PC is wrong: Mass immigration left ‘lost decade’ of young workers

In argued earlier this week that “what has already been a lost decade is turning into a lost generation” for younger Australians.

Now the Productivity Commission (PC) has picked up on the theme, showing that the real average annual disposable income of Australian workers in the 35-64 age group increased by 1.4% the 10 years to 2018, whereas they have surged by 86% for over-65s.

In contrast, the average annual disposable income of those aged 16-24 and 25-34 fell by 1.6% and 0.7% respectively over the same period:

The most likely explanation for the decline in wage rates and in full-time work is an imbalance between labour demand and labour supply. Some of this imbalance relates to the business cycle: the slowdown in the economy after the GFC and the slowing of the mining boom reduced economy-wide labour demand after 2008. Some of this imbalance is due to long-term changes in the economy. Later retirement for over 55s increased the supply of workers, and strong increases in the number of university graduates increased the supply of workers who compete for jobs that require more education. Although immigrants increased labour supply, evidence shows that they also created labour demand in the firms they bought goods and services from; the overall effect was neutral…

Seeing greater competition for starting positions, firms offered lower starting wages.

The PC’s claim that mass immigration has not pulled down wages is nonsensical.

The lion’s share of recent migrants are of prime working age and, therefore, have high labour force participation.

Indeed, a recent paper by Melbourne University Professor, Peter McDonald, found that around three quarters of employment growth in Australia between 2011 and 2016 was attributed to immigration:

The permanent and temporary skilled migration policies established by the Australian Government from 1995 played an important role in meeting that labour demand, especially in the boom years of the first decade of the 21st century…

From July 2011 to July 2016, employment in Australia increased by 738,800. Immigrants accounted for 613,400 of the total increase…

Migration has had a very large effect on the age structure of employment with most new immigrant workers (595,300) being under 55 years.

Clearly then, the ongoing supply shock from immigration is unambiguously the primary reason why labour supply continues to outrun demand and why wage growth remains anaemic, especially among younger Australians.

Gareth Aird, head of Australian economics at CBA, explains these dynamics as follows:

From a wages perspective, a high level of NOM augments the supply of labour beyond what would have naturally occurred. That intensifies the competition for existing jobs, while of course also adding to the demand for labour. The bigger the supply side shock, the more that the competition for existing jobs intensifies. This puts downward pressure on wages initially, but its effect should only be temporary. However, if the supply side shock continues when slack is elevated the temporary impact may not prove to be so short lived. This has been the pre-COVID-19 case in Australia since the end of the mining boom. We have essentially run a high immigration program via elevated NOM based on the notion of skills shortages even when there has been plenty of slack in the labour market (chart 9).

In 2018/19, the “Skill Stream” accounted for ~70% of the total migration programme outcome. From the perspective of an employee, working in an industry that has a skills shortage means that the labour market in that profession should be tight. In industries with skills shortages, bargaining power between the employee and employer should move more favourably in the direction of the employee and higher wages should be forthcoming. But in Australia’s case there has been a lack of evidence of widespread skills shortages based on the broad-based weakness in wages growth (chart 10 & 11).

The relatively high intake of skilled workers in the past looks to have been a pre-emptive strike on the expectation that there will be skills shortages in the future. If NOM is lowered on a permanent basis then “skills shortages” are likely to manifest themselves over time because employees will find it harder to hire from abroad. This means that employees may see a boost in their bargaining power that is independent of the level of slack in the local labour market. Essentially talent is a scarce resource if firms cannot hire from a global pool of labour as they may have previously done.

The PC has also ignored the systemic wage theft from temporary migrants, which has become entrenched across the entire Australian economy.

Entire industries have become heavily reliant on migrant workers to perform low-skilled work in the labour market for below award rates, which is unambiguously undercutting local workers and lowering overall wage growth.

The impact is most pernicious on younger Australians, as explained recently by the Grattan Institute:

As the Productivity Commission noted, where migration does displace existing populations, it tends to affect people with low skills and youth most. That seems to be happening in Australia. And because international students and backpackers are primarily looking for part-time work, they may affect under-employment more than unemployment…

Low-skill migrants might also put downward pressure on wages (if accurately measured). The measured wages of those aged 20 to 34 have not risen as fast as the wages of older workers for some time (Figure 7)…

Australia is now running a predominantly low-skill migration system. People from this system form a material proportion of the younger workforce. Because of visa conditions, many of these migrants have incentives to work for less than minimum wages, and there is anecdotal evidence that many do. It is impossible for data sources on the Australian labour force to pick up all of this phenomenon. It is possible that the scale of this influx to the labour market is depressing wages and increasing under-employment specifically for low-skill younger workers.

In short, endless mass immigration is partly behind the lost decade of wage growth for younger Australians.

Unconventional Economist
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