PC mulls Australia’s immigration policy

By Leith van Onselen

In 2006, the Productivity Commission (PC) completed a major study on the Economic Impacts of Migration and Population Growth, which modeled the impact of a 50% increase in the level of skilled migration over the 20 years to 2024-25 and found that it caused real GDP to be 4.6% higher than would otherwise have been the case in 20 years time (more labour inputs equals more outputs).

The PC also found that real income per person would increase ever so slightly. That is, 20 years later real income per head would be 0.7%, or $380 a year, higher than would otherwise be the case.

However, “the distribution of these benefits varies across the population, with gains mostly accrued to the skilled migrants and capital owners. The incomes of existing resident workers grow more slowly than would otherwise be the case“.

So according to the PC, opening the spigots on immigration would make the existing resident population worse-off because they would earn less income than would otherwise be the case.

Today, the PC has released its draft Migrant Intake into Australia report, which calls for “a responsive and carefully balanced approach to immigration policy”.

The PC supports Australia’s merit-based system towards permanent migration:

The focus on education and skills targets immigrants with characteristics that enable them to integrate successfully and deliver good labour market and economic outcomes.

Opportunities for family reunion are important for the wellbeing of Australians and for Australia’s attractiveness to prospective skilled immigrants.

A separate quota for immigrants who meet the criteria for humanitarian resettlement allows Australia to meet its international responsibilities.

It notes that Australian immigrants have a lower employment to population ratio than their Australian-born peers. They also experience higher unemployment during recessions, but similar unemployment to the incumbent population at other times:

Immigration can also displace workers at the lower end of the labour market:

Increased risk of displacement can be expected to be more likely at the lower end of the skill spectrum and in the youth labour market. Youth (aged 15–24) labour market outcomes have been particularly poor in recent years. This largely reflects weak economic conditions since 2007 as well as a longer-term decrease in youth labour market engagement. While there is some tentative evidence to suggest that there may be some relationship between immigration and youth employment outcomes, it is not conclusive.

Skilled immigration may also dampen incentives for domestic workers and employers to invest in skills and training. However, further evidence is required to determine the size of any effect.

However, there can be positive productivity impacts from immigration:

Immigrants — especially skilled ones — can contribute to productivity through innovation, entrepreneurship and technological change. The human, financial, social and network capital which immigrants bring with them can augment existing labour and capital resources, and spill over to the broader community, contributing to increased aggregate productivity.

International evidence suggests that skilled immigrants have a small positive impact on a range of drivers that affect productivity growth.

But also negative impacts:

The impacts of immigration on the natural and built environment arise from the major contribution that immigration makes to population growth… both permanent and temporary immigrants are more likely to gravitate to major cities compared to the resident population. This adds a geographic dimension to the impacts on the environment.

An increase in population from any source places pressure on environmental services and existing public infrastructure. The impact of immigration can therefore be perceived as adding to the overall pressure…

Congestion is a major concern to many residents in some Australian cities — not least Sydney. Population growth in urban areas adds to congestion… the costs of congestion are real and population growth does add to congestion for users of existing infrastructure assets. For example, the Bureau of Transport and Regional Economics (2007) estimated the avoidable costs of congestion in the Australian capital cities were $9.4 billion in 2005 ($3.5 billion in private time costs, $3.6 billion in business time costs, $1.2 billion in extra vehicle operating costs and $1.1 billion in extra air pollution costs). On the basis of historical immigration numbers, which are lower than recent arrivals, these costs were projected to rise to $20.4 billion by 2020. The estimates of the rise in costs are $3.5 to $7.8 billion for Sydney, $3.0 to $6.1 billion for Melbourne and $0.9 to $2.1 billion for Perth, which are the cities most likely to be affected by immigration…

These costs do not include the mental health costs associated with congestion, including road rage, and stress from loss of time at work and with family…

There are also impacts on the price of land and housing particularly in metropolitan areas…

Australia has considerable natural resources in regard to mineral wealth. As non-renewable resources deliver rents for those who extract them and for governments in the form of resource royalties and taxes on company profits, a larger population means those rents that are captured by government are shared across a larger number of people.

An increasing proportion of Australians also believe that immigration levels are too high:

…there has been a mild downward trend in measures of social cohesion since 2007, mainly due to a decline in feelings of acceptance. From the perspective of residents, recent surveys have found that 35 per cent of the community consider that immigration levels are too high.

The fiscal impacts of immigration are likely to be “marginally positive”, with temporary skilled migrants delivering the best Budget outcome:

The Commission’s preliminary modelling undertaken for this inquiry finds that a larger population, with the associated changes in its demographic structure and the level and composition of economic activity, will have fiscal implications for Australian governments. However, as government revenues and expenses overall are projected to increase in line with GDP, the net fiscal impact of immigration is projected to be marginally positive.

