Woodhouse on immigration

Bernard Hickey had an interesting article the other day, having talked to both the Minister of Immigration and the Minister of Finance about the growing calls for a rethink of immigration policy, and particularly about the high number of relatively lowly-skilled migrants that have been allowed in.   I’m still staggered that we grant immigration approval, even for temporary work visas, to any labourers, let alone 6500 of them.

The Ministers seem torn.  Woodhouse in particular often comes across, as Steve Joyce typically does, as a true believer.  Immigration is good and, if anything, more immigration would be better.  Of course, there is no evidence of these benefits to New Zealanders at an economywide level –  Ministers don’t produce any, and their advisers in MBIE and Treasury don’t either.  25 years of the current policy, and 70 years of high immigration since World War Two (with a brief exception between the mid 70s and the late 80s), and you’d think the advocates of the policy would have no real trouble demonstrating the benefits to New Zealanders of their policy, if they existed.  I know people still debate the merits of free trade (although most of the debate these days is about the non-trade aspects of preferential trade agreeements), but pretty much everyone welcomes the much cheaper cars, clothes, TVs etc that followed from the dismantling of import controls.  It was a clear gain for the overwhelming bulk of New Zealanders.

But there is simply nothing comparable for the succession of large scale immigration programmes New Zealand has run.  As a reminder, we’ve had one of the very largest planned immigration programmes anywhere, and one of the very worst productivity performances among advanced countries for decades.  The best case story must be that the immigration just stopped things getting worse, but no one has even been able to show that.  Of course, there is the hardy perennial of the wider range of ethnic restaurants.  But it is hard not to think that that is typical example where upper income people are capturing almost all the gains. I can’t imagine that people on the average wage or below eat out much at all.  Actually, with three hungry kids and a (good) single income, we don’t.

If Woodhouse and Joyce are true believers, there are signs of a bit of unease, and bet-hedging, going on.   Woodhouse repeatedly runs John Key’s line that the demand for immigrant workers is a “sign of success, not failure”, but when pushed on the possibility that –  as Treasury warned –  high levels of low-skilled immigration could be dampening wages for low-skilled New Zealanders, he accepts the warning but notes that in his view the “evidence is not clear yet”.   That isn’t exactly a ringing statement of confidence.  The Minister of Finance is similarly hesitant.  Perhaps even MBIE is beginning to have second thoughts?

The curious thing about the current debate is that on my reading of the international literature and evidence, no thoughtful advocate of large scale immigration really bothers to contest the idea that if you bring in lots of unskilled immigrants it will probably have some adverse effect on the wages of the native unskilled.  Those who are more enthusiastic will stress their view (their reading of the evidence) that the effect is pretty small, and might go on to argue that often recent immigrants aren’t actually competing with natives at all, but with the last-but-one cohort of earlier immigrants.  That competition is part of how the (claimed) wider national benefits of that sort of immigration (as distinct from the possible productivity spillovers from really highly-skilled and innovative people) arise –   it makes projects viable that otherwise wouldn’t have been.  Defenders of the New Zealand programme can reasonably point out that our immigration programme is less heavily weighted towards unskilled people than those of many other countries –  the US, with its focus on family-based immigration criteria, is a prime example –  but that unskilled (or modestly-skilled) component of our immigration can only benefit New Zealanders as a whole (and it may not do so even then)  if it changes relative prices –  making relatively unskilled labour relatively cheaper.    If it doesn’t do so, there is no point in having it at all  (at least on economic grounds –  the ostensible basis of the programme).

Ministers like Woodhouse and Joyce devote huge amounts of time to recounting stories of labour shortages in particular sectors, or regions, or firms and how they –  and their wise bureuacrats –  closely monitor emerging pressures etc, juggle and refine the approved occupational categories to match supply and demand.  It has all the overconfidence of a Soviet-era central planner –  and not a jot of faith in the markets, or indeed in their fellow New Zealanders.

Which is strange in a way since, in their former pre-politics lives, both Woodhouse and Joyce were private sector CEOs, operating medium-sized businesses.  Of course both were in domestically-oriented sectors (private hospital and radio respectively)  –  which is where the firms are who do tend to benefit from immigration, at the expense of the tradables sector.  But perhaps the business mindset comes through in this way: from any individual firm’s perspective, it would be worse off if it (in isolation) were not able to draw in immigrant labour.   Business CEOs aren’t paid to worry about the national economy, but about the best interests of their shareholders (and perhaps other direct stakeholders).  If my individual rest home  –  or dairy farm –  can’t import Filipino labour and competitors can. I’m in a much worse position.  In  a business with tight margins, it might even be enough to force me out of business.  But you simply can’t do –  as business people commenting on public policy often do –  and translate straight from an individual firm’s perspective to a whole economy perspective.

At an individual firm level, increased demand is, typically, a sign of success, and the need to take on more staff is, typically, too.  At a whole economy level, increased demand might simply be the result of high levels of immigration (foreigners coming, or New Zealanders not leaving because the Australian labour market isn’t that good).  We know –  and it has been the consensus view of New Zealand macroeconomists for decades –  that the short-term demand effects of an upsurge in immigration exceed the supply effects.  Why?  Because immigrants are people too: they need housing, schools, shops, offices, roads etc,  And each fully fitted out member of a modern economy needs physical capital equivalent to several years of additional labour supply.   And this is partly why it is hard to detect the wage effects of immigration –  in the short-run, immigration actually creates its own demand, supporting employment and activity.  It often takes time for any relative price changes to work through, and there is always lots of other stuff to complicate a reading of the data.

