Last week’s speech by RBA Assistant Governor, Guy Debelle, admitted that Australia’s turbo-charged immigration program has held down Australian wages growth [my emphasis]:
The Bank’s forecast is that, as the labour market continues to tighten, wages growth should gradually pick up, and along with that we would expect market services inflation to also increase. However, as we have noted on a number of occasions, there is considerable uncertainty about the extent of unutilised capacity in the labour market and how quickly a reduction in spare capacity would translate into higher wage and price inflation. It is possible that the unemployment rate could fall faster than expected and wages growth could pick up more strongly as a result. Alternatively, it is possible that the flow of new workers into the labour force could continue to be stronger than usual, so that unemployment declines more slowly than we expect and wage pressures could take longer to emerge.
Clearly, the primary driver of “the flow of new workers into the labour force”, which has caused unemployment to “decline more slowly” and caused “wage pressures… [to] take longer to emerge” is immigration. That’s what happens when 200,000-plus migrants are added to the economy every year, most with work rights, thus ensuring labour supply is continually expanded.
Treasury’s recent propaganda report also admitted that most new jobs created in Australia have gone to migrants:
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Recent migrants accounted for two-thirds (64.5 per cent) of the approximately 850,000 net jobs created in the past five years. For full-time employment, the impact is even more pronounced, with recent migrants accounting for 72.4 per cent of new jobs created.
Yesterday, CBA senior economist, Gareth Aird, released a new report confirming that Australia’s mass immigration ‘Big Australia’ program is contributing to low wages growth:
There is a close inverse relationship between underutilisation and wages growth (chart 5). As underutilisation rises (falls) wages growth falls (rises). The fitted line on chart 5 implies that for an underutilisation rate of 14%, wages growth, as measured by the WPI, should be around 2½%pa. In other words, most, but not all, of the current weakness in wages growth can be explained by a high level of labour market underutilisation.
Slack in the labour market is elevated in Australia because the supply of labour has exceeded the demand for workers. Policy has played a role. The decision to run a very high immigration program by OECD standards (charts 6 and 7) has augmented the supply of labour and pushed up the participation rate beyond what would have naturally occurred. That intensifies the competition for existing jobs while of course also adding to the demand for labour. So there is both a supply and demand impact.
The recent evidence suggests that running a high immigration program when there is plenty of slack in the labour market means that “skill shortages” are not able to manifest themselves as quickly as they might have otherwise because employees are able to hire from abroad in sizeable quantities. The relatively high intake of skilled workers looks to be a pre-emptive strike on the expectation that there will be skills shortages in the future. If there was widespread skills shortages then wages growth would be higher than its current rate of 2.1%pa.
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Various Productivity Commission modelling has also shown that immigration lowers the wages of incumbent workers (see here). These results were confirmed recently by modelling from Victoria University (see here).
International analysis from the Bank of England and Cambridge University also shows that immigration reduces wages growth (see here).
The economics is simple: continually increasing labour supply via immigration necessarily reduces workers’ bargaining power and ergo wages growth.
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Again I ask: why isn’t Australia’s union movement up in arms at Australia’s mass immigration ‘Big Australia’ policy, which is not only eroding workers’ conditions and pay, but also pushing-up their cost of living via housing as well.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