Skilled migration targeted at young workers improves the demographic profile and would boost GDP per capita through to 2060:

Without net migration, real GDP per capita is projected to be around 42 per cent higher in 2060 compared to 2014 (figure 4, first bar) based on natural increases in the population and the continuation of longer-term industry productivity trends. The population in 2060 is projected to be 27 million under this scenario…

As immigrants entering Australia have a substantially younger age profile than the incumbent population, demographic projections indicate that continuing net migration at long-term average levels to 2060 will reduce the effects of population ageing. This provides a demographic dividend to Australia through higher labour force participation, with real GDP per person projected to be around 50 per cent higher in 2060 than in 2014 (figure 4, second bar). In 2060, this translates into an increase in real GDP per person of some 5 per cent relative to the zero net migration scenario. The population in 2060 is projected to be 40 million under this scenario…

The Commission’s modelling illustrates that choosing immigrants with high rates of workforce engagement and employment in higher skilled occupations in line with the occupational profile of the Australian workforce is likely to lead to an increase in per capita GDP, provided that the rate of net migration remains broadly stable. An immigration system geared to attracting migrants with these characteristics is therefore more likely to deliver outcomes that are in the interests of the Australian community.

However, there are costs in the long-term from such immigration:

In the long term, larger cohorts of immigrants will themselves add to the proportion of the population aged 65 and over as they age and, thus, reduce the impact of further immigration intakes on the age structure of the population (PC 2013a)… immigration cannot realistically prevent Australia transitioning to an older
population.

In its 2005 research paper Economic Implications of an Ageing Australia, the Commission found that ‘larger intakes can start to make appreciable differences to ageing, but only at the cost of unsustainably large population growth’ (PC 2005b, p. XVII). To illustrate this, the Commission projected that to retain the age dependency ratio at 2005 levels until 2045 would require an annual migrant intake of 3.1 per cent of the population — growing the Australian population to 85 million and the annual net migrant intake to 2.5 million by 2045.

I will note that the PC has also not given any consideration to negative productivity impacts caused by congestion in its latest modelling of the economy-wide impacts. Nor has it considered the distribution of these GDP gains on the existing population, as it did in its 2006 study.

Importantly, the PC does not support auctioning visas – as proposed by several senate cross-benchers – which it believes could lead to detrimental outcomes long-term:

By removing the qualitative criteria attached to the current system, it could attract immigrants who are willing and able to pay, but who do not have the attributes that underpin successful integration. In particular, such a system could shift the balance of the migrant intake towards older and wealthier immigrants who are less likely to work and contribute to Australia’s economy…

Preliminary modelling undertaken by the Commission suggests that under a price-based system, a charge in the order of $35 000 to $45 000 per person would maintain the annual intake of permanent immigrants at around 190 000. The results also suggest that such a system would reduce the number of skilled immigrants…

Any approach that leads to a shift away from the skill streams and/or to older migrants would be inherently risky from a fiscal perspective.

The PC also recommends better targeting of migration towards “genuine labour shortages”:

The Consolidated Sponsored Occupations List (CSOL) and the Skilled Occupation List (SOL) apply to primary applicants under the employer-nominated and the independent points-tested skilled streams respectively…

There is no requirement of labour shortage for an occupation to be on the CSOL. In contrast, the SOL is a list of (currently 191) occupations that are deemed by the Australian Government to be in shortage, based on labour market analysis and a public consultation process.

There are a number of issues with these lists. Whether an occupation is classified as ‘skilled’ is arbitrary. Further, government’s assessments of whether an occupation is currently in shortage are, at best, informed speculation about the state of the labour market today and in the future. The lack of transparency around the compilation of these lists creates scope for vested interests to unduly influence the outcomes.

The PC has also questioned the merits of the business and investment visa program:

Most immigrants through this stream own or operate established businesses in retail or hospitality with fewer than five employees… The BIIP has recently been reviewed by the Joint Standing Committee on Migration. It found that limited data exist to assess the impacts of the program, and that it is probably not meeting objectives related to increasing innovation or linking with international markets. The Commission agrees with this assessment. Data limitations make it difficult to assess whether the BIIP generates genuine additional economic activity, or simply displaces other potential business owners. It is also not possible to compare the impacts of BIIP immigrants relative to other immigrants…

And calls for the abolition of the Significant Investor Visa and the Premium Investor Visa programs:

Because there are no English-language requirements for the Significant Investor Visa and Premium Investor Visa, and no upper age limits, it is likely that these immigrants will generate less favourable social impacts than other immigrants. Further, compared to other visa streams, investor visas are prone to misuse and fraud. Concerns about visa fraud played a part in the Canadian Government’s decision in 2014 to scrap its investor visa scheme.

Overall, the case for retaining the Significant Investor Visa and Premium Investor Visa streams is weak and the Government should abolish these visas.

Overall, not a bad report. Although it does not pay enough attention to the negative impacts of a significantly larger population on living standards, namely via: increased congestion, higher housing costs (and less space), higher infrastructure costs, lower environmental amenity, and dilution of Australia’s fixed mineral endowment.

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