of cheap young workers declines, migration to the city should decline with them, the number of elderly will be rising etc.All the numbers will decline from here on in a similar way to the USA, they just peaked 4 years later.

    • +1 Nod

      The CPI is kept this way as well due to all government obligations related to it like pensions. The CPI is massaged to get the answer they want for the balance sheet. At some point this breaks, but that’s when welfare gets wound back.

      WRT mining and the processing of minerals here, there is also a difficulty getting smelters etc. built due to the green agenda and compliance in general. Labor/Greens are happy for the carbon in the processing of our exported minerals to be in China/India/etc. as long as it not here and they can say how green we are (not yet, but I think that is a goal). Also, with high wages and lack of skills in this country, how do you build manufacturing. This is a big issue, and we don’t support science and engineering like we need to.

      I’d be surprised if OneSteel and BlueScope are still trading in five years due to the carbon tax.

      This country, with Labor/Green, should they remain in government, is in serious trouble once mining slows down.

      On the population issue, my experience is that it tough to support a family these days with the cost of housing, and living. Who can afford to have four kids? In our group o friends it’s one or two. And both parents need to be working full time if you can get it.

  5. Australia is running a population ponzi scheme and enormous pressure is being applied to government to keep the ponzi going. Various vested interests have various motivations. Mining, for instance, ravenous for cheap labour and ravenous to rip the mineral wealth out of the Earth and ship it as quick as possible, all the while avoiding paying as much tax as possible:

    http://www.couriermail.com.au/business/rio-tinto-boss-calls-for-mining-investment-to-back-fresh-wave-of-exploration/story-e6freqmx-1226081570643

    Loosely translated as – we want to pay you less to dig up your wealth and we’ll leave you with a ravished Earth, ravished communities and nothing to fall back on when we take our rightful profit and leave for greener fields.

    More info on Ponzi demography:

    http://www.theglobalist.com/storyid.aspx?StoryId=8321

    • MontagueCapulet

      Ravished earth? That’s a pretty dramatic way to describe a hole in the middle of the desert.

      Ravished communities? You mean towns that only exist because the mine is there?

      Cheap labour? Is this mining we are talking about – the industry that pays $100k per year for a kitchenhand?

      If you were talking about some operation in the Congo using buckets and spades you might have a point but in an Australian context you just sound out of touch.

      • Fracking and other mining practices very definitely have the potential to ravish the Earth and poison the water table destroying vast swathes of arable land for generations. Kakadu, for instance, was very close to a major environmental disaster during the recent wet season.

        No, I do not mean towns that only exist because the mine is there, I mean communities, including inner city, swamped by immigrants we are told we need to fill skills gaps. Meanwhile businesses refuse to train Australians and squeal for immigrants whenever there is a shortfall.

        Whatever kitchenhands are making (100k sounds made up) they would be making more without miners getting the free kick of flogging off Australian citizenship. And it is right that Australians should partake of the mining boom up to the hilt, and if the mining companies don’t like it they are free to go dig in the Congo.

  6. “Immigration puts upward pressure on house prices when land supply is constrained”
    .
    Not only there is land supply constraint by the government, but there is deliberate supply-side funding constraints from the banks. It is funny how banks don’t believe their own propaganda of “underlying demand”, “chronic under-supply” and insist on 75%+ pre-sales before they finance any property development.
    .
    However, In light of the debacle in the Gold Coast, the banks who try to fix the market got played instead – come settlement time, people forfeited their deposit and ran away, forcing developers into administration and the banks saddled with bad debt.

    • “Not only there is land supply constraint by the government, but there is deliberate supply-side funding constraints from the banks. It is funny how banks don’t believe their own propaganda of “underlying demand”, “chronic under-supply” and insist on 75%+ pre-sales before they finance any property development.”

      Mav – yeah I’ve had similar sentiments recently. Over here our banks (actually yours!)have been talking up big housing shortages for a long time, and a couple of the “housing economists” (ie. bank economists) have been stating for quite a while that this is going to edge prices higher (even though they have been flat / falling in the last year or so). Yet with the failure of most of NZ’s finance companies, there is little funding available to deliver on this so-called housing shortage.

