Grattan rolls: “Australia now running a low-skilled migrant visa system”

After spending years defending Australia’s mass immigration system, and claiming that migrants “push average wages up a little bit”, John Daley from the Grattan Institute has finally capitulated.

In a discussion paper delivered to the RBA’s 2019 conference last week, Daley presented evidence showing that “Australia is now running a predominantly low-skill migration system”:

What we do know is that when the Fair Work Ombudsman (FWO) conducted a review of 20 7-Eleven stores, it found that 60 per cent appeared to be underpaying staff, and record-keeping was inconsistent, incomplete or misleading in 95 per cent of stores.4 As Allan Fels, appointed by 7-Eleven to investigate found, ‘My strong impression is that the only way a franchisee can make a go of it in most cases is by underpaying workers.’

The FWO investigation of horticulture and viticulture businesses along the Harvest Trail found serious underpayment at 130 of the 836 businesses investigated.6 And a series of other FWO investigations suggest that underpaying of low-skill migrant workers is widespread.

Peter Mares’ book, Not quite Australian,8 recounts many stories, particularly of working holiday makers who earn the right to spend a second year in Australia provided that they work for at least three months in a regional area in a primary industry. The scheme gives employers enormous bargaining power, and as a result, Mares claims, many migrants work for much less than minimum wages.

Once underpayment takes hold in a material minority of cases in a particular labour market, it can change how other employers behave. If a dishonest employer underpays, then they can offer prices that undercut an honest employer who does pay minimum wages. So if in a particular industry a significant number of employers employ and underpay many migrants, then they pressure all the other employers in the industry to do the same – and to underpay non-migrants as well…

If a material number of people are being paid less than the minimum wage, there’s a good chance that they’re not going to show up in the data being analysed. Wage growth in low-end jobs may be even lower than the statistics suggest, because wages in these roles are systemically under-reported.

Of course, these unobserved wages may affect the wages that can be observed in the official economy. An employer is under less pressure to pay more than the minimum wage, because earning the minimum wage is a lot more attractive than alternative employment for many of the potential employees… a little over 20 per cent of the workforce are paid at minimum wages,12 suggesting that ‘low skill’ employment at or below minimum wages could be big enough to matter…

As shown below, the shape of Australia’s migration system14 has shifted significantly over the past six years, towards younger, less-skilled migrants…

Many believe that Australian migration is highly skilled and has nothing to do with the underpayment of minimum wages. That might have been true in the past, but it’s less true now… the number of temporary migrants (other than New Zealanders) in Australia has almost doubled since 2007 to almost 1 million (Figure 1).

New migrants to Australia are disproportionately 18-40 years old… Consequently, temporary migrants are about 10 per cent of the younger-aged workforce…

Of those temporary visa holders who do work, most (59 per cent) are in low-skill occupations. Of those with student and working holiday visas who work, even more (about 75 per cent) are in low-skill occupations…

If we look at the flow of migrants, the story is even starker. Net overseas migration for 2017-18 was 237,000 people. Of these, 105,000 (of the net migration) were students, 27,000 were working holiday makers, and 58,000 were visitors…

About three quarters of net migrants to Australia today are not high-skill, at least when they arrive… The stock of temporary students remains relatively low-skill…

As the Productivity Commission noted, where migration does displace existing populations, it tends to affect people with low skills and youth most. That seems to be happening in Australia. And because international students and backpackers are primarily looking for part-time work, they may affect under-employment more than unemployment…

Low-skill migrants might also put downward pressure on wages (if accurately measured). The measured wages of those aged 20 to 34 have not risen as fast as the wages of older workers for some time (Figure 7)…

Summing up

Australia is now running a predominantly low-skill migration system. People from this system form a material proportion of the younger workforce. Because of visa conditions, many of these migrants have incentives to work for less than minimum wages, and there is anecdotal evidence that many do. It is impossible for data sources on the Australian labour force to pick up all of this phenomenon. It is possible that the scale of this influx to the labour market is depressing wages and increasing under-employment specifically for low-skill younger workers.

While the John Daley’s capitulation around temporary migration is welcome, one can only wonder why he has neglected to mention the abundant evidence that skilled visas (both temporary and permanent) are also depressing wages.

First, while Australia’s is purported to run a ‘skilled’ permanent migration program, the Productivity Commission’s (PC) 2016 Migrant Intake into Australia 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)…

Second, the actual pay levels for skilled migrants is pathetically low. Therefore, they are very likely undercutting local workers and putting downward pressure on overall wages.

According to the ABS’ most recent Personal Income of Migrants survey, the median employee income of migrants under the skilled stream was just $55,443 in 2013-14.

Separate ABS data also revealed that Temporary Work (Skilled) visa holders earned a median income of only $59,436 in 2016.

And across all skilled visa categories, the median full-time salary 18 months after being granted the visa was $72,000 in 2016, which was below the population average of $72,900 (which comprises both skilled and unskilled workers), according to the Department of Home Affairs.

The fact of the matter is that allowing the mass importation of migrant workers circumvents the ordinary functioning of Australia’s labour market by enabling employers to source cheap foreign workers in lieu of raising wages, as well as abrogating the need for training.

Tightening up access to migrant workers would, therefore, place upward pressure on wage growth. This would also be beneficial for the Australian economy, given:

1. the least productive businesses would lose people, shrink and go bust, transferring workers, land and capital to more productive businesses, raising average productivity across the economy; and
2. all businesses, observing higher wages, would invest more in labour saving technologies, training and restructuring to raise productivity.

This is how Australia’s labour “market” is supposed to work.