Chris Joye: Mass immigration is used to hold down wages

Last week, economist Gerard Minack wrote a note warning that rebooting Australia’s mass immigration program will crush wage growth and prevent the RBA from achieving its wage targets, which will keep inflation lower for longer:

Stagnant incomes and below-target inflation [over the last decade] were due to low wage growth. Wage growth was low because there was slack in the labour market…

Arguably the single most important reason for persistent labour market slack was high levels of migration…

To the surprise only of a few professors of economics, reducing the supply of labour seems to be putting upward pressure on its price…

Wage growth is now central to RBA policy. The Bank says it will not tighten until actual inflation is sustainably within its 2-3% target range, and that will require materially higher wage growth than current levels…

Markets have significantly lifted their expectations for the RBA cash rate target over the past month… That’s daft. There is no reason for the RBA to tighten simply because the Fed tightens. The key to the RBA is domestic wage growth. The tricky point is that wage growth is likely to be a function of how reopening the international border affects labour supply. The longer supply is crimped, the more likely it is the wage growth may increase to the point where the RBA will need to tighten before 2024. But if migration flows revert to pre-pandemic levels, then it’s likely that wage growth reverts to pre-pandemic levels. If that happens the RBA may be able to go another 11 years without tightening.

On Friday, Chris Joye noted similar in The AFR:

The Australian economy has been exceptionally good at growing at a reasonable pace without generating excessive wage costs. This is partly a function of our ability to continuously import human capital through an ambitious skilled migration program…

NSW Premier Dominic Perrottet wants to attract 2 million skilled migrants. And Prime Minister Scott Morrison and Treasurer Josh Frydenberg have similarly stated they want to capture the best brains globally to make Australia an Indo-Pacific powerhouse.

A wave of students and skilled migrants would alleviate upward pressure on wage costs and inflation, and possibly allow the RBA to defer increases to its target cash rate into 2023. A great deal therefore hinges on labour supply, and the current lack thereof.

Our analysis previously showed that the massive reduction in the jobless rate had been primarily driven by the departure of about 334,000 foreign workers. If this offshore labour supply returns, the skills shortages that many firms have been complaining about should dissipate.

This echoes RBA Governor Phil Lowe’s recent acknowledgement that high immigration pre-COVID was used to hold down wages, which was vigorously attacked by the immigration boosters and the fake left (I’m looking at you Greg Jericho).

Rebooting mass immigration, as advocated by the Morrison Government, the Treasury, the NSW Government, and business and edu-migration lobbies, would unambiguously increase the supply of labour, reduce worker bargaining power, keep unemployment elevated, and prevent wages from rising.

It’s perverse isn’t it? Crush wage growth to ensure lower interest rates and higher house prices: win-win for the elites.

Shelter inflation good, wage inflation bad.

Unconventional Economist
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  1. Jericho dances to Kath Murphy’s tune. No sooner had TAPRI published their survey – nearly half the sample wanting very low or nil net migration – Guardian Essential poll then claimed that Australians wanted big migration more than ever.

  2. It his way of selling mass imigration to a very skeptical public.
    “The more immigrants we bring in the lower your mortgage repayments (interest rates) and your house prices will continue to rise. Push back on mass immigration and you will get higher rates and inflation.”
    Given a majority off australian are making more money on house price rises than they are in wages , it will probably work.
    The fact that the gains are mostly illusory will get by most people.
    The thorny part will be if the dollar falls on the back of overseas rate rises and fuel prices stay high. Then we will get high inflation and high immigration / no wage growth.

      • Display NameMEMBER

        Good to see our LNP shill is back and on message.

        No Australian government has been as corrupt and incompetent as the current federal LNP. They are a shambles. I will grant that I don’t expect much more out of Labour. The only solution I see is moderate independents.

        • Strange EconomicsMEMBER

          LNP is bad, Labor may be worse is not an argument about the basic policy.
          The Australian policy goal is higher house prices forever to keep
          aspirational mortgaged voters happy. Half the FHBs can just keep quiet and go and find wealthy parents.

          This article is a big hint to the LNP to get immigration back on stream before election or else risk higher interest rates might kill the golden goose (which liver stuffed with pate is in big demand in those high priced restaurants)

  3. Display NameMEMBER

    Ok so we have an epiphany that supply and demand exists in relation to Labour and wages, but we are still insisting it is skilled?

    Come on. Progress but not enough.

