Ross Gittins is right today:
If Turnbull can con Labor into spending most of the time until the election arguing about tax, he’ll have pulled off a fabulous diversion from the most pressing source of voters’ present hip-pocket discomfort: weak wage growth.
But he’s also wrong:
So who’s the one public figure pointing to the megafauna in the room? Lowe. He’s been talking about weak wage growth for months, seeing the problem as largely cyclical (temporary) and urging us to be patient.
Trouble is, as each quarter passes without any sign of the wage price index stirring from 2 per cent a year, that argument weakens. And in a recent speech he shifted ground, acknowledging that the “norm” for annual wage rises had shifted from 3 to 4 per cent to about 2 per cent, for reasons that are both cyclical and structural (lasting).
Cyclically, wages are weak because, at about 5.5 per cent, unemployment is still above the “conventional estimates” that full employment – the NAIRU, or “non-accelerating-inflation rate of unemployment” – is about 5 per cent.
What’s more, Lowe says, we may find that, like the US and other advanced economies, the NAIRU is now a fair bit lower than we’ve hitherto assumed.
True, Phil. But that’s a significant acknowledgement. What is it that causes the NAIRU to shift? Changes in the structure of the labour market.
In his search for structural explanations for our four-year absence of real wage growth, Lowe says part of the story is likely to be the way globalisation – greater trade between rich and poor countries – has changed the bargaining power of workers by effectively increasing the global supply labour.
But another important part of the story, he says, lies in the nature of recent technological progress. It’s no longer just a matter of firms installing the latest generation of better machines. It’s about software and information technology; intangible capital, not physical capital.
Come on, Gitto, you know Lowe’s also dodging the elephant in the room as well. The key structural change in the labour market that is driving down wages growth is as obvious as it is ignored.
The Australian output gap is currently the worst since the 1990s boom and bust and much more chronic. Yet we are still running mass immigration into this slack, including huge unutilised labour resources. When you put the two together on a chart, weak wages make perfect sense:
This is the smoking gun of weak wages growth. We have always before adjusted immigration down when there was too much slack in the economy but this time we have ramped it up. The fallout is as overwhelming as it is shocking:
- For years we have seen Dominos, Caltex, 7-Eleven, Woolworths and many other fast food franchises busted for rorting migrant labour.
- The issue culminated in 2016 when the Senate Education and Employment References Committee released a scathing report entitled A National Disgrace: The Exploitation of Temporary Work Visa Holders, which documented systemic abuses of Australia’s temporary visa system for foreign workers.
- Mid last year, ABC’s 7.30 Report ran a disturbing expose on the modern day slavery occurring across Australia.
- Meanwhile, Fair Work Ombudsman (FWO), Natalie James, told Fairfax in August last year that people on visas continue to be exploited at an alarming rate, particularly those with limited English-language skills. It was also revealed that foreign workers are involved in more than three-quarters of legal cases initiated by the FWO against unscrupulous employers.
- Then The ABC reported that Australia’s horticulture industry is at the centre of yet another migrant slave scandal, according to an Australian Parliamentary Inquiry into the issue.
- The same Parliamentary Inquiry was told by an undercover Malaysian journalist that foreign workers in Victoria were “brainwashed” and trapped in debt to keep them on farms.
- A recent UNSW Sydney and UTS survey painted the most damning picture of all, reporting that wages theft is endemic among international students, backpackers and other temporary migrants.
- A few months ago, Fair Work warned that most of Western Sydney had become a virtual special economic zone in which two-thirds of businesses were underpaying workers, with the worst offenders being high-migrant areas.
- Dr Bob Birrell from the Australian Population Research Institute latest report, based on 2016 Census data, revealed that most recently arrived skilled migrants (i.e. arrived between 2011 and 2016) cannot find professional jobs, with only 24% of skilled migrants from Non-English-Speaking-Countries (who comprise 84% of the total skilled migrant intake) employed as professionals as of 2016, compared with 50% of skilled migrants from Main English-Speaking-Countries and 58% of the same aged Australian-born graduates. These results accord with a recent survey from the Bankwest Curtin Economics Centre, which found that 53% of skilled migrants in Western Australia said they are working in lower skilled jobs than before they arrived, with underemployment also rife.
- The Australian Bureau of Statistics (ABS) latest Characteristics of Recent Migrants report, revealed that migrants have generally worse labour market outcomes than the Australian born population, with recent migrants and temporary residents having an unemployment rate of 7.4% versus 5.4% for the Australian born population, and lower labour force participation (69.8%) than the Australian born population (70.2%).
- ABC Radio recently highlighted the absurdity of Australia’s ‘skilled’ migration program in which skilled migrants have grown increasingly frustrated at not being able to gain work in Australia despite leaving their homelands to fill so-called ‘skills shortages’. As a result, they are now demanding that taxpayers provide government-sponsored internships to help skilled migrants gain local experience, and a chance to work in their chosen field.
