Paul Kerin, an adjunct professor at Adelaide University’s School of Economics, has penned a ridiculous article in The Australian arguing that “immigration is the golden goose our economy needs”. Let’s dissect his arguments:
Immigration over recent decades has made today’s Australians much better off — and further ongoing immigration is critically important if we are to maintain and improve our future living standards.
Why the false binary? One Nation aside, nobody has argued to end immigration, just to lower it closer to the sensible and sustainable levels that existed prior to when John Howard dramatically increased the intake in the early-2000s:
Back to Kerin:
As the Productivity Commission noted recently, the impact of immigration on house prices has been exacerbated by state, territory and local governments’ failures to implement sound urban planning and zoning policies. These failures have constrained growth in land supply and land use intensity. Easing these constraints would grow the size of the pie we can all enjoy. Cutting immigration wouldn’t. It may reduce house prices, but would boost neither land supply not land use intensity; therefore, it would simply transfer wealth from sellers to buyers. In fact, it would actually shrink our pie.
This is nonsensical. Under Australia’s current mass immigration program, Australia will need to add a Canberra-worth of infrastructure and housing every year simply to keep up with population growth, with Sydney’s and Melbourne’s populations projected to grow by a whopping 87,000 and 97,000 people per year respectively for decades to come:
You don’t have to be a rocket scientist to see that it is virtually impossible for housing and infrastructure to keep up with such strong population growth, even with the world’s best planning system.
Back to Kerin:
Unfortunately, those who favour immigration cuts have sometimes used fears that immigrants might steal our jobs or depress wages as Trojan horses to advocate for a position they help anyway…
Nor does the evidence support fears that immigrants steal locals’ jobs and reduce wages. Consistent with the findings of international studies, the [Productivity] Commission concluded that immigration has negligible effects on the wages, employment and workforce participation of local workers…
The evidence indicates that immigration raises GDP per person, even in the short run. The Productivity Commission has estimated that a 0.6 per cent NOM rate (Australia’s long-run average) would increase GDP per person by 7 per cent ($7000) in the long run. That’s not to be sneezed at, but some advocates of immigration cuts have snorted.
A higher NOM rate would boost GDP per person further. The commission estimated that a 1 per cent NOM rate would raise GDP per person by 10 per cent in the long-run.
The Productivity Commission’s (PC) various modelling over the years has shown that the benefits of immigration flow to the migrants themselves and the owners of capital, whereas incumbent residents are left worse-off.
The PC’s latest Migrant Intake Australia report, released in September 2016, compared the impact on real GDP per capita from:
- Historical rates of immigration, whereby population hits 40 million by 2060; and
- Zero net overseas migration (NOM), whereby population stabilises at 27 million by 2060.
The PC’s modelling did find that GDP per capita would be 7% ($7,000) higher by 2060 under current immigration settings. However, all the gains are transitory and come from a temporary lift in the employment-to-population ratio.
More importantly for incumbent workers, labour productivity and real wages are projected to decrease under current immigration settings versus zero net overseas migration (NOM):
Compared to the business-as-usual case, labour productivity is projected to be higher under the hypothetical zero NOM case — by around 2 per cent by 2060 (figure 10.5, panel b). The higher labour productivity is reflected in higher real wage receipts by the workforce in the zero NOM case.
Therefore, according to the PC’s latest modelling, high immigration improves per capita GDP by 2060 by boosting the proportion of workers in the economy, but this comes at the expense of lower labour productivity and lower real wages.
Moreover, beyond the forecast period (2060), the migrants will age and retire, thus dragging down future growth – classic ‘ponzi demography’.
