IMMIGRATION: TOO MUCH OF A GOOD THING?

Like most Australians, I accept that immigration has delivered many good things to Australia economic, social and cultural. The Howard Government’s shift in the composition of immigration from family reunion to a person’s ability to fill gaps in the labour market has also been a boon for the economy.

But the total number of migrants has nearly doubled since 1996/7. They are now running at levels not seen since the old glory days of immigration. Is this going too far?

Let me raise a few questions for discussion.

1. How is increased immigration affecting the standard of public infrastructure? The acceleration in population growth is translating into an increase in the growth rate of real GDP overall. This is increasing the need for capital widening investment on public infrastructure as a % of GDP (investment rates are a function of the rate of growth). But is the increased need being fully met? (I have argued that it is not and partly blamed our silly low public debt fetish). Is the community right to be concerned about our dilapidated and inadequate infrastructure?

2. To the extent that investment need is being met, is it adding more to Australia’s investment levels than to our saving potential and hence to our trend external current account deficit (the saving-investment imbalance)? Should we worry about that?

3. Is immigration making excessive demands on our scarce water resources and posing a serious risk to the urban environment of cities like Sydney?

4. Are we approaching the limit of our capacity as a nation to absorb ethnic diversity without creating social tensions of the Hansonite kind? (N. B. I am a person of non-Anglo Celtic background myself, who migrated to Australia in 1950).

5. Does ethnic diversity create a more hostile attitude to traditional welfare and egalitarian policies? I note here the debate between Leigh and Norton. It is interesting to see how attitudes to welfare are changing in Scandinavian countries as they become more ethnically diverse.

6. Is our immigration policy (especially the more liberal approach to guest workers, including unskilled ones, and students) having the effect of appreciably increasing the elasticity of labour supply and if so is this holding down wage rates of many low to middle income wage earners and partly driving the ever-rising share of profits relative to GDP? Should we worry about that?

7. Is the pick up in immigration in good part responsible for the rise in house prices and is it squeezing many low to middle income Australians out of home ownership or forcing them out to outer areas where jobs are scarce?

8. Is Australia, as one of the richest countries in the world, morally entitled to entice scarce skilled workers and professionals from developing and emerging countries?

I have not done any serious research in this field since the mid 1980’s, so I am not in a position to answer any of the 8 questions dogmatically (although I am pretty sure about two or three of them) . I merely want to start a wide-ranging debate on them.

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25 Responses to IMMIGRATION: TOO MUCH OF A GOOD THING?

  1. TimT says:

    I don’t believe it! I don’t believe any of what you are saying! Immigration can’t have gone up, because John Howard’s Government is RACIST! Shut up! I don’t want to hear it!

  2. JC says:

    Fred

    Immigration is ok only if the capital/labor ratio is maintained at the very minimum. If the ratio is falling than it not ok, in fact it would be diluting economic well being.

    The US is a perfect example – A first world nation with about 11 million unskilled illegal workers adversely affecting the wage structure of the less skilled.

    The US capital structure has been adversely affected and distorted by an enormous influx of unskilled illegals.

    We need to watch out for this. We need to make sure our capital accumulation is growing at a rate that is catering for immigration.

  3. JC says:

    1. How is increased immigration affecting the standard of public infrastructure?

    Impossible to judge as a raw factor. It would be too hard.
    ———————————————————————

    2. To the extent that investment need is being met, is it adding more to Australia’s investment levels than to our saving potential and hence to our trend external current account deficit (the saving-investment imbalance)? Should we worry about that?

    See above

    ———————————————————————

    3. Is immigration making excessive demands on our scarce water resources and posing a serious risk to the urban environment of cities like Sydney?

    No. because scarcity is caused by bad policy outcome when water is a public good. Always has been and awlays will be. If water was totally privatized and capacity was allowed to expand we would not have a problem
    ———————————————————————-

    4. Are we approaching the limit of our capacity as a nation to absorb ethnic diversity without creating social tensions of the Hansonite kind? (N. B. I am a person of non-Anglo Celtic background myself, who migrated to Australia in 1950).