- In early 2018 the senate launched the”The operation and effectiveness of the Franchising Code of Conduct” owing in part to systematic abuse of migrant labour.
- Then there is new research from the University of Sydney documenting the complete corruption of the temporary visas system, and arguing that Australia running a “de-facto low-skilled immigration policy” (also discussed here at the ABC).
- In late June the government released new laws to combat modern slavery which, bizarrely, imposed zero punishment for enslaving coolies.
Why we have done this is pretty straight forward. The political economy is corrupt. Instead of managing the economy in the national interest, it now desperately seeks to prop up asset values at the expense of everything else. Population growth today is not about nation building. It is simply an attempt to back-fill the housing bubble.
Don’t be a part of it, Gitto. You’re old and rich and don’t need to be. Bring back this Gittins:
There are at least four counts against the advocates of high immigration. First, their refusal to engage with the academic environmentalists arguing that we’ve exceeded the “carrying capacity” of our old and fragile land. Scientists? What would they know?
Second, they keep asserting high immigration’s great economic benefits, blithely ignoring the lack of evidence. Whenever the Productivity Commission has examined the issue carefully it’s found only small net effects, one way or the other. Its latest modelling found only a “negligible” overall impact.
Third, the advocates not only decline to admit the high social and economic costs that go with high rates of immigration, they decline to accept their share of the tab, doing all they can to shift it to the young, the poor and those on the geographic outer, including many of the migrants.
You rarely hear pro-immigration economists acknowledging the clearest message economic theory gives us on the topic: more population requires more spending on additional public and private infrastructure if material living conditions aren’t to deteriorate.
The more we invest in such “capital widening” to stop the ratio of capital to labour declining, the less scope for investment in “capital deepening” to keep the ratio increasing, and so improving the productivity of our labour.
The fourth criticism of high immigration is that it’s the cheapest and nastiest way to pursue economic growth. You get a bigger economy, but not the promised benefits. The studies repeatedly fail to show high immigration leads to a significant increase in real income per person…
In principle, one productivity-enhancing effect of high immigration is that you get greater human capital on the cheap by pinching it from other (mainly poor) countries… But as Dr Bob Birrell, of the Australian Population Research Institute, has shown, there’s a big gap between the claims made for our skilled migration program and the reality. We let in people whose skills aren’t in high demand, and plenty of them end up driving taxis…
High immigration may suit our rent-seeking business people, but it’s a hell of a way to pursue the professed benefits of economic growth.
This Gittins:
I’ll start by stating upfront where I’m coming from on population: I believe we should do what we can to limit the growth of our population, and do that by focusing largely on immigration…
What are my reasons for favouring limiting immigration to limit our population growth? It’s mainly my concern about the damaging ecological effects of population growth, as much from a global perspective as from a local Australian perspective. But this concern is augmented by my belief that economic growth (ie increase in material standard of living, as conventionally measured by the real growth in GDP per person) does nothing to increase subjective wellbeing (happiness) in developed countries. If so, why pay a social or environmental price to pursue it?..
For a rigorous economic analysis it’s not good enough to simply assume that bigger is better. Why exactly is it better? The conventional answer is that bigger is better if it brings us a higher material standard of living – if it makes us more prosperous. But for this to happen – not necessarily for each individual, but on average, and for the community as a whole – the economy must grow faster than the population grows ie there must be an increase in real GDP per person.But there’s a third layer: even if increased population does lead to higher GDP per person, who shares in that increase? Conventional economics is about self-interest, so for immigration to be justified economically it has to be shown that the pre-existing population benefits from the decision to increase the population. If instead all the benefit went to the immigrants, then the immigration program would be merely an act of charity…
The most recent official attempt to answer those questions came in a report prepared by the Productivity Commission in 2006, Economic Impacts of Migration and Population Growth. Now, the Productivity Commission is a body of impeccable credentials in economic orthodoxy, it’s one of the leading advocates for economic growth and you’d expect it to be very favourably disposed to the belief that immigration makes us better off materially. Which makes its findings all the more significant…
The proposition the PC modelled was the effect of a 50 pc increase in the level of skilled migration over the 20 years to 2024-25. It found that this did cause real GDP to be 4.6 per cent bigger than otherwise in 20 years time. And, yes, this did lead to an increase in real income per person, but the increase was pathetically small: 20 years later real income per person would be 0.7 per cent higher, or $380 a year. The PC found that ‘the distribution of these benefits varies across the population, with gains mostly accrued to the skilled migrants and capital owners. The incomes of existing resident workers grow more slowly than would otherwise be the case’.
The PC concludes that ‘factors other than migration and population growth are more important to growth in productivity and living standards’. Indeed, growth in income per person from technological progress and other sources of productivity growth, and long-term demographic changes, could be expected to be about 1.5 pc per year, or more than $14,000 a year by 2024-25.
