Immigration is no “golden goose” for economy

By Leith van Onselen

Paul Kerin, an adjunct professor at Adelaide University’s School of Economics, has penned a ridiculous article in The Australian arguing that “immigration is the golden goose our economy needs”. Let’s dissect his arguments:

Immigration over recent decades has made today’s Australians much better off — and further ongoing immigration is critically important if we are to maintain and improve our future living standards.

Why the false binary? One Nation aside, nobody has argued to end immigration, just to lower it closer to the sensible and sustainable levels that existed prior to when John Howard dramatically increased the intake in the early-2000s:

Back to Kerin:

As the Productivity Commission noted recently, the impact of immigration on house prices has been exacerbated by state, territory and local governments’ failures to implement sound urban planning and zoning policies. These failures have constrained growth in land supply and land use intensity. Easing these constraints would grow the size of the pie we can all enjoy. Cutting immigration wouldn’t. It may reduce house prices, but would boost neither land supply not land use intensity; therefore, it would simply transfer wealth from sellers to buyers. In fact, it would actually shrink our pie.

This is nonsensical. Under Australia’s current mass immigration program, Australia will need to add a Canberra-worth of infrastructure and housing every year simply to keep up with population growth, with Sydney’s and Melbourne’s populations projected to grow by a whopping 87,000 and 97,000 people per year respectively for decades to come:

You don’t have to be a rocket scientist to see that it is virtually impossible for housing and infrastructure to keep up with such strong population growth, even with the world’s best planning system.

Back to Kerin:

Unfortunately, those who favour immigration cuts have sometimes used fears that immigrants might steal our jobs or depress wages as Trojan horses to advocate for a position they help anyway…

Nor does the evidence support fears that immigrants steal locals’ jobs and reduce wages. Consistent with the findings of international studies, the [Productivity] Commission concluded that immigration has negligible effects on the wages, employment and workforce participation of local workers…

The evidence indicates that immigration raises GDP per person, even in the short run. The Productivity Commission has estimated that a 0.6 per cent NOM rate (Australia’s long-run average) would increase GDP per person by 7 per cent ($7000) in the long run. That’s not to be sneezed at, but some advocates of immigration cuts have snorted.

A higher NOM rate would boost GDP per person further. The commission estimated that a 1 per cent NOM rate would raise GDP per person by 10 per cent in the long-run.

The Productivity Commission’s (PC) various modelling over the years has shown that the benefits of immigration flow to the migrants themselves and the owners of capital, whereas incumbent residents are left worse-off.

The PC’s latest Migrant Intake Australia report, released in September 2016, compared the impact on real GDP per capita from:

• Historical rates of immigration, whereby population hits 40 million by 2060; and
• Zero net overseas migration (NOM), whereby population stabilises at 27 million by 2060.

The PC’s modelling did find that GDP per capita would be 7% ($7,000) higher by 2060 under current immigration settings. However, all the gains are transitory and come from a temporary lift in the employment-to-population ratio.

More importantly for incumbent workers, labour productivity and real wages are projected to decrease under current immigration settings versus zero net overseas migration (NOM):

Compared to the business-as-usual case, labour productivity is projected to be higher under the hypothetical zero NOM case — by around 2 per cent by 2060 (figure 10.5, panel b). The higher labour productivity is reflected in higher real wage receipts by the workforce in the zero NOM case.

Therefore, according to the PC’s latest modelling, high immigration improves per capita GDP by 2060 by boosting the proportion of workers in the economy, but this comes at the expense of lower labour productivity and lower real wages.

Moreover, beyond the forecast period (2060), the migrants will age and retire, thus dragging down future growth – classic ‘ponzi demography’.

In 2006, the PC also 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 “the incomes of existing resident workers grow more slowly than would otherwise be the case”. Here’s the money quote:

The increase in labour supply causes the labour / capita ratio to rise and the terms of trade to fall. This generates a negative deviation in the average real wage. By 2025 the deviation in the real wage is –1.7 per cent…

Broadly, incumbent workers lose from the policy, while incumbent capital owners gain. At a 5 per cent discount rate, the net present value of per capita incumbent wage income losses over the period 2005 – 2025 is $1,775. The net present value of per capita incumbent capital income gains is $1,953 per capita…

Owners of capital in the sectors experiencing the largest output gains will, in general, experience the largest gains in capital income. Also, the distribution of capital income is quite concentrated: the capital owned by the wealthiest 10 per cent of the Australian population represents approximately 45 per cent of all household net wealth…

