How much human capital does Australia get via visas?

The Australian visa point-system is the envy of the world as it has ensured that Australia gets a large influx of well-educated, healthy, English-speaking migrants. How large is the free gift that comes walking into our doors this way? Conservatively, I would say 50 billion dollars per year, probably more. Let us go over the calculation.

One method of calculating the free gift of migration is to look at how much the roughly 180,000 migrants earn during their life in Australia. With a lifetime income in the range of 2-4 million dollars(not counting those migrants above 44 years of age or below 15), this would make the gift of migration in the order of 100-200 billion dollars a year, i.e. 10-20% of GDP every year. Yet, of course, this method is not valid because migrants also consume: they take up space, commute, drive up housing prices, etc. What they produce in their life is not the added benefit to Australia of their arrival because they will also consume part of what they produce. If there were perfect markets and no initial investments, then migrants would just get paid what they are worth and thus consume what they produce.

Yet, there are initial investments coming in with migrants, namely the cost of acquiring their human capital. It is that cost that Australia does not have to bear that is the net benefit to the community they came to augment. The value of a migrant is hence not really their lifetime income but rather the costs we do not have to cover because they walk in already trained instead of having to be raised and educated by means of local investments. In the simplest terms, the taxes on their income pays for the education and development of locals, but not for those already reared and educated  when they arrived.

One way to consider the gift we get is to calculate how much effort would be required to create the same outcome ourselves. What are the costs of educating and raising the same number of people to the same level as these migrants? Let us consider some estimates from the US and Australia.

The US department of Agriculture estimates that in America, it costs around 227,000 dollars to raise a child from birth till the age of 18. This includes food, shelter, the opportunity cost of the time investments of the parents, and school tuition fees. The cost of then getting that child through university is another 250,000 dollars, meaning that your average American university under-graduate represents and investment of about 477,000 dollars.

Now, in poorer countries these costs are lower whilst in some richer countries, these costs are higher. Yet, given that US GDP per capita is about as high as Australian GDP per capita, one could argue that 375,000 dollars will be close to what it costs in Australia to raise someone up to be a university undergraduate.

There are of course also estimates for Australia. A 2009 federal government report puts the costs at around 500,000 dollars per graduate , and Social Researcher Mark McCrindle estimates the costs to be as high as 1 million per 24-year old, but this includes costs of pregnancy and the supposed costs of children on accommodation (which is a bit much since pregnancy is partially consumption). Yet other estimates put this as lower, but still around 500,000 per undergraduate.

There are of course those who argue that people with kids are actually richer than most others and hence kids can’t be that expensive, but I prefer the studies that tabulate what actually goes into kids and to price those investments, which in turn reaches the half a million per graduate mark.

How many migrants do we get that fit this bill? Well, in 2010-2011 we got 113,725 migrants in the Skill Stream, and the planning level for the ensuing years is about 130,000. Yet, these are the number of people coming in under a particular Visa stream, which doesn’t just mean the skilled person but also his/her family and partner. Whilst the family and partner also already represent a significant investment of another country, the free gift is not equally as high as the skilled migrant themselves.

The productivity commission managed to dreg up the age-distribution of people in different visa categories. Presuming that their 2004-2005 distributions still holds, would mean that 66% of the skilled are in the 25-44 age category, and another 20% in the 10-24 years category, with basically no-one above 65. Indeed, at least 65% of the persons coming in under skilled migration have at least a bachelor’s degree. 16% have a postgraduate degree and the other 35% are mainly still at school.

As a rule of thumb, in the skilled visa category, we are getting around 100,000 migrants with a bachelor degree paid for by overseas countries. This represents a free gift per year of 50 billion Australian dollars, or 5% of GDP. If we would further count the well-educated in the family visa streams and count some of the education already in the kids who come with migrants, this is higher, but we could get lower numbers if we start counting the costs of the relatively less healthy and older in all visa categories. A more in-depth study would be needed to get a tighter number, but my ball-park guess is around 50 billion dollars per year, which makes immigration our most lucrative industry

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conrad
conrad
9 years ago

“What are the costs of educating and raising the same number of people to the same level as these migrants?”

