Immigration and productivity spillovers

In the run-up to the release this month of the new book by Julie Fry and Hayden Glass, which appears to focus on the potential for the immigration of highly-skilled people to contribute to lifting New Zealand’s long-term economic performance and the incomes of New Zealanders, I was doing a bit of reading around the issue.

At issue here is whether, or under what conditions, immigration to New Zealand of highly-skilled people can lift not only the average productivity of the workforce in New Zealand (that seems quite plausible in principle –  think of a tech company simply relocating a particular research lab, staff and all, to New Zealand), but whether something about the skills those people have can translate into lifting the skills, productivity, and performance of the people who were already here.  Those sorts of “spillovers” are really what we must be looking for if we are serious about running a skills-based immigration programme, as some sort of economic lever or, in the government’s words, a “critical economic enabler”.    We can think about this in the context of New Zealand’s own history.  European immigration to New Zealand in the 19th century brought people from the world’s (then) most advanced, innovative and economically successful society to a country where the indigenous population had been operating at a level not that much above subsistence.  It would be astonishing if the European immigration had not raised average incomes of the people living in New Zealand (ie including the immigrants).  But it would have been a pretty unsatisfactory programme if it had done nothing to lift the productivity, skills and income of the native New Zealanders.

Fry wrote an interesting working paper for the New Zealand Treasury a couple of years ago reviewing the arguments and evidence on the economic impact of (more recent)  immigration to New Zealand.  But when I went back and had a look at that paper I was a little surprised at how little focused discussion there was of mechanisms by which such productivity spillovers might occur –  whether in generating more new ideas, or in applying better the stock of knowledge already extant – and how that might (or might not) have played out in New Zealand.

I also had a look at the old Department of Labour’s 2009 research synthesis on the economic impact of immigration.  They had a nice discussion on the possible link between immigration and innovation.  As they note, for some types of migrants to the United States there is reason to think that such spillovers might be material

The main mechanism in the United States appears to be the education of foreign graduate students rather than skilled worker immigration. The United States is the global leader in academic research, so the country attracts the top foreign students from across the world (positive self-selection). These account for most doctoral graduates (but there appears to be no crowding out of the United States born from research universities) and many of these foreign born doctoral students work in research and development (R&D) sectors in the United States, leading to a positive correlation between concentrations of highly skilled migrants and concentrations of patent activity.

Unfortunately, as they note, there is little evidence of such gains or spillovers in the limited New Zealand research.  That might reflect the fact that our actual immigration programme has not been very highly skills oriented at all (something the data make pretty clear), which could perhaps be changed by altering the parameters of the immigration system. Or it might reflect some things about New Zealand that cannot easily be changed: we are small, and remote, relatively poor, and have universities which typically don’t rank highly as centres of research, in contrast to the United States which is not just the “global leader in academic research”, but large, wealthy and more centrally-located.   And despite the recent surge in New Zealand exports of education services, that hasn’t been centred on our universities (it is a welcome boost to exports, but not likely to be the basis of any productivity spillovers to New Zealanders).

George Borjas is a leading US academic researcher on the economics of immigration and had a very accessible post up the other day looking at the question of productivity spillovers, and highlighting a range of quite recent and fascinating studies on some “natural experiments”.  One of the cleanest such experiments was the purging by the Nazi regime in Germany of Jewish academics (and research students).

In 1933, shortly after it took power, the Nazi regime passed the Law for the Restoration of the Professional Civil Service, which mandated that all civil servants who were not of Aryan descent be immediately dismissed. That meant that Jewish professors like John von Neumann, Richard Courant, and Albert Einstein were fired from their university posts. Many of these stellar scientists found jobs abroad, particularly in the United States.

Researchers have been looking at what the impact of these dismissals, and relocations, was on the productivity of those around them.  That included the impact on the productivity (published research output) of the graduate students (PhD candidates) of those the dismissed academics had been working with, the impact on the output of former colleagues of those who had been dismissed, and the impact on the colleagues that dismissed academics found themselves working with later (in the case of those who subsequently took up US academic positions).

This is perhaps the starkest chart from Borgas’s post, drawn from this paper,  illustrating the lifetime impact on the graduate students left behind.

borjas chart

There are clear signs of a material adverse long-term impact (the mirror image of the sort of positive productivity spillovers those promoting a high-skills immigration programme are looking for).  PhD programme supervisors can matter hugely.    But any impact on the productivity of former colleagues was much less visible.

In another paper, recently published in the AER,  looking at the impact on innovation in the US from the relocation of these displaced Jewish scientists, the authors find that the new recruits did not increase the productivity of existing US inventors, but encouraged greater innovation in the US as a whole by attracting new researchers to their distinctive sub-fields of research.

Borgas sums up his take on this series of papers thus

My take from all this is very simple: At least in the experimental context, the evidence that high-skill immigrants produce beneficial spillovers is most convincing when the immigrants that make up the supply shock are really, really high-skill; when the number of such exceptional immigrants is sufficiently small relative to the market; and when those immigrants directly interact with the potential recipients of the spillovers.