The PC’s latest report also noted that there are many costs associated with running a high immigration program that are not captured in the modelling but are borne by the incumbent population and unambiguously lowers their welfare:

High rates of immigration put upward pressure on land and housing prices in Australia’s largest cities. Upward pressures are exacerbated by the persistent failure of successive state, territory and local governments to implement sound urban planning and zoning policies…

Urban population growth puts pressure on many environment-related resources and services, such as clean water, air and waste disposal. Managing these pressures requires additional investment, which increases the unit cost of relevant services, such as water supply and waste management. These higher costs are shared by all utility users…

Immigration, as a major source of population growth in Australia, contributes to congestion in the major cities, raising the importance of sound planning and infrastructure investment …governments have not demonstrated a high degree of competence in infrastructure planning and investment. Funding will inevitably be borne by the Australian community either through user-pays fees or general taxation.

Hence, running a high immigration program becomes increasingly costly for existing residents. A classic example is infrastructure, where the PC in 2013 warned that total private and public investment requirements over the next 50 years are estimated to be more than 5 times the cumulative investment made over the last half century! Good luck with achieving that level of investment.

Kerin also fails to mention that Australia pays its way in the world primarily by selling-off our fixed mineral endowment. Importing more people necessarily means that Australia’s minerals base must be spread more thinly across a larger population, which necessarily makes Australians poorer (other things equal). Again, the PC has made similar observations:

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 more people.

To illustrate, consider the below chart, which shows the breakdown of Australia’s exports, most of which come from Australia’s regions (i.e. commodities and agriculture):

Increasing the number of people via mass immigration does not materially boost exports but does increase imports (think flat screen TVs, imported cars, etc). Moreover, it requires Australia to sell-off our fixed mineral assets quicker to maintain a constant standard of living (other things equal).

Put another way, Australia would ship roughly the same amount of commodities and agriculture exports regardless of how many people are coming in as all the productive capacity has been set up and it doesn’t require more labour. So basically high immigration is wrecking the trade balance via more people coming in each year (mostly to Sydney and Melbourne) because of all the additional imports.

Anyone disputing this view only needs to look at the below charts showing the stalling of export growth amid the sharply deteriorating trade balances in NSW and VIC, which of course have been the primary destinations of migrants:

And, not surprisingly, this immigration has helped drive gigantic trade deficits in Australia’s two biggest states:

Meanwhile, the infrastructure deficits in both Sydney and Melbourne, along with congestion, housing affordability and overall liveability worsens each year as more and more people flood into each city and push against infrastructure bottlenecks amid woeful planning.

In short, growing bigger cities via immigration means a less competitive Australian economy and a wider current account – hardly a desirable situation.

Back to Kerin:

Immigrants also improve labour market flexibility. As they haven’t established roots, they’re more willing to move to where jobs are. As immigrants have different skill sets — and on average have significantly higher skill levels — they complement local workers, thereby raising their productivity and hence demand for them.

Again, Kerin is being loose with the truth. The PC’s latest report clearly showed that migrants are far more likely to settle in major urban areas than people born in Australia. Thus, it’s hard to argue that immigrants ‘flexible’ when they primarily come to Sydney and Melbourne only.

As shown in the below PC chart, 86% of immigrants lived in the major cities of Australia in 2011, whereas only 65% of the Australian-born population did:

Moreover, according to the PC, “of the immigrants living in capital cities in 2011, most lived in either Sydney or Melbourne, with 1.5 million residents of Sydney and 1.3 million residents of Melbourne born overseas”.

Second, the claim that immigrants “on average have significantly higher skill levels” is patently false.

The below chart does show that so-called “skilled” migrants made up around 129,000 of Australia’s 200,000 strong permanent migrant intake in 2016:

However, the PC’s latest report explicitly stated that around half of the skilled steam includes the family members of skilled migrants, with around 70% of Australia’s total permanent migrant intake not actually ‘skilled’:

…within the skill stream, about half of the visas granted were for ‘secondary applicants’ — partners (who may or may not be skilled) and dependent children… Therefore, while the skill stream has increased relative to the family stream, family immigrants from the skill and family stream still make up about 70 per cent of the Migration Programme (figure 2.8)…

Primary applicants tend to have a better fiscal outcome than secondary applicants — the current system does not consider the age or skills of secondary applicants as part of the criteria for granting permanent skill visas…

The PC also showed that while primary skilled migrants have slightly better labour market outcomes than the Australian born population in terms of median incomes, labour force participation, and unemployment rates, secondary skilled visas, and indeed all other forms of migrants, have much worse outcomes:

Another point that needs to be recognised is that the most popular categories of skilled migrants – accountants, engineers and IT professionals:

Are also the categories with the biggest surplus of workers:

Thus, the skilled migration system is destroying career prospects for local graduates in these (and other) areas.