    This is something to watch out for. OZ dodged a bullet with the emornous influx of southern Euro migratns of my parents generation. However a lot of those problems were mitigated by the second generations having assimilated quite well. Almost 80% inter marriage rates.

    ——————————————————————–

    5. Does ethnic diversity create a more hostile attitude to traditional welfare and egalitarian policies?

    Yes, it does promote huge problems. Soon had a good idea that immigrants ought to pay a fee on entry payable over some years. US exmaple is that people cannot claim pension entitlements unless they have worked for 10 years.

    ——————————————————————–

    6. Is our immigration policy (especially the more liberal approach to guest workers, including unskilled ones, and students) having the effect of appreciably increasing the elasticity of labour supply and if so is this holding down wage rates of many low to middle income wage earners and partly driving the ever-rising share of profits relative to GDP? Should we worry about that?

    See above.

    ——————————————————————–

    7. Is the pick up in immigration in good part responsible for the rise in house prices and is it squeezing many low to middle income Australians out of home ownership or forcing them out to outer areas where jobs are scarce?

    Well yes, some of it is. But it should be noted that Oz population expansion is really not that great as the natives are having less kids. However there is a problem. If the state governments continue restricting land availability and nimbies prevent height restrcitions the demand curve will have to shift.

    ——————————————————————

    8. Is Australia, as one of the richest countries in the world, morally entitled to entice scarce skilled workers and professionals from developing and emerging countries?

    morals don’t come into it.

    ——————————————————————

  4. cam says:

    Fred: On 3 IIRC only about 8% of water usage is residential, with 67% of it being agricultural. Of that the three biggest consumers of water are livestock, cotton and rice in that order.

    I dont think 4 is an issue. Each generation of immigrants is treated with suspicion by the current population, but reminiscining and familiarity for them increases over time. There was research in the US, cannot recall where I saw it that, in the 1920s the irish werent particularly liked, but now the Irish immigration waves are looked upon as positive. Same with Italian Americans. Anecdotally I think you can see that with Greek-Australians where they have been dislodged from the ‘suspicious’ category by the Lebanese-Australians who will probably be knocked off by a possible future wave of Iraqi and Iranian Australians it seems.

    On 6, I thought productivity was the biggest determinant of future wage growth?

    On 7, Apparently the majority of immigrants go to Sydney (60% or something IIRC), however rates have been cheap fro a long time and Australian policies skew capital to be tied up in bricks and mortar rather than business activity. Perth is the latest to be hit by house price inflation and if most immigrants go to Sydney, Perth should remain cheap. I think Japan’s deflationary economy, and its 0% interest rates, are more responsible for high house prices than

    On 8, I recall reading a paper that compared Au and Canada in this area as both use point mechanisms. IIRC Au’s immigration was still largely anglo-saxon (UK, NZ, etc) while Canada’s was more Chinese and Indian. If the US economy is anything to go by, Indian immigrants disproportionately go entrepreneurial. So maybe we should be cherry picking Indian tertiary educated immigrants from America and Canada.

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  6. Amused says:

    Well it is good to see that someone is raising this point. TimT you are cute but very unperceptive. It is entirely consistent for a government like the Coalition to be supporters of very high immigration levels, and foster crude national chauvinism at the same time. The politics of why this is useful should be obvious even to you. I don’t believe the ‘government’ as such is racist. That is a nonsense proposition. This government does however foster a kind of defensive national ‘identity’ politics both as political mobilisation, and as ‘shield’ against the very tendencies that Fred Argy article is pointing to.