Or as he put it in another of his own recent journal articles looking at the impact of the mass emigration of Soviet mathematicians following the fall of the Soviet Union

Knowledge spillovers, in effect, are like halos over the heads of the highest-quality knowledge producers, reflecting only on those who work directly with the stars

I found these papers fascinating in their own right (nerd that I am) but they also prompt thought about what we can actually hope for in a New Zealand context.  Even if we get past the sick-joke aspect of New Zealand’s  allegedly skills-based immigration, and the disproportionate number of chefs, aged care nurses, and café and shop managers, what could we really expect to be able to achieve with the best possible skills-based programme?

It would almost certainly be a much smaller programme.  And it would have to aggressively target the very best people – not be content with people who just happen to creep above a points-threshold, artificially boosted by a willingness to move to some of the more remote and less economically promising parts of the country.

But then one has to ask how realistic any of this is.    With all due respect to our green and pleasant, and moderately prosperous, land, why would the very best people want to come to New Zealand, let alone stay here?    We had our own stellar academic refuge from the Nazis –  Karl Popper taught at Canterbury for several years – but even he didn’t stay that long.  We have adequate, but not great, universities –  and there are many better in countries with many of the good things New Zealand can offer.  We have modest academic salaries.  We have small home markets, small networks of people working in possible similar areas, and if global markets in principle can be serviced from anywhere, evidence still suggests people tend to do it from closer rather than further away.  We seem to have almost nothing of what 1930s Britain or the US could offer to the displaced German academics –  or certainly nothing that a wide range of other countries couldn’t offer more of, more remuneratively.

But perhaps Fry and Glass can make a robust and more optimistic case.  I’ll look forward to the book, and will no doubt write about it here.







6 thoughts on “Immigration and productivity spillovers

  1. Even if we get past the sick-joke aspect of New Zealand’s allegedly skills-based immigration, and the disproportionate number of chefs, aged care nurses, and café and shop managers, what could we really expect to be able to achieve with the best possible skills-based programme?

    Now that’s a very good question.
    Being out there every day talking to customers and others in business I can tell you and if you want can quote business people saying that they just cannot get the people they want with the skills they want. A quick example is concrete grinding. Oh you all reckon a simple laboring job.
    Hell no. sure they walk along behind a machine but when you are polishing stairs in someones million or two dollar house you have to get it right or in many of the large concrete buildings that are being built. Not a rip shit job will do. But do you know they cannot find anyone in NZ and immigration rate that job as a labourer and so can’t import a skilled person.
    A person whose productivity begins the day they start the machine.

    I go into retirement villages often and rest care facilities. I can tell you that without the Filipino people who work in these places there would be a calamity in the industry. Now they are productive.

    Try hiring a chef. Todays paper in the Waikato will tell you that story.

    Sure we don’t need more Indian taxi drivers or Somali’s etc. Many of the African types are never going to work. They just don’t, anywhere in the world.

    Following from what I said yesterday we do need highly skilled people but above you bemoan the low wages on offer, the small and not very highly accredited Universities.
    Well you are right on that.
    Our uni’s have dumbed down for the sake of numbers and the Govt. because it is constantly wanting to feed the lower economic people have stolen the money that should have and should be going into R&D.
    They play favourites and they have dismantled the “hotbeds” of science like the DSIR once was without putting anything free to use in its place.
    Companies are bled dry by taxation, high interest rates and a very poor innovation and R & D policy driven by accountants and socialists.

    The RBNZ and Govt. expenditure have become the God of Govt. aided by innovative tax avoidance, at the expense of innovation in the market place.

    We have side deals done to get films made here with the rewards going offshore but any ordinary company doesn’t get the same treatment.

    We need to grow up and back ourselves a lot more. we need to have capital markets that support our technology markets so the owners don’t just sell all their hard earned business off shore to some company that then transfers all that to somewhere else in the planet.
    We don’t own much these days.

    One of the great opportunities missed is student loans.
    The normal rules of business is that expenses incurred in earning your income are tax deductible against that income.
    If as some companies do, a student is paid by and their fees are paid by a company then the company can follow those rules and deduct the costs of training. (Training being anything from rope courses to first aid to dog handling, you name it if its training in business time then its deductible.)
    But if an individual goes to do training and not just UNI or polytech then nothing is deductible to that individual, forcing many to opt off oversea’s to pay their loans.

    The cool trick here would be to allow tax deductablilty of that uni degree. allow a yearly deduct ability until the costs are extinguished in the same way as we allow depreciation.
    That offset to be in the same or lessor ratio as incurred each year.

    Simple and economical and certainly would assist those that go to a higher degree of learning, PHD’s etc.
    Better than allowing lawyers, accountants and various many others and all to claim for fancy cars that earn nothing and contribute nothing to productivity.

