CBA: Mass immigration biggest risk to wage growth

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In his commentary to yesterday’s Monetary Policy Decision from the RBA, CBA’s head of Australian economics, Gareth Aird, warned that rebooting immigration back to pre-COVID levels is now the biggest risk to Australian wage growth:

There is a risk that the RBA looks through any near term strength in wages growth if the Board puts it down to the sudden drop in net overseas migration due to the international border closure. If that were to be the case the RBA would need to acknowledge the explicit link between wages growth and the level of net overseas immigration which is something they have not done to date. If they were to do that it could create an interesting dynamic between the RBA and the Federal Government which sets the net overseas migration target each year.

In any event we think that the expansionary fiscal stance of both state and federal governments coupled with a partial drawdown of the huge stock of household savings will see the labour market remain at full employment when foreign workers return,provided net overseas immigration does not catapult back to its strong pre-COVID level.

For years the economic fraternity at large (Gareth Aird being one of the few exceptions) denied the link between immigration and wage growth. Outfits like the Grattan Institute among others even tried to argue that migrants “push average wages up”.

During the pandemic we have witnessed a profound shift with Australian economists now openly admitting that the collapse in immigration has driven unemployment down, created labour shortages, and will soon spike wages as businesses compete for scarce staff. Business groups are also furiously lobbying policy makers to reopen the immigration floodgates so they can avoid paying staff more.

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Any doubt about the impact of immigration on wages was eviscerated last month by RBA governor Phil Lowe who explicitly stated that sustained lower immigration will drive up Australian wage growth:

“The main effect of the closure of the borders on the labour market is that we can no longer tap the overseas labour market for areas where workers are in short supply.

“So, what used to happen before the pandemic is if there was a shortage in the labour market for a particular skill, firms could go overseas and tap the global labour market. And that meant that if there was very strong demand for workers of a particular skill, the price – the wage – didn’t really move very much because you could go and get workers from overseas.

“You can’t do that at the moment… tap global labour markets for areas where there is a shortage.

“And we’re starting to hear reports of wages moving for some of those jobs. But other firms are saying ‘look, we don’t want to bid up the cost base now. Because perhaps late in the year there will be some way to get workers to come back in with skills that we really need and that will alleviate some of the pressures’.

“I think if that doesn’t happen, and we’re still in this position in a year’s time where we can’t get workers and skills are in short supply, then we will see more upward pressure on wages and inflation”.

Thus, Australia’s number one economist has explicitly explained how Australia’s immigration program has been used to hold down wages. This is exactly the same point MB has argued for nearly a decade. There is no longer any debate.

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Stopping immigration from returning to turbo-charged pre-COVID levels is now central to achieving the RBA’s goal of higher wage growth. But rebooting mass immigration, as advocated by the Morrison Government, Treasury and business groups, would increase the supply of labour, reduce worker bargaining power, keep unemployment elevated, and prevent wages from rising.

Do policy makers want higher wages or not? If so, stop the bullshit.

About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.