    The strategy of high levels of immigration as a way of keeping downward pressure on wages is a clear tendency in most of the OECD. There is a further interesting question here, concerning the future of the nation state as we have grown used to it, and the clear preference for short term labour on visas, as an alternative to immigration programs. Recent moves in the US to introduce a massive ‘guest worker’ program is typical of the tendency to ‘offshore’ the costs of labour reproduction to poor countries, whilst enjoying the benfits of ready formed labour power which is infinitely flexible (can be sent back at any time) and has the useful and novel quality (at least since the 19th century) of being without a vote. The US proposals would limit the time a guest worker can work in the US to a maximium of six years. The 457 Visa scheme here is similar, and is being used to deploy semi and unskilled workers across a range of industries. The relatively bold and so far uncontested strategy of deploying deliberately disenfranchised labour power across nation states that are otherwise part of the liberal democratic ‘order’, is disempowering for the native working class, whilst providing much needed money for the families of the ‘guest workers’ and relieving their home countries of social and economic pressures which might otherwise arise. Whether a global movement that can link the interests of both the guest workers and their native counterparts as well as the families of the guest workers in their own contries can be built is an open question, but there is no doubt that the return to disenfranchised labour power in western emocracies will have a number of unforseen consequences, and not all of them will be benign. even for those who on the face of it, benefit from these arrangements.

  7. Robert Braby says:

    Last year’s report of the Productivity Commission, “Economic Impacts of Migration and Population Growth”, contained some interesting results:
    . An increase in skilled migration would reduce productivity (income per hour worked),
    . Any income gains would accrue mostly to the new migrants, but at the expense of the existing population, whose per capita incomes would be reduced,
    . The impact on the environment would be adverse.
    These results were misreported by the media, which relied on the report’s Key Points Summary, which misreported its own findings! Could this reflect the political sensitivity of the topic?
    The report examined a range of economic factors – capital dilution, participation rates, terms of trade, etc. as well as environmental effects, but I believe seriously understated the latter (as economists are prone to do).
    Club Troppo last week featured a discussion of possible reasons for Australia’s declining productivity. Population growth could well be one of these reasons, although the effects are small and gradual and may not show up in short time spans. But if environmental degradation could be quantified and incorporated into the productivity calculations, productivty growth would I am sure be a lot less and possibly negative! I believe Australia’s population reached optimum a long time ago, and that diminishing returns has well set in.

  8. Tom N. says:

    IMMIGRATION vs DOMESTIC REPRODUCTION

    Fred’s third question on water and environmental pressures, and arguably some of his others, are actually about the effects/implications of additions to our overall population level; not about immigration specifically. Yet population and its growth come from two sources: immigration and domestic reproduction. Surely, to the extent that additional population growth is seen as a problem (and I, for one, am inclined to the view that we may already have exceeded our optimum population), it is appropriate to question not just immigration levels but also the massive governmental support provided for domestic reproduction; and to examine the merits of cutting back the latter rather than the former.

    (Of course, Fred’s other questions are relevant to that debate too. However, we should not automatically assume, as many often appear to, that perceived population pressures should be addressed simply by cutting back on immigration).

  9. Tony Healy says:

    Fred, you raise extremely important questions here. I think Australia generally has been backward in understanding the complexity of migration, despite numerous puff pieces to the contrary.

    Regarding water, Cameron’s figures are misleading. They are for overall water use, if correct. But the figures that concern us are urban water usage, and there we find that residential usage comprises 61 percent in the Sydney basin.

    According to a NSW Parliamentary briefing paper, Sydney is already using 106 percent of the annual sustainable yield of its water supplies. By 2021, on current trends, we will be short of water to the extent of 140,000 ML each year.

    On skilled worker migration, that has clearly been used to weaken the bargaining power and wages of local workers, including migrants. It’s also been abused by the large Indian offshoring firms, who are critically dependent on being able to site about a third of their staff locally in Australia, using 457 visas. That’s an abuse of the intent of skilled worker visas.

    Researcher Bob Kinnaird highlighted that the universities and the immigration system expanded the supply of programmers by 80 percent at a time when IT graduates were facing 30 percent unemployment. (Kinnaird, B, The impact of the skilled migration policy on domestic opportunity in information technology, People and Place, Vol 13, No 4, 2005 pp 67

  10. conrad says:

    Actually, its probably worthwhile realizing that even though immigration is at historically high levels, emmigration is is also. Thus, at least in terms of questions to do with infrastructure and population numbers, it is probably more meaningful to use a net figure (alternatively, for other questions, such as movement of skilled workers, it might be meaningful to look at the categories independently)

  11. harry clarke says:

    Most of the issues you raise Fred have been analysed many times over the years.