    Depreciation is another tool. Follow Germany’s example. We keep operating with too much old stuff.
    New fixed plant should be written off in 3 years. ( This should not include motor vehicles, big new trucks maybe 5 or 7 years, cranes etc same)

    Interesting that broken down Bill managed to find a way to remove depreciation from buildings just when they all needed to be upgraded to new earthquake standards. ( Like wheeler English is a jadded old idea control freak)

    But one can see that as long as we think that inflation, deflation, exchange rates etc are the be all and end all of business life we will continue to fail.

    W. Edwards Deming offered 14 key principles for management to follow for significantly improving the effectiveness of a business or organization. Many of the principles are philosophical. Others are more programmatic. All are transformative in nature. The points were first presented in his book Out of the Crisis. Below is the condensation of the 14 Points for Management as they appeared in the book.

    1. Create constancy of purpose toward improvement of product and service, with the aim to become competitive and to stay in business, and to provide jobs. 2. Adopt the new philosophy. We are in a new economic age. Western management must awaken to the challenge, must learn their responsibilities, and take on leadership for change. 3. Cease dependence on inspection to achieve quality. Eliminate the need for inspection on a mass basis by building quality into the product in the first place. 4. End the practice of awarding business on the basis of price tag. Instead, minimize total cost. Move toward a single supplier for any one item, on a long-term relationship of loyalty and trust. 5. Improve constantly and forever the system of production and service, to improve quality and productivity, and thus constantly decrease costs. 6. Institute training on the job. 7. Institute leadership (see Point 12 and Ch. 8). The aim of supervision should be to help people and machines and gadgets to do a better job. Supervision of management is in need of overhaul, as well as supervision of production workers. 8. Drive out fear, so that everyone may work effectively for the company (see Ch. 3). 9. Break down barriers between departments. People in research, design, sales, and production must work as a team, to foresee problems of production and in use that may be encountered with the product or service. 10. Eliminate slogans, exhortations, and targets for the work force asking for zero defects and new levels of productivity. Such exhortations only create adversarial relationships, as the bulk of the causes of low quality and low productivity belong to the system and thus lie beyond the power of the work force.

    Eliminate work standards (quotas) on the factory floor. Substitute leadership.
    Eliminate management by objective. Eliminate management by numbers, numerical goals. Substitute leadership.

    11. Remove barriers that rob the hourly worker of his right to pride of workmanship. The responsibility of supervisors must be changed from sheer numbers to quality. 12. Remove barriers that rob people in management and in engineering of their right to pride of workmanship. This means, inter alia, abolishment of the annual or merit rating and of management by objective (see Ch. 3). 13. Institute a vigorous program of education and self-improvement. 14. Put everybody in the company to work to accomplish the transformation. The transformation is everybody’s job.

    Excellent stuff and still as good today as when Deming introduced this to Management in Japan after the war.

    NZ is a company of many facets


      • Well it simply is not the truth.
        You can raise the wage rates to astronomical but you can’t stay in business and that effects every other business in the same trade. Next you will be complaining about inflation of wages. Without enough people the jobs will still not get done.

        Raising the wage rate won’t help if there is not someone with the particular skills that are needed and the whole scenario is exacerbated when the dumb pratts that the taxpayer funds to serve their needs simply have no idea’s other than what some higher up pratt has written on their clip boards for them to follow.
        I know of two business who both want well qualified chefs. Not your average polytech school leaver. they just don’t exist in the market place and they cannot import them.

        What is needed is better policy or better still get the stupid(Govt.) out of business and peoples lives.

        Looking at track records one could compare RBNZ, Treasury and Fonterra. All an abject failure at soothsaying.
        Why would any sane business person believe anything they predict?
        Add the levels of govt. servants and all, advising Ministers who are bloody hopeless anyway and its no wonder we are a failure in the world.

        You need to talk to more business people to get a better perspective of how things are out here.
        We are the guys that develop, make the product, sell the product and earn the money. Its getting harder each year
        Why do you all want to regulate, tie us down and lower all our standards of living?


      • But you need to take the whole picture into account. A NZ with much lower immigration would have a lower exchange rate, lower real interest rates, and lower inflation pressures more generally. Labour currently doing, eg, building for the rapidly growing population would be available to do (and would need to do) different stuff.


  2. “With all due respect to our green and pleasant, and moderately prosperous, land, why would the very best people want to come to New Zealand, let alone stay here?”

    I don’t fully agree. New Zealand is truly special, geographically, and a few billionaires who could live anywhere choose to live here at least some of the year. This is a good thing in my book – Peter Thiel backed Xero, for example. The question we must ask is why they would come so far. In my view, personal freedom and the rule of law has a lot to do with it.


  3. Rather more (in fact rather more than 15 times as many) choose to live in the UK though…..

    New Zealand is probably a wonderful place to relax or even retire….and there are a few spillovers for NZers when eg Julian Robertson gets involved here…..but unless their involvement becomes more like a base for major business activity it probably doesn’t do much for NZers. It isn’t the source of a problem, just not really a solution either.


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