I’m not really sure you can make that assumption in the way you have — it assumes that there are enough willing and able Australians that could replace the skilled migrants. This seems highly unlikely to me given that our universities are basically so saturated that we are probably now taking many people with IQs in the low 90s (and what can you really teach them?) and the apprenticeship scheme has a 50% drop-out rate. Thus the real cost would have to be increased to account for fixing up the high school system so you could produce more people that can do maths and have a reasonable enough level of literacy and hence might be able to learn something at university, fixing up the universities so that people actually got trained properly rather than trying to work out what you can do with often jaded and often not very bright students, fixing up the TAFE scheme so people would stay in, and thinking of incentives so people would actually want to pursue many of the job opportunities that the migrants now do. All of these represent huge recurrent costs that occur at a different level to that of the individual but would be needed if you really thought you could fill these jobs with Australians (and I guess Kiwis). This is also assuming that the kind of training you need might can also be obtained in Australia, which would only be true for some of those jobs.

conrad
conrad
9 years ago

Actually, I may as well add another expense of replacing migrants to your list — this being that in some professions, it’s actually very hard to find people who are really good due to individual productivity falling onto a distribution predicted by a power law, and this is not a-priori obvious when you train them. For example, think of all those economics PhD students you’ve had, and think of how many will actually make it (sport, IT and high level science are other obvious examples). So if you get a really good migrant, then it might have taken the training of, say, 5 others to get that one.

Chris Lloyd
Chris Lloyd
9 years ago

Well I am confused. 180,000 migrants earning say 40,000 per year means 7.2 billion – not 90-100 billion – per year. They pay tax on this and consume services. The difference between the tax they pay and the services they consume for an average Australian over their life time would not be that much I reckon. How much of your lifetime income do you die with? Not that much. This whole calculation doesn’t make much sense to me.

The cost of education calculation is easier to think about. Economist should always be comparing one policy with another. If the choice if between one educated migrant aged 30 and one new-born baby, we are k$500 better off with the migrant.. I would point out though that the logical consequence of this argument is that we would have a society with no children at all and perhaps 400,000 migrants per year to achieve a sustainable population.

The choice however is not between a child and a migrant. People will have as many children as they desire. It seems unlikely that the fertility rate will drop in Australia from the current level of about 1.8-1.9. The choice is between a migrant and no migrant. So I think you are back to the first calculation.

Surely the reasons for immigration are (i) to fill holes in the labour market e.g. doctors and lumbers, (ii) widen the perspective of the society.

Paul Frijters
Paul Frijters
9 years ago

Chris,

as I said on Core where I cross-posted this, the issue with your calculation is that at any point in time you have way more than 180,000 people who came as migrants: they stay more than a year. So it is an issue of not just counting the first year of their stay but the lifetime value of their stay, which gets you a much higher number than what they make in the first year of their arrival. Even more important perchance though is that one should not see their wage as what they add to the incumbents: it is their productivity minus their consumption that is the rent the incumbents get. So I think the confusion stems from the fact that we are talking cross-purposes. The 50 billion is the benefit to the incumbents of this year’s migrant intake. Their lifetime wages is another number and the impact on the overall economy of their arrival is yet another number.

Cameron Murray
9 years ago

First, thinking statically is a killer. You need to think about immigration as not the flow of a person, but of a lineage entering the system at a given point. If they are highly educated 20/30 somethings, that’s great. But they will have children who cost the existing members of society to educate, medicate etc. They will also get older, and cost society in terms of their own health care and so forth. Even the PC models shows that the age-dependency ratio get worst with higher immigration.

Second, a lot of skill that skilled immigrants arrive with are actually job experience. This means that someone looking to climb the corporate ladder will get crowded out by these people. Highly educated people need capital to work with. No good having a well trained engineer using a pick and shovel, that any able-bodied person could handle. So it really appears like owners of capital get to invest in capital without paying to invest in training people to use it (roughly speaking).

Third, Australians mostly pay for their own university education through HECS. And if we keep importing university educated people, it will decrease the return to domestic university education – a bad outcome for existing youngsters.

Forth, in the short term there are capital costs paid by existing residents to duplicate infrastructure for a larger population – roads, dams, pipes, parks, etc.