    1.migrants can free ride of existing infrastructure but make above average contributions to the public purse through relatively low unemployment ooverall and relatively low dependency ratios.

    2. who cares if migrants blow out the current account – historically it has but there are no welfare costs at all.

    3. water is underpriced so population growth creates distortions. The better our environmental policies the more migrants – and the greater the consequent immigration we can have.

    4. politics – I think the pace of entry matters. There are in my view some problems with Muslim migration.

    5. I don’t know.

    6. skilled migration probably has complementary effects in driving up unskilled wages. Unskilled migration is distributionally harmful – it hurts the local unskilled and gives low efficiency gains.

    7. Basic economics says that broadening the market for non-traded assets is welfare improving. Local vendors get bigger gains than local home purchasers lose.

    8. I think this is a serious moral concern.

    On Robert Braby’s point. The PC report on the effects of skilled immigration on the Australian economy is the worst argued piece of baloney I have seen on immigration issues in the 20 years I have worked in the field.

    Environmental effects had no role in this analysis – the immiserising effects of skilled migration are (it is claimed) due to terms-of-trade effects. Migrants import more so we must export more to balance the trade account. Since we have some monopoly power in our export markets this means we must cut export prices which means the TOT deteriorate.

    What a load of bloody crap. Think about this Robert. If skilled migration is bad so is any form of migration. Any form of migration would reduce standards of living of people who already live here oif you believe the PC argument.

    Thus if we wanted to maximise GDP/head we should hand Australia back to the aboriginees.

    The PC generally produce good reseach but this is a total load of crap.

  12. harry clarke says:

    I provide a detailed argument for a skilled migration focus here. My first draft of that that unfortunate PC report is here.

  13. Fred Argy says:

    Thank you all for your helpful comments. I will try to summarise the key themes (if possible) at the end of the debate. But in the meantime one particular comment intrigues me. It is Harry Clarke’s.

    Harry, I know you are an expert in this field and I very much appreciate your intervention – most of which I agree with. But I think we may differ on housing.

    You seem to accept that high and rising immigration is creating housing problems and adding to our rental crisis. But you say that “

  14. harry clarke says:

    Fred, The argument that immigration has favourable effects on housing markets for residents is just equivalent to the case for free trade. People who don’t own houses have to pay more but house owners get more and a bit of math shows the gains to sellers outweigh the losses to consumers.

    But you are right that distributionally the effects might be unfair given that capital gains on owner-occupied housing are untaxed. And taxing these gains – whatever the intrinsic worth of the proposal – is not on. I don’t have any simple second-best policy to address this distributional concern other than just boosting transfers to low income people from general taxation.

    Generally liberal immigration policies hurt labour and increase property incomes. Its an old efficiency/equity argument that in my view suggests we need to maintain moderate rates of migrant intakes and concentrate on migrants with skills.

  15. Fred Argy says:

    Thank you all for your interesting responses. They were relatively few in number but high in quality and thoughtfulness. As I do not detect much more interest being aroused, let me try to summarise a few of the themes that stand out (on which there is close to consensus:

    First, we have not been investing enough in our social and environmental infrastructure to offset the increased demands on it from our ambitious immigration policies (or at least the population boost it is generating). This is threatening productivity per hour worked and wellbeing. –

    Secondly, high skill immigration is on balance positive even for unskilled workers (although free access to skilled migrants may be having a disincentive effect on employers to train their own e.g. computer programmers).

    However immigration of the short-term 457 Visa kind, which includes relatively low-skilled workers, has the potential to further weaken the position of many workers relative to employers (compounding the adverse effects of out-sourcing and IR/welfare reforms). While it might benefit the migrants and their families, it is viewed by many Australians as ‘unfair’ and could create an unpredictable backlash at home.

    Thirdly, everyone accepts it is creating housing problems and adding to our rental crisis. In my view, and as I outlined earlier, the social gains (from capital gains for vendors) do not outweigh the social costs by any means.

    Fourthly, although some doubt that the environment effects (natural and urban) are significant, most are concerned about them.

    Fifth, no one is losing any sleep over potential effects on the external account deficit.

    Sixth, I sense an undercurrent of concern about the extent of cultural diversity we can absorb (the pace of entry).

    Seventh, with one exception, I do not detect much concern about the morality of “plundering”

  16. Robert Braby says:

    Apologies for my tardiness, Fred, but I have been mulling over Harry’s comments.
    The major econometric analysis undertaken by the Productivity Commission was undertaken by a Monash team, and supported by reports from three referees. (Obviously, Harry was not one of them.) An alternative study (Econtech) was also included in the report; it gave similar, but slightly, very slightly, more favourable results.
    One criticism made by the referees was that the Monash study excluded environmental effects – that’s why the report included a qualitative assessment of them.
    Economists often ignore or understate environmental effects, yet these are by far the main effects of population growth. Harry, certainly water is currently underpriced; and trebling the price would be better than bureaucraticly-imposed water restrictions with all their inefficiencies. In a perfect market, that would encourage greater supply. But how? Desalination plants, domestic tanks, etc. involving steeply rising marginal cost curves – a perfect example of diminishing returns – and propelling us well beyond optimum population size? The same could be said of harbour tunnels, City Link projects, high rise buildings (unit cost of which rises sharply with height), etc., etc.
    Conversly, to hand back Australia to the aboriginals, as you say, would take us to the other extreme.
    An interesting book worth reading is Max Neutze’s Economic Policy and the size of cities, in which he pioneered the theory of decentralisation policy based on the concept of an optimum urban population size. He tentatively suggested that the optimum for capital cities was between 200,000 and one million, a controversial but plausible range I believe. Australian cities reached that range in the 1920s, when Australia’s total population was 6 million. As over 60% of Australia’s population live in the major capitals, metropolitan size could be the benchmark on which to base a national policy.
    Fred, I would answer your final paragraph by noting that most of our environmental policies have been terrible; whether it be town planning, traffic planning, decentralisation, greenhouse gasses, cane toads or logging in water catchments. Anyone who argues that we can solve the environmental problems created by population growth has their head in the clouds.
    Harry, you say “if skilled migration is bad, so is any form of migration”. How true. The P.C. report was confined to skilled migration, so would have overstated the benefits of population growth generally.
    You also refer to low (or lower?) unemployment rates for migrants. The figures show that rates for migrants have traditionally been higher than average, and it is only in the last few years that they have come down to average.

  17. JC says:

    Not a silly question here:

    How does anyone know if the price of water is underpriced, or even over priced for that matter. We have no possible way of telling for a product that is treated as public good. The price mechanism has not been allowed to work. Meanwhile capacity is not allowed expand to meet demand which is hilarious if it wasn’t so tagic.

    No major capacity has been added to the southern region in years yet the population and industry has grown and expanded.

    We have shortages primarily because water is a public good. Period.

  18. harry clarke says:

    RB, having liberal immigration policies is like having free trade – so if you believe the case for free trade you should welcome migrants. If the environment is appropriately priced then immigration is like removing a labour market distortion – we do gain.

    Skuilled migration provides extra benefits diue to external benefits associated with having skills.

    JC, water isn’t a public good. Consumption is excludable and generally rival. It is a publicly-provided private good.

    We know it is underpriced because we are depleting stocks of it – there is an excess demand for water.

  19. Robert Braby says:

    Harry,
    I believe in free trade, as a general rule, so concede there is a case for free migration and also freedom of family choice. But:
    (1)Freedom involves removal of price distortions, such as the subsidisation of migration programs, tourism (including grand prix and other sporting events) and child rearing.
    (2)Government intervention should target and correct market distortions, e.g. by taxing and discouraging activities which create external diseconomies. As population growth creates huge external diseconomies in the form of environmental damage, depletion of resources, greenhouses, etc., there is a strong case for discouraging population growth including natural increase. Even that P.C. ‘baloney’ had a half chapter on environmental externalities.
    I agree with your reply to J.C., assuming your definition of ‘public goods’ is the same as his, which I doubt.
    Keep the debate rolling.