      So my question, like yours, is:

      “If the banks are so confident that there is a serious housing shortage developing and that prices will rise, why are they so cautious in lending to developers?”

      Is it because at the moment it suits them to try and re-inflate property values?(although conversely you would think if more housing starts occured there would be more business for the banks).

      Is it because they secretly don’t believe in their own hype about housing shortages?

      Leith – would be interested in your take on this

  7. Sometimes the chart cannot give you the whole story.

    The cut in immigration mostly occur in the family reunion program, and they closed off a huge loophole where immigration businesses were masquerading as ‘education institutions’. Also, the skilled immigrant program was reassessed so hairdresser no longer qualifies. The actual quota for 2010/2011 remains the same as before, and the decrease in general skilled quota is offset by an increase in employer-sponsored quota.

    The articles mentioned is the ‘vested interest’ talking through their mouthpieces. Their arguments are not connected to reality.

  8. Leith, your article also highlights, implicitly, Australian people’s dis-proportionate infatuation with resource-centric thinking.

    Resources a a big deal, sure – partially because it is all we really have going for us at the moment – but it is not the economy-altering force that so many seem to be thinking and commenting as if it were.

    No: Resources << sum of everything else…even just Housing on its own…!

  9. Immigration for perceived labour shortages is a sham.
    It is an “aura of health” projection by the government and its arms e.g. the RBA. They are trying to ward off close inspection by the vigilantes-derivative vigilantes looking for chinks in the armour.

    Two anecdotal examples in Brisbane.

    1. After the floods, a Kiwi crew was fully imported to conduct it/data cabelling infrastructure. I told a friend with contacts in this industry. He immediately contacted his friend who has a business in this sector. He contacted the people who issued this to foreigners and was told the locals were not contacted or told because the issuer “believed” that all the local firms were too busy, now or in the future. Totally false. Other local firms contacted had no work on the books going forward, either in Brisbane, the Gold Coast or Sunshine Coast. Go figure.

    2. Tunnel infrastructure in Brisbane. Contacts have told me that a worker was approached by a Kiwi unskilled labourer onsite on how to operate a power saw. Two weeks previous he had been a labourer on a dairy farm-never had been in construction-ever. Yet there are thousands of “skilled tradesmen and labourers” locally that are unemployed or in need of fulltime employment. Majority of labour is Kiwi and Irish. Go figure.

    This is not a xenophobic article. It is about market intelligence from the actors on the frontline. Sure there maybe certain skills shortages. Personally I think it’s just BS in support of a myth-a government myth. A government myth on unemployment and labour shortages.

  10. Skilled labour shortage ?

    More like someone doesn’t like paying the market price for labour

    Looking forward to the importation of plane loads ( business class) of resource industry executives to put some downward pressure on CEO salaries.

    The supply and cost of labour is a natural limiting factor on the mining boom.

    Sustainable Migration has its place but not for the pupose of enabling the marginal projects of the mining boom before the bang.

  11. Well said Pfh007. Funny how all these ‘free market’ people (when it applies to putting money into their pockets, will do anything to stop wage rises to their market rate.

    Ditto the neo-liberal economists (hangers on, fellow travelers, useful idiots etc). They all bang on about lowering wages, when there is unemployment, to the ‘market clearing rate’.

    But you never hear them advocate free market principles to clearing the market when there are ‘skill shortages’.

    Want to stop skill shortages? Let wages raise to the proper market rate (as advocated for CEOs). When a mining company pays $150,000+ (plus costs, accommodation, etc) for a diesel fitter then people will move.

    Other people will get training to get one of those jobs and so on.

    But we want to clear the market at $50,000, hence more immigration and ‘temporary’ work visas.

    This of course raises profitability (and hence CEO wages), but socialises the costs. Everyone else has to pay for the infrastructure and things like constraint inflation.

    Privatise the profits and socialise the costs (or losses). Last time I looked that wasn’t capitalism, I think it was called something else.