So that’s an end point of $380 a year from immigration versus $14,000 a year from technological advance. On this evidence, a rational economic rationalist would have little enthusiasm for population growth. From my perspective, it leaves me confident my opposition to immigration-fed population growth on ecological grounds would not come at any great cost in terms of our material standard of living (or our happiness, for that matter)…
I doubt that it [the modelling] takes sufficient account of the effect of the extra pressures migration creates for the public sector: the extra public infrastructure needed to meet the needs of the bigger population and the greater demands on the budget for services provided to immigrants and their families. This implies a need for higher taxation – paid by the original residents, not just the immigrants. And any delay or foul-up in providing the extra housing, roads, public transport, utilities, schools and hospitals etc could have significant negative effects on road congestion and other aspects of our amenity.
Even more significant, conventional economic analysis abstracts from the effect of economic activity on the natural environment, essentially assuming the environment to be a free good…
This Gittins:
The original bipartisanship was a kind of conspiracy. The nation’s business, economic and political elite has always believed in economic growth and, with it, population growth, meaning it has always believed in high immigration…
We can’t continue treating the economy like it exists in splendid isolation from the natural environment. And even when you ignore the environmental consequences, the proposition that population growth makes us better off materially isn’t as self-evident as most business people, economists and politicians want us to accept. Business people like high immigration because it gives them an ever-growing market to sell to and profit from. But what’s convenient for business is not necessarily good for the economy.
Since self-interest is no crime in conventional economics, the advocates of immigration need to answer the question: what’s in it for us? A bigger population undoubtedly leads to a bigger economy (as measured by the nation’s production of goods and services, which is also the nation’s income), but it leaves people better off in narrow material terms only if it leads to higher national income per person.
So does it? The most recent study by the Productivity Commission found an increase in skilled migration led to only a minor increase in income per person, far less than could be gained from measures to increase the productivity of the workforce.
What’s more, it found the gains actually went to the immigrants, leaving the original inhabitants a fraction worse off…
Why doesn’t immigration lead to higher living standards? To shortcut the explanation, because each extra immigrant family requires more capital investment to put them at the same standard as the rest of us: homes to live in, machines to work with, hospitals and schools, public transport and so forth.
Little of that extra physical capital and infrastructure is paid for by the immigrants themselves. The rest is paid for by businesses and, particularly, governments. When the infrastructure is provided, taxes and public debt levels rise. When it isn’t provided, the result is declining standards, rising house prices, overcrowding and congestion.
I suspect the punters’ heightened resentment of immigration arises from governments’ failure to keep up with the housing, transport and other infrastructure needs of the much higher numbers of immigrants in recent years…
This Gittins:
Just about every economist, politician and business person is a great believer in a high rate of immigration and a Big Australia. But few of them think about the consequences of that attitude – which does a lot to explain our economic problems…
It shows even our economists have turned off their brains on the question of immigration and lost their way between means and ends. Now they believe in growth for its own sake, not for any benefits it may bring us.
Of course, slower growth in the population means slower growth in the size of the economy. But what of it? What do we lose?
The economic rationale for economic growth is that it raises our material standard of living. But this happens only if GDP grows faster than the population grows. So it doesn’t follow that slower GDP growth caused by slower population growth leaves us worse off materially.
That would be true only if slower population growth caused slower growth in GDP per person. I suspect many people unconsciously assume it does, but where’s the evidence?…
Politicians are always boasting about record government spending on this or that, but never make allowance for population growth in making such claims. (Why would they when often they don’t even allow for the effect of inflation?)
As for the claim that slower population growth will make it harder to reduce the budget deficit, it reveals just how unthinking we’ve become on immigration. It’s true enough that slower growth in the workforce means slower growth in tax collections.
But is that all there is to it? What about the other side of the budget? Aren’t we assuming a bigger population is costless? Skilled immigrants and their dependents never use the health system? They don’t have kids needing to be educated? They don’t add to traffic congestion, wear and tear on roads and 100 other taxpayer-provided services? Since there’s often a delay while they find jobs, who’s to say budgets, federal and state, wouldn’t be better off with fewer immigrants?
But what’s strangest about the economic elite’s unthinking commitment to high immigration is the way they wring their hands over our weak productivity growth and all the “reform” we should be making to fix it, without it crossing their minds that the prime suspect is rapid population growth.
It’s simple: when you increase the population while leaving our stock of household, business and public capital unchanged, you “dilute” that capital. You have less capital per person, meaning you’ve automatically reduced the productivity of labour.
So you have to do a lot more investing in housing, business structures and equipment and all manner of public infrastructure – a lot more “capital widening” – just to stop labour productivity falling…
Lower immigration would help reduce a lot of our economic problems – not to mention our environmental problems (but who cares about them?).
This Gittins:
This Gittins:
Phil Lowe and the RBA have been utterly culpable in keeping immigration off the agenda regarding wages and broader discussion just so that they can protect their own housing bubble.
It’s disgraceful and corrupt and Gittins should say so.
