Grattan Institute can’t handle the immigration truth

Last week, the head of the ACTU, Sally McManus, dared say that the sharp fall in Australia’s unemployment rate has been caused primarily by the collapse in immigration:

This Tweet was met with furious opposition from several economists, who claimed the collapse in immigration has little to do with Australia’s strong labour market, of whom I comprehensively demolished.

Yesterday, the Grattan Institute joined the attack against McManus, penning a strawman article in The Conversation claiming that “shutting down immigration did not kickstart the economy”:

Australia’s unemployment rate – now at 4.2% – is at its lowest in more than a decade. It’s not too far off slipping below 4%, something that hasn’t happened for the best part of half a century.

This good news story has ignited fierce debate over who deserves the credit…

ACTU Secretary Sally McManus… tweeted last week that the reason unemployment rates were low was closed borders.

It had “nothing to do” with economic management…

New arrivals (often migrants) most certainly do add to the supply of labour. They compete with pre-existing Australians for jobs.

But that’s only half the story.

The other half is that new arrivals consume goods and services, for a while at a greater rate than Australians who have been here longer. They save less or run down savings in order to do it.

By buying more, they add to the demand for goods and services, and for workers to produce them.

If migrants enter Australia to work, but then spend more than they are paid, they might even create more jobs than they ‘take’…

Most recent research confirms that migrants both take and create jobs, finding little overall impact on the employment or wages of existing workers.

One study even found temporary skilled migrants boosted the wages of lower-skilled Australians by prompting them to move up into higher-paid jobs…

Putting the story together in the chart below, it’s clear that stimulus (both “fiscal” from the government, and “monetary” from the Reserve Bank) boosted the economy far more than did closed borders.

The dark-blue bar captures the decline in spending overseas on travel and education as fewer Australians travelled, while the light-blue bar captures both the decline in spending on Australian education and travel, and the effects of fewer working migrants, as fewer visitors arrived.

Both are swamped by stimulus, which is marked in dark and light orange…

Our low unemployment today is a testament to the success of economic policy.

Attributing it to closed borders runs the risk of leaving us with the wrong lesson the next time the economy turns down.

Amazingly, the Grattan Institute framed the argument around Australia’s labour market without even bothering to analyse the market.

Nobody is denying that the massive stimulus deployed by governments prevented Australia from falling into a deep depression. But this stimulus only filled the hole left by lockdowns and did not put the economy on a higher trajectory.

Australia’s jobs growth remains well below the pre-COVID trend:

Yet, despite this lackluster jobs growth, the resident unemployment rate has plunged to its lowest level since 2008 and the employment-to-population ratio has hit its highest level on record:

Australia’s resident underemployment rate has also fallen to its lowest level since 2008:

The reason for the collapse in unemployment and underemployment in the face of lackluster jobs growth is obvious: Australia has gone from importing over 180,000 foreign workers every year via immigration to losing tens of thousands of migrant workers over the pandemic:

As a result, Australia’s labour supply has gone from growing strongly to stagnating over the pandemic:

Had the pre-COVID level of immigration continued through the pandemic, there would be roughly 460,000 more workers in the economy and the unemployment and underemployment rates would be far higher then their current 2008 low.

Thus, Sally McManus’ Tweet is correct – Australia’s closed international border is “why unemployment rates are low”.

It is also why Australian workers are facing the best labour market conditions in generations. Not having to compete against a flood of migrant workers means almost anybody that wants a job can get one and the scourge of involuntary unemployment has almost been eliminated.

The data is staring Grattan in the face, yet it refuses to acknowledge it.

The immigration issue also highlights the broader contradictions of the Grattan institute across a number of policy areas:

To put it bluntly, the Grattan Institute suffers from a chronic case of cognitive dissonance surrounding immigration and needs to start examining issues as a whole, rather than in silos.

Grattan’s undying support for mass immigration directly contradicts its other policy goals.

Unconventional Economist

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