Back to Kerin:

Advocates of immigration cuts sometimes cite long-term absolute numbers that sound big to scare us. For example, our population might well grow to 40 million in 40 years’ time. But you only need annual population growth of 1.3 per cent to get there. Such growth is eminently manageable; indeed, it will benefit us greatly.

Growing to 40 million mid-century sounds scary because it is. Such rapid population growth would see Sydney and Melbourne grow to 8 million people mid-century, creating infrastructure and housing havoc, crush-loading living standards.

Don’t take my word for it. Here’s former Treasury Secretary, Ken Henry:

“The Australian population is growing by something like 400,000 a year. Think of it: a new Canberra every year between now and the end of the century. Or, put it this way, every five years building a brand new city from scratch in Australia for 2 million people.

Or put it this way: building a whole new city the size of Melbourne every decade between now and the end of the century…

My observation in Sydney and Melbourne today, is that people already think, with very good reason, that the ratio of population to infrastructure is too high. But we have set ourselves on a journey that implies an increase in that ratio. An increase in that ratio that is associated with more congestion, longer commute times to work, increasing problems with respect to housing affordability”…

And here’s Journalist, political commentator and author, George Megalogenis:

“If most of the population growth that’s already in train for the next 10, 20, 30 years ends up in Sydney and Melbourne, we’ve got a problem…

You look at Sydney’s topography and it can’t fit another million people easily. And you look at Melbourne’s, and it will fit in another million but at the expense of livability because they just keep pushing the boundary out…

The default setting to me could potentially be catastrophic for the country over the next 20 years if people just end up in Melbourne and Sydney…”

Quite frankly you’d have to be delusional not to see the problems that come with growing Australia’s population by one million people every 2.5 years, as projected under current immigration settings.

Back to Kerin:

In any case, the 2015 Intergenerational Report contained much more scary numbers. It estimated that our dependency ratio (ratio of working age population to population aged 65-plus) will fall from 4.5 per cent to 2.7 over the next 40 years (even with 1.3 per cent average annual population growth); this will put an enormous burden on workers.

As immigrants are much younger than locals, they help to ease this burden by limiting the decline in the dependency ratio. This “demographic dividend” of immigration (as the commission calls it) is enormously valuable.

We’d be mad to throw away the substantial benefits that immigration provides.

Has Kerin been living under a rock? For more than a decade, the PC has debunked the myth that immigration can overcome population ageing:

• PC (2005): “Despite popular thinking to the contrary, immigration policy is also not a feasible countermeasure [to an ageing population]. It affects population numbers more than the age structure”.
• PC (2010): “Realistic changes in migration levels also make little difference to the age structure of the population in the future, with any effect being temporary“…
• PC (2011): “…substantial increases in the level of net overseas migration would have only modest effects on population ageing and the impacts would be temporary, since immigrants themselves age… It follows that, rather than seeking to mitigate the ageing of the population, policy should seek to influence the potential economic and other impacts”…
• PC (2016): “[Immigration] delays rather than eliminates population ageing. In the long term, underlying trends in life expectancy mean that permanent immigrants (as they age) will themselves add to the proportion of the population aged 65 and over”.

In short, trying to overcome an ageing population through higher immigration is a Ponzi scheme. It requires ever more immigration, with the associated negative impacts on economic and social infrastructure, congestion, housing affordability, and the environment.

To summarise, Kerin needs to recognise that it is the living standards of the incumbent Australian population that is the threshold issue in the immigration debate. Living standards in the major cities are unambiguously being eroded by mass immigration via negative externalities that are not captured in either the national economic accounts nor the economic modelling, such as increasing congestion, falling housing affordability, and environmental degradation.

If Kerin was my economics student I would give him a ‘D’ for only considering the benefits of immigration in a superficial way and completely ignoring the costs.

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