In 2006, the PC also completed a major study on the Economic Impacts of Migration and Population Growth, which modeled the impact of a 50% increase in the level of skilled migration over the 20 years to 2024-25 and found that “the incomes of existing resident workers grow more slowly than would otherwise be the case”. Here’s the money quote:
The increase in labour supply causes the labour / capita ratio to rise and the terms of trade to fall. This generates a negative deviation in the average real wage. By 2025 the deviation in the real wage is –1.7 per cent…
Broadly, incumbent workers lose from the policy, while incumbent capital owners gain. At a 5 per cent discount rate, the net present value of per capita incumbent wage income losses over the period 2005 – 2025 is $1,775. The net present value of per capita incumbent capital income gains is $1,953 per capita…
Owners of capital in the sectors experiencing the largest output gains will, in general, experience the largest gains in capital income. Also, the distribution of capital income is quite concentrated: the capital owned by the wealthiest 10 per cent of the Australian population represents approximately 45 per cent of all household net wealth…
The PC’s latest report also noted that there are many costs associated with running a high immigration program that are not captured in the modelling but are borne by the incumbent population and unambiguously lowers their welfare:
High rates of immigration put upward pressure on land and housing prices in Australia’s largest cities. Upward pressures are exacerbated by the persistent failure of successive state, territory and local governments to implement sound urban planning and zoning policies…
Urban population growth puts pressure on many environment-related resources and services, such as clean water, air and waste disposal. Managing these pressures requires additional investment, which increases the unit cost of relevant services, such as water supply and waste management. These higher costs are shared by all utility users…
Immigration, as a major source of population growth in Australia, contributes to congestion in the major cities, raising the importance of sound planning and infrastructure investment …governments have not demonstrated a high degree of competence in infrastructure planning and investment. Funding will inevitably be borne by the Australian community either through user-pays fees or general taxation.
Hence, running a high immigration program becomes increasingly costly for existing residents. A classic example is infrastructure, where the PC in 2013 warned that total private and public investment requirements over the next 50 years are estimated to be more than 5 times the cumulative investment made over the last half century! Good luck with achieving that level of investment.
Kerin also fails to mention that Australia pays its way in the world primarily by selling-off our fixed mineral endowment. Importing more people necessarily means that Australia’s minerals base must be spread more thinly across a larger population, which necessarily makes Australians poorer (other things equal). Again, the PC has made similar observations:
Australia has considerable natural resources in regard to mineral wealth. As non-renewable resources deliver rents for those who extract them and for governments in the form of resource royalties and taxes on company profits, a larger population means those rents that are captured by government are shared across more people.
To illustrate, consider the below chart, which shows the breakdown of Australia’s exports, most of which come from Australia’s regions (i.e. commodities and agriculture):
Increasing the number of people via mass immigration does not materially boost exports but does increase imports (think flat screen TVs, imported cars, etc). Moreover, it requires Australia to sell-off our fixed mineral assets quicker to maintain a constant standard of living (other things equal).
Put another way, Australia would ship roughly the same amount of commodities and agriculture exports regardless of how many people are coming in as all the productive capacity has been set up and it doesn’t require more labour. So basically high immigration is wrecking the trade balance via more people coming in each year (mostly to Sydney and Melbourne) because of all the additional imports.
Anyone disputing this view only needs to look at the below charts showing the stalling of export growth amid the sharply deteriorating trade balances in NSW and VIC, which of course have been the primary destinations of migrants:
And, not surprisingly, this immigration has helped drive gigantic trade deficits in Australia’s two biggest states:
Meanwhile, the infrastructure deficits in both Sydney and Melbourne, along with congestion, housing affordability and overall liveability worsens each year as more and more people flood into each city and push against infrastructure bottlenecks amid woeful planning.
In short, growing bigger cities via immigration means a less competitive Australian economy and a wider current account – hardly a desirable situation.
Back to Kerin:
Immigrants also improve labour market flexibility. As they haven’t established roots, they’re more willing to move to where jobs are. As immigrants have different skill sets — and on average have significantly higher skill levels — they complement local workers, thereby raising their productivity and hence demand for them.
Again, Kerin is being loose with the truth. The PC’s latest report clearly showed that migrants are far more likely to settle in major urban areas than people born in Australia. Thus, it’s hard to argue that immigrants ‘flexible’ when they primarily come to Sydney and Melbourne only.
As shown in the below PC chart, 86% of immigrants lived in the major cities of Australia in 2011, whereas only 65% of the Australian-born population did: