Fitch: Lower immigration will drive up wages

The ABC’s Gareth Hutchens has posted Fitch research claiming that the cut in immigration will lead to a tighter Australian labour market and stronger wage growth:

[Fitch] said Australia has historically relied on immigration for growth, but since the mid-2000s net overseas migration has picked up sharply…

In fact, between 2000 and 2019, Australia experienced the fastest population gains among large developed markets.

And for the last 10 years, population growth has been the main source of growth for Australia’s economy from a supply-side perspective.

“Indeed, Australia has seen a steady deterioration in underlying productivity performance, which was the main growth engine prior to the mid-2000s,” they said…

The Fitch economists said Australia’s decision to close its international borders brought net overseas migration to a standstill in 2020 and 2021…

It’s had a profound impact on the labour market.

“There is little doubt that Australia’s tight labour market and rising job vacancies in the wake of the pandemic is in large part due to the fall in net overseas migration,” they said.

“Against a backdrop of supportive macro policy settings, labour demand has increased while the largest source of labour supply — net overseas migration — has dried up”…

Overall, they estimated Australia would experience a net overseas migration-induced labour supply shortfall of roughly 275,000 people across 2020 and 2021.

They assume migration will see a gradual recovery after this year to return to pre-pandemic levels in 2023.

But they don’t think the shortfall in migrants in 2020 and 2021 — the people who would have come to Australia if the pandemic never happened — will be fully recovered over the next five years…

At any rate, what will our smaller population growth mean for economic growth?

According to the logic of this “supply-side” analysis, the negative shock to net overseas migration will hit Australia’s potential growth rate.

It will cause GDP to be 1.9 per cent smaller by 2026 compared to its pre-pandemic path, according to Fitch’s economists…

According to Fitch’s economists, it means Australia’s economy will quickly run into capacity constraints in coming years.

They said with fewer workers in the economy, and record-high job vacancies, wage pressures were more likely to build.

“The stoppage of new foreign arrivals since 2020 … clearly dried up the supply of labour,” they said.

“We believe the dislocation between labour demand and supply — unwitnessed in recent history — will eventually translate into higher wage growth, probably from mid-2022 when the economy will be in full swing.”

Economists’ obsession with aggregate economic growth must stop. Australia’s economy grew reasonably in the decade leading up to the pandemic (i.e. the 2010s) thanks to extreme immigration. But once you divide that growth among the extra people, per capita growth fell to levels not seen since the early 1980s recession:

In fact, the 2010s was the worst decade for per capita GDP growth in 60 years:

The 2010s was also the worst decade for per capita household income growth in 60 years of data:

What’s the point of importing hundreds of thousands of migrants every year if it does not increase the material wellbeing of the incumbent population and erodes broader living standards by:

  • Suppressing wage growth;
  • Forcing Australians to live in smaller and more expensive housing;
  • Placing increased burden on infrastructure, driving up congestion costs;
  • Degrading the natural environment; and
  • Increasing inequality?

The only groups that are negatively impacted by lower immigration are those that have already hoarded assets and capital, namely the already entrenched, wealthy and corporate interests.

Sadly, those are also the groups that pull our policy makers’ strings. The wellbeing of ordinary Australians is ignored entirely.

Unconventional Economist
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Comments

  1. I’m bookmarking this because you continue to be spot on. This guy smacks down the obvious conclusion that we should have less-extreme immigration to maximize utility for every individual Australian (all past, present and future migrants). These guys continue to gaslight the public so big business benefits. We are no longer in the era of ‘populate or perish’ right? Further, it is clear that the RBA can’t hit its inflation targets without an immigration lever – are they the only ones who can save us from the vested interests on extreme immigration? Unlikely I guess.

  2. The ABC are doing a one-two punch. They first scare people by telling them that house prices are predicted to FALL in 2023; but then, reassure them that house prices will NOT fall, and might even RISE, if immigration is ramped up to 250,000. Remember, folks – all you have to do is vote for Big Australia and disaster will be averted.

    https://www.abc.net.au/news/2021-11-18/house-prices-roll-over-affordability-rising-interest-rates-bite/100630338
    https://www.abc.net.au/news/2021-11-17/migration-house-prices-rent-housing-affordability-property/100625806
    “If Australia’s annual immigration intake lifts, beyond federal budget forecasts, to reach about 250,000 people in 2023, that would turn predictions of house price falls into price gains.”

    • Now, all the ABC now needs is an article from Dr Demography to say that you are racist deplorable if you do not agree with her view that we need 400k extra people by December 2022.

  3. “The only groups that are negatively impacted by lower immigration are those that have already hoarded assets and capital, namely the already entrenched, wealthy and corporate interests.”
    Leith, I think you meant to say “aren’t” rather than “are”

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