  20. Tony Healy says:

    Fred, a few more things to consider:

    1. Richard Freeman of NBER and Wolfgang Kasper of Australia’s CIS both propose that immigrants pay market value for access to their destination country, since they are the main beneficiaries of that migration.

    2. One of the problems with current migration arrangements is that it’s nothing like free trade. Thus it is false to equate all migration with free trade, as Harry does. One is a complicated set of practices. The other is an ideal.

    3. It is also wrong to accept that all skilled immigration addresses skill shortages. There is overwhelming evidence in IT that much so-called skilled migration had other agendas, such as reducing pay, developing dodgy labour hire businesses, and facilitating the Indian offshoring business. Core references on this are Matloff and Hira, but it’s a very big topic.

    4. Much of the expansion of the 457 program in Australia was driven by labour hire businesses, and was probably modelled on the abuses in the IT sector.

  21. harry clarke says:

    Tony, Most of Freeman’s arguments for auctioning the quota and for charging entry fees have been around since the early 1990s. I published studies on both and there were others.

    Migrants to Australia do now pay most of their costs – in the past English language teaching costs were signigficant.

    I said liberal immigration policies were analogous to free trade in goods and that’s true. Its free trade in labour services rather than free trade in DVD recorders but has precisely the same gains associated with it.

    These arguments that immigration is designed to drive down wages irritate me. Of course they are! That’s what a shortage is – an inability to secure labour at a low enough wage. Moreover basic immigration economics shows we get gains from immigration because wages fall. Its the reason we get gains from imported goods – their prices are lower.

  22. Sinclair Davidson says:

    We know it is underpriced because we are depleting stocks of it – there is an excess demand for water.

    Sorry Harry – this answer strikes me as a tautology, underpriced and excess demand amount to the same thing. The depleting stocks component requires a view as to how much water there should be in the dams. Clearly, that number is not 100%, nor 0%. I imagine it would be a function of the water delivery technology – so water can be easily pumped etc when dams are x% (or more) full. (I am open to correction on this point). The water restriction limits strike as being arbitrary. So JC’s point is sttill valid, without a theory of how much water there should be, we can’t say what the price should be either.

  23. Tony Healy says:

    Harry, Freeman’s proposal is not just that migrants pay their costs, but that they pay for the value they derive from being able to live and work in the destination country. This would be a substantial amount. His rationale is that the revenue thus raised could help compensate native workers for lost wages. In the context of this thread, that revenue could also help pay for the improved infrastructure needed by the migrants.

    Regarding your equating of liberal migration policies with free trade, my point is that this is a misleading comparison, because our migration policies are not liberal. You seem to be defending our current migration policy by praising the merits of an ideal that doesn’t exist.

    Re lower wages, that’s refreshing you agree that’s an aim of migration. I’m accustomed to arguing with IT industry shills, including Amanda Vanstone, who dispute this. For example, Vanstone quotes average salaries that include those of doctors and senior managers, when the problem is with line professional and unskilled roles.

    You refer to shortages, but some of the claimed shortages have been fraudulent.

    You also claim that lower wages are good. Clearly they are not good for the people whose pay declines. If the declining pay deters students and workers from important fields, then the decline is also detrimental for the economy. Low wages don’t help African countries.

    Also, what’s your view on the hypocrisy of Qantas management screaming for protection from other airlines, shortly after offshoring 400 IT jobs?

  24. Tony Healy says:

    By the way, the offshoring of the 400 jobs was facilitated by our immigration policies in that, to do the work, the Indian firms had to obtain 457 visas for Indian staff to work in Australia. Those visas are meant to be for skills Australia lacks. In this case, as in many others, this was clearly not the case.

  25. harry clarke says:

    Tony, if you have quotas you can action off positions in this quota to access that future value. I agree.

    Lower wages are a consequence of immigration in the most standard economic models. People have tested whether wages fall much and found they don’t. But the fall in wages is the standard way gains-from-immigration are realised. Wages fall but total output increases and the value paid to other productive inputs increases.

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