There is no wages case for a permanent cut to immigration
RBA governor Philip Lowe makes a reasonable point about the short-term suppression of wages in some industries. But long-run evidence shows migration lifts demand for workers. Originally published in the Australian Financial Review.
Australia’s closed borders mean net immigration has gone into reverse, with more people leaving than arriving on our shores. The increasingly common view, reinforced by comments from Reserve Bank governor Philip Lowe yesterday, is that the absence of new immigrant workers, and the tighter labour market this is helping engender, will be good in the short term for putting upward pressure on domestic wages.
The governor is making a reasonable point. But this is very far from evidence that Australia should be permanently cutting back on immigration, as some commentators want to argue. Nor do a range of other arguments that one increasingly hears these days add up to a convincing case for less immigration.
There is no shortage of studies by economists looking at the impact of immigration on local wages. The overall conclusion from international studies as well as the more limited Australian evidence is that the ultimate impact on local wages by influencing supply and demand in the labour market is about zero.
How can this be?
In the short term, there can be a suppressing effect on wages as immigrants compete with locals for jobs, especially when the economy is depressed. Coming out of the pandemic recession, it might therefore make sense to have a bit less immigration temporarily.
But over time things adjust. Immigrants are consumers too. And with both more workers and consumers at hand, businesses invest and expand – lifting the demand for workers.
Because immigrants tend to bring a different skill mix to local workers, they also act more as complements, rather than substitutes. Immigration also makes the communication skills and local knowledge of native workers more valuable – allowing them to shift into new, potentially managerial, roles.
If that were the end of the story, there would still be little benefit to locals from immigration. However, there is more going on.
Immigration is also good for productivity. Studies, and common sense, point to immigrants bringing in new ideas, innovative and entrepreneurial dynamism, and social networks that facilitate international trade and investment. Immigration also means greater economies of scale, specialisation, informal learning, and diversity of thinking. Especially beneficial in high skill industries.
Exactly how big the productivity gains are is difficult to say. But they are there. And, like it or not, productivity is the only path to sustained real wages growth.
If the productivity benefits are too intangible though, immigration has other more obvious benefits.
Bringing in more young workers of course helps to slow population ageing. It also means a net boon for the government budget – money that can be used to cut taxes, expand public services, or lower the post-pandemic national debt.
What about broader concerns such as high house prices, inadequate public services, and environmental sustainability? These are real pressure points. But the critics are overstating their case.
The right answer is to start with fixing obvious policy deficiencies, rather than blaming immigration – adopting less restrictive urban planning rules, investing more and smarter in public infrastructure and services, and introducing climate policies actually in line with the scale of the transition challenge.
It is also worth remembering an alternative perspective – immigration raises the value of assets owned by Australians, provides fiscal resources and care workers to support key services, and, while adding to Australia’s environmental footprint, it moves this from other parts of the world and brings it to a country with far more potential than most to thrive in a net zero carbon future thanks to our abundant land, wind, and sunshine.
In any case, when taking a broader view of Australian living standards, it does not make sense to only focus on the negatives.
A bigger economy, with richer international connections, helps pay for the national defence, deepen our mutual affinities with other nations, and bolster Australia’s security in an increasingly uncertain world.
Multiculturalism makes for a more diverse, vibrant, and interesting society. And there are strong moral reasons to give others the freedom to move across countries – to reunite with family, escape persecution, or just make a better life.
What does a balanced assessment look like then? There is no perfect answer. But why not just ask the Australian people? Opinion polls by both the Lowy Institute and Scanlon Institute show that most Australians think that immigration makes the nation stronger overall and the slight majority think it should remain the same or be higher still.
There is undoubtedly room to improve upon the specifics of Australian immigration policy. But the case for permanently cutting back our immigration intake is not there.