John Kehoe embarrases self with immigration propaganda

The AFR has taken another shot at RBA governor Phil Lowe for daring to admit that Australia’s mass immigration program pushed down wage growth.

The robber baron’s paper of choice has now enlisted economics editor John Kehoe to cherry-pick research and testimony claiming that immigration does not push down wages. Below are Kehoe’s main arguments:

• “The RBA got it wrong on immigration and wages… More migrants do not mean lower wages”.
• Economic studies are inconclusive about the impact of immigration on wages.
• “Australia’s disproportionately skilled migration program may be ‘decreasing inequality’ – because skilled foreign workers compete for jobs and wages against higher paid Australians”.
• “Immigration has positive spillover effects on jobs, wages, productivity, innovation and government finances”.
• “Highly skilled immigrants enhance the economy’s productivity – the only sustainable way to increase real wages”.
• “New Zealand’s unemployment rate fell to 4 per cent by 2018, despite surging population growth and its labour supply growing much faster that Australia’s. Kiwi wage growth was about 1 percentage point higher”.
• “If immigrants and native workers specialise in different tasks, then the two groups may not directly compete in the labour market”.
• “Immigration may increase productivity and wages if immigrant and native workers perform complementary tasks.”

Since the arrival of Michael Stutchbury as editor, the AFR has been governed by a dumbed-down, trickle-down economic philosophy that conflates lower wages with productivity growth, when there is almost no relationship between the two.

Mass immigration of cheap foreign labour sits neatly within this Stutchbury frame of reference. Free and easy access to cheap foreign labour kills wage growth via a ceaseless supply shock while lifting overall aggregate demand via more warm bodies. This provides benefits to some narrow sectors of the economy like banking, property and retail.

However, it does so by ignoring very important macroeconomic effects that deteriorate over time – increasing inequality and crush-loading capital – which make it very negative for Australians overall.

The model works like this. An ever-increasing population substitutes more warm bodies for rising per capita GDP and incomes. Over time, this concentrates more income and wealth in fewer hands and a demand deficit develops. Meanwhile, infrastructure is crush-loaded and capital investment into efficiency gains like automation go into reverse. This “capital shallowing” slows productivity growth. This is key to the chronic economic underperformance suffered by the vast majority of Australians in the last cycle.

The data for this case is unequivocal at the macro level. After the GFC, badly managed and excessive mass immigration prevented the output gap from ever closing, ensuring there was always too much labour supply meeting too little demand for it:

Chronically oversupplied.

With wages stalled and demand chronically weak, there is no need for business to invest in efficiency, leading to the structurally lower productivity performance experienced since 2005 when the immigration intake exploded:

Australia’s labour productivity has collapsed since 2005 after immigration ramped-up.

Nor does Kehoe’s claim that Australia’s immigration program is highly skilled pass scrutiny. Only around 30% of the permanent migration program are primary skilled workers, with the remainder partners, family migration and humanitarian. And the average pay of migrants is much lower than the general population, according to the government’s own Continuous Survey of Australian Migrants (extract below), which suggests lower productivity (see here):

Migrants are paid less than the general population.

Add to this the temporary migration system, which has delivered systemic wage theft across multiple sectors, unambiguously holding down overall wage growth.

Kehoe’s comparisons with New Zealand is also weird, since it too suffered from chronically low wage growth and stagnating growth in per capita GDP after ramping up immigration:

New Zealand wage growth poor in the decade leading up to COVID.

The situation in New Zealand is so bad that the Ardern Labor Government has ordered a sweeping review by the Productivity Commission (PC) of the nation’s immigration system.

The New Zealand PC also recently released a report, entitled “New Zealand firms: Reaching for the frontier”, which explicitly noted that successive governments had enabled high levels of immigration without targeting this to close the skills gap of New Zealand workers. This mass immigration program had, in turn, resulted in high levels of labour force participation but poor productivity and low wages. It had also disincentivised firms from undertaking productivity-enhancing investment.

As such, the PC recommended the Ardern Government wean New Zealand firms off their heavy reliance on migrant workers:

Aggregate data (Figure 2.2) show that New Zealand businesses are typically capital-shallow (ie, workers have limited equipment and other capital goods to work with). Capital shallowness holds down labour productivity…

The ready availability of labour at modest or low wages (eg, through immigration policies that allow high levels of low-skill migration) has not helped either, because it has reduced firms’ incentives to invest in labour-saving and productivity-enhancing equipment…

About the only accurate thing Kehoe says in his article is the following:

“Federal and state governments have failed to implement supply-side reforms to accommodate the extra people and boost productivity… That’s why household disposable incomes per head stagnated in Victoria pre-COVID-19”.

Australia’s population grew by an insane 6.5 million people over the 20 years leading up to COVID and Treasury’s intergenerational report (IGR) projects that it will repeat that growth twice over again over the next 40 years, increasing by 13.1 million people (a 50% increase). That’s the equivalent of adding another Sydney, Melbourne and Brisbane to Australia’s current population.

Who honestly believes that federal and state governments will successfully “implement supply-side reforms to accommodate the extra people and boost productivity”? They failed dismally to do so over the past 20 years. So what makes Kehoe confident that they will magically achieve this over the next 40 years as Australia records double the volume of population growth?

Obviously it won’t happen and living standards and productivity will be crushed by Kehoe’s mass immigration fetish, as happened over the prior 20 years.

The last word on this issue should again go to Professor Gary Banks, who headed the Productivity Commission for 15 years from its inception in 1998 until 2013. Professor Banks is one of the nation’s leading experts on public policy formulation, and last month he gave a speech calling for a much lower immigration intake post COVID:

Treasury’s budget forecasts envisage net immigration getting back to its previous annual peak of 235,000 by 2025… One has to question whether, federal budget repair aside, attempts to revive immigration to the extent forecast would be sensible from a national interest perspective. While Treasury is perhaps understandably bullish, the Productivity Commission has provided a more nuanced assessment. This suggests that, under realistic assumptions, immigration does little for either participation or productivity nationally in the long term, with income gains in per capita terms small and largely skewed to migrants themselves.

Moreover, while highly skilled migrants are good for the economy, and sectors like mining in particular, and should be encouraged, the average skill level for the intake as a whole in recent years has not been high.

When externalities such as congestion and housing affordability are taken into account, I’d suggest that the optimal level of net immigration for Australia could be closer to Treasury’s forecast in the first IGR of 90 000 than the latest one. Where it ends up is unclear. But what is clear is that immigration policy is too important to be devised primarily on fiscal grounds or in relative seclusion.

Most Australians already know this, which is why they reject the immigration and population growth projections espoused by the IGR and blinkered economists like John Kehoe.