    • It’s all about skills: through an ambitious “skilled” migration program and also to attract 2 million “skilled” migrants.

  4. Joye’s article reads as a warning that anyone standing in the way of supersized population growth could be accused of crashing the housing market. By making the point that a big ‘skilled labour’ intake is needed to keep wages down to contain inflation and prevent interest rate rises, he’s applying pressure to those who might think about raising the tie between immigration and wage inflation.

    In particular I’d say it is a warning to some at the RBA (looking at you Captain Phil) that they should zip it on the subject of our large ‘skilled labour’ intake depressing wage growth. Let’s see if Phil or anyone else at the RBA ever talks about immigration and wage growth again. My prediction is that we never hear from Phil again on the subject.

    • Strange EconomicsMEMBER

      Yes , the tone of this article is actually hint hint we need the migration to keep interest rates low.
      Otherwise unsustainably high house prices might become unsustainable.
      (and the restaurant prices stay down with underpaide workers , where the elites are going to sit on Saturday nights) .

      • Yep, you guys have nailed the real message being sent out with that article. It’s a warning to anyone who may be looking in Bo Jo’s direction to keep their eyes on the Australian growth model of mass immigration, crushed wages and soaring property prices. Tamper with either of the former and you risk the latter, which has become the sacred cow of the Australian economy.

  5. Jumping jack flash

    “Wage growth is now central to RBA policy. The Bank says it will not tighten until actual inflation is sustainably within its 2-3% target range, and that will require materially higher wage growth than current levels…”

    Of course. We needn’t fear the interest rates rising until we can all safely afford it. I’ve been saying this for ages.

    “Shelter inflation good, wage inflation bad.”

    I’d add to that “price inflation bad”, but how does anyone expect businesses to pay their workers more if they don’t raise the prices of the services and imported goods they sell?

    We need massive inflation, it is coming whether we like it or not, and we had best be correctly positioned to ride it out. Scomo totally misread the room and bungled our stimulus which was required to kick off massive price inflation, followed by similar wage inflation, becoming self-sustaining and leading to never-ending debt growth and debt spending for consumption. The stimulus would pay for the price inflation while wages caught up.

    My greatest fear now is that other countries that were able to implement this strategy correctly will recover quickly and be able to raise their interest rates which are embarrassingly low, catching Aus. with our pants down while interest rates rise all around us forcing ours up, before we have got a chance to get our wages growing to pay for it.

  6. Even StevenMEMBER

    “Shelter inflation good, wage inflation bad”

    That last line, UE, is about the most depressing thing you’ve ever written.

    • But so true.

      Australia has refined the perfect means of manufacturing millions of debt serfs.

  7. And now we understand why immigration is the real cause behind high house prices and everything else (supply, IR’s, NG/CGT, etc) are just transmission mechanisms. Some of these transmission mechanisms take years to play out (e.g. house building isn’t fast) which makes the analysis complicated. More head count is the only “real thing” that lasts and isn’t financial engineering.

    More people = Lower IR’s (via lower wages) and more bodies to need housing. Its a double win for housing prices.

    1) IR’s are tied to wage growth. As long as wage growth is low IR’s stay now.

    2) Therefore keep pumping migration in to lower wages and therefore measurable CPI. Wages are tied to supply and demand for labour, if you want to keep them low add supply. This makes money cheap and helps drive houses up more.

    3) These migrants add to the demand of existing stock either in ownership or rents. This also drives prices up.

    Because of the above virtuous cycle it pays to invest in real estate when you know it is in a permanent demand shock without the ability to catch up. Lower migration, wait 2-3 years or so when business’s finish lobbying for more and finally capitulate with higher wages, and watch wages rise, IR’s rise.

    I contend this is the real reason they are opening borders. They want to bring back the population growth; that’s it. Given Dom wanting the Fed’s to double it I might as well just go with the flow and buy something tomorrow.

  8. I really don’t get why MB and others jump on Gerard’s work and make him out to be some kind of economic prophet. The argument on wages is blindingly obvious to anyone who can draw supply and demand curves…

    The argument run by business that “we cant source the labour we need” is always an incomplete sentence, which should be / but never is for obvious reasons, followed by “at wages we are prepared to pay to ensure our profit margins.” Cheap immigrant labour makes business sloppy, it’s plantation economics… why innovate, treating labour (and capital) as the scarce resources they are, when the global labour supply curve is perfectly elastic and all you need do is bully dumb, corrupt and venal politicians.