Fifth, the distribution of benefits is important. As Chris suggests, if they earn even $100,000 each a year, that’s $10billion in wages. If they are really contributing $50billion to output (which the aren’t in your analysis anyway, although people will read it that way), who captures the difference? I would say mostly this return is captured in asset prices and corporate profits, rather than distributed amongst wages.

Sixth, and probably most importantly (I hope everyone is reading this far), your model simply says – calculate the ‘cost saved’ of raising an educated person, and multiply it by the number of educated immigrants ($500k a pop). Which is obviously nonsense because it compares on scenario against a fictitious other – the same rate of population growth occurring through births. A better way is to compare is the total output with 100,000 skilled immigrants divided by (population+100,000) against total output without divided by population. Of course, this is another static model. We should also consider the long run demographic changes and the likely costs/benefits under the two population growth/education scenarios.

So if you can’t tell, I disagree.

In fact, I would almost go so far as to argue that having unskilled immigrants is better for the existing population, since it crowds out unskilled jobs making the return on education better.

conrad
conrad
9 years ago
Reply to  Cameron Murray

Cameron, under your assumptions, migrants appear to contribute nothing at all to productivity, and somehow all of these jobs done by them would have been done by some Australian born residents had they not turned up. The alternative to your position is that they basically keep various industries alive, make other industries better etc. .

I might point out here that exactly the same arguments were used when females started entering the workforce (they’ll displace males etc. and we’ll all lose!), and it’s pretty clear what the overall effect of that was. I’m also not too sure too many people would dispute that it was also a good thing (indeed, I can’t think of any decent countries where females arn’t able to or are seriously restricted in terms of working).

Also, some of your points make no sense:
1) If you think children are a cost, then surely the important difference is the difference between the number of children locals and immigrants have. In addition, presumably, according to your logic, the best number in your case is zero (Singapore is at .79 per female, so perhaps we can get there).
2) As above
3) Australians don’t pay for most of their university education. They part for a part, and generally a small part (there are some exceptions).
4) I agree, but since skilled migrants generally bring money, they also contribute directly the economy. I’m not clear what the trade-off is.
5) Who captures the difference due to high productivity is really a question for the government to solve via taxes etc. . Given migrants make the pie bigger, this means there are more crumbs even if the percentage take is the same.
6) As above. Incidentally, what you’re really talking about here is known to philosophers as the non-identity problem. I’m not sure anyone actually has a good handle on what to do about that (but I’m not philosopher, so perhaps there is new stuff on it).

Cameron Murray
9 years ago
Reply to  conrad

“1) If you think children are a cost, then surely the important difference is the difference between the number of children locals and immigrants have. In addition, presumably, according to your logic, the best number in your case is zero (Singapore is at .79 per female, so perhaps we can get there).”

That was Paul’s assumption that justifies his $50billion figure.

Female participation has displaced male participation. Second, females are already support by the population of worker, so the net effect of increasing the participation rate is a win all round. The long run effect of high immigration is to decrease the participation rate as the new immigrants age.

Got to run.

conrad
conrad
9 years ago
Reply to  Cameron Murray

“Female participation has displaced male participation”

Perhaps At t = 0, but the increased productivity presumably created industries etc. that males entered (are you really disputing that? Check out the employment rates in all the countries where females don’t work).

“The long run effect of high immigration is to decrease the participation rate as the new immigrants age. ”

That depends on how old they are when they come. What you really want to do is look at the dependency/work ratio. For example, let’s say the average local studies for 25 years, retires for 25, and lives to 90. This means they work 40 years and are dependent for 50. So their work/dependency ratio is 4/5.

Now, let’s take an immigrant that also lives to 90, and hence has 25 years dependency. To get worse than the 4/5 ratio they would need to be 45 or greater (i.e., work for only 20 years = 20/25). Since most immigrants are less than 45 when they come, they are clearly reducing not increasing the dependency ratio.

Cameron Murray
9 years ago
Reply to  Cameron Murray

““Female participation has displaced male participation”

Perhaps At t = 0, but the increased productivity presumably created industries etc. that males entered (are you really disputing that?”

My point is that this has occurred to a degree. For example, this chart show some displacement, but a net increase in participation. It’s pretty typical.

On age dependency, as I mentioned, you need to consider the children and family of immigrants as well. All high population growth scenarios lead to this (eg. PC models)

Also, as far as the magical benefits we receive, I find it difficult to imagine that we benefit nothing in the alternative ‘no skilled immigration scenario’ from these skills being employed in other countries. If people in Perth benefit from having an extra engineer in Darwin, they surely benefit from having an extra engineer in Beijing or Delhi through increased total world output.

conrad
conrad
9 years ago

Cameron, your graph is entirely biased since it doesn’t take into account aging etc. . If you look at the ABS series here:

http://www.abs.gov.au/ausstats/abs@.nsf/Lookup/by+Subject/4125.0~Jan+2012~Main+Features~Labour+force~1110

what you see is that males of working age have very high employment rates (not unlike 1948 on your graph) and the graph looks nothing like the one you linked to. Clearly, displaced males are getting retrained (presumably in part thanks to the money generate by females working).

As for getting qualified people from overseas — This is a moral question in my books, and one that is argued about a lot (especially for the medical workforce). As it happens, I’m not sure we should be taking some groups based on this, but that’s a different question.

Cameron Murray
9 years ago
Reply to  conrad

Well this seems to be your area of expertise. I don’t have all the long run data at hand so I can’t say for certain whether the type of graph I linked, or yours, is truly a common long run factor once you control for ageing, education etc.

Which I guess is also relevant to the topic – not ignoring ageing.

My original argument was not about crowding out as such, but about the competitiveness of the labour market for locals – the return to education an so forth. I think you would agree that more women in the workforce has made it more competitive for men.

Gender equality in the workforce being a good thing does not immediately lead to immigration being a good thing.

Imagine a household where the man works, but the women is actually much more savvy and if she was not constrained, she would earn more and be more productive in the workplace than her husband. Her entering the workforce is going to be good for the household.

Now imagine that we open this household to skilled immigrants, who have a similar skill set to the wife. The extra competitiveness of that part of the labour market might mean that the wife no longer receives a wage/ return to justify her absence from the home, or in any case it will probably decrease her wage relative to the previous scenario.

Even if the household is better off in per capita terms with the new immigrants (say the household of 4 with the husband and wife workers compared to a household of 8 with 3 workers competing for the wife’s job in the previous scenario), the net effect is both growth and redistribution towards the new immigrants and the owners of capital utilised by the new skilled immigrant, so that the existing household is worse off.

If you are thinking in equilibrium terms, the problem here is that returns to education in areas where there is high skilled migration will be low, and that will decrease the demand for domestic education in these areas.

Imagine if you opened the floodgates to allow doctors trained from anywhere to enter the country because of their skills. What would happen to wages of doctors?

Say they fall by 25%, would more or less domestic students want to train as doctors?

I guess the bigger picture I tried to point to in my last comment is that it is not at all clear that in a highly connected global market that we avoid costs of foreign-educated people. If half of China stopped working an spent 5 years reading at uni, it would cost the rest of the world big time.

Paul frijters
Paul frijters
9 years ago

Cameron,

It is perhaps important to be clearer about what is being calculated in the post: we are looking at a form of foreign direct investment worth 50 billion per year of which the returns stay in the country. That is also the title of the post, ie how much human capital is Australia given. Under particular assumptions, which indeed do not perfectly apply, this coincides with the benefit other Australians get. If you wish to make a fuller calculation, be my guest. I might even help you set up the model and the data!

Cameron Murray
9 years ago
Reply to  Paul frijters

“If you wish to make a fuller calculation, be my guest. I might even help you set up the model and the data!”

That seems to be where it’s heading!

Apart from my 6 points earlier, it is not at all clear that
1. There is no cost to Australia from foreign investment in education.
2. All returns stay in Australia.

You basically assume a closed economy for both the source and destination countries for skilled migration. Which doesn’t make sense to me.

Chris Lloyd
Chris Lloyd
9 years ago

Cameron, It is ridiculous to compare migrants with women. The women were already here and part of the economic system. It makes sense for them to be as productive as possible. Nobody would argue that migrants should be prevented from workign when they come here!

Anyway, as I said at Core, Paul HAS measured the value of the human capital Australia “gets” via visas. The word “gets” here means that the capital resides in Australia. But you and I do not “get” it. It is really an irrelevant figure.