So the individual business person sees immigration as imperative (never pondering how other economies ever prospered without high levels of immigration) because s/he mostly sees the situation his or her specific firm faces right then (which is how markets do and should work). For a rest-home operator, advertising for staff at the prevailing wage might bring no suitable New Zealand applicants.  But why would it when immigration settings have allowed in lots of immigrant labour to the sector, typically from countries with much lower wages than New Zealand?  New Zealand wages in the rest-home sector get driven towards the minimum wage, and New Zealanders gravitate elsewhere.  It is individually-rational behavior all round.  The possibility of reducing access to immigrant labour will scare the individual rest home operator –  or even employers in the sector as a whole.  Where will we get labout from they ask?  New Zealanders won’t do the job. they will say.

In fact, New Zealanders won’t at the prevailing wage –  which both they, and employers, treat as given.  But it isn’t a given.  Pull back on the ability to bring in lowly-skilled immigrants and the market will adjust.  In the Hickey piece, Michael Woodhouse is quoted as worrying that shutting the door overnight would be “quite damaging”.  And perhaps it would be quite disruptive, but his is a straw man worry.  After all, these things can be phased. Give a year’s notice for example.   Halve the number of work visas next year, and halve it again the following year.  Pull down the number of residence approvals by 10000 a year for each of the next three years. I’ve got no problem with clear signaling of a reform path.

Recall the high levels of immigration create a lot of demand.  With a much lower targeted annual inflow, many fewer people will be required in sectors directly oriented to a rising population (not just construction, but all the projected employment growth in non-tradables sectors).  So when the rest-home, or the dairy farm –  or those firms employing immigrants labourers or clerks –  go looking for New Zealand staff, they probably will have to offer a bit more than they have been (especially in sectors that have been heavily reliant on immigrant labour), but they’ll also find more New Zealanders looking for work.  In the short-term higher wages offered by an individual firm help draw staff away from competitors in the same industry, but over time they will draw more people into the industry itself.  Will this undermine competitiveness of our tradable sector firms?  Well, no, because with a much lower rate of immigration we would finally see our interest rates converge to those in the rest of the advanced world –  and without population pressures, any house price responses would be pretty muted, to say the least –  and the exchange rate would be lower, probably quite a lot lower.  Because here is the thing, for all that ministers like to talk about tradables sector firms needing immigrant labour, once you take a whole economy perspective, tradables firms typically aren’t better off at all –  slightly cheaper immigrant labour (what the firm itself sees) only slightly offsets the adverse impact of the higher real exchange rate.  Almost all the gains have flowed to firms in the non-tradables sector, and not surprisingly our exports (share of GDP) have done poorly, and there has been no per capita growth in tradables sector output for 15 years now.

It is time Ministers started taking a whole of economy perspective on immigration, not the individual business CEO perspective they have been bringing to the issue (backed by their business supporters).  In passing, the other day, I noted that if one wanted to do something about work visa numbers, one could look at imposing a rule that said that, in most circumstances, no work visas would be granted for any position paying less than, say, $100000 per annum (perhaps phased in over two or three years).  I haven’t given the option a lot of detailed thought, but on the face of it, it looks very attractive.  And, frankly, if we did that I’d be a lot more relaxed about having a lot less central planning around work visas –  there might be little harm in allowing any firm to hire anyone in a job paying more than $100000 for a single, non-renewable, three year work visa.  It would be a lot more skills (and market) oriented than the current work visa system.  And to the extent that immigration did intensify wage competition it would be for people at the upper end of our income distribution rather than at the bottom end –  which seems rather less unappealing on social justice grounds.

Having said all that, I should reiterate that my own main area of focus is on the (high, but fairly stable) long-term residence approvals programme.  When I started working in this area around 2010, I took for granted the official rhetoric that our immigration was very skills-focused and built my arguments on that assumption.  The essence of my story –  that rapid immigration-fuelled population growth has put persistent pressure on real interest rates and the real exchange rate, skewing the economy away from business investment (especially in the tradables sector) and undermining productivity growth –  works on that assumption.  Since then, I’ve become more aware of just how modestly-skilled most of our immigrants are, and have also come to focus more on the heavy burden our remote physical location imposes in generating really high incomes for lots of people.  None of that story is much affected at all by short-term swings –  up or down –  in official net immigration numbers.

And so, while I welcome the current debate, which is raising some important issues, I am uneasy that with a few policy tweaks here and there, or a resumption of a larger outflow of New Zealanders to Australia (in many ways, that exodus is the defining feature of New Zealanders’ experience in the last 40 years), will remove the current vocal discontent, without ever having addressed the longer-term questions I’m raising about the possible links between our medium to long-term immigration programme and our disappointing poor longer-term economic performance.

On which note, readers might be interested in the latest issue of North and South magazine, which features 20 pages of immigration-related articles. Included in that is a fairly lengthy interview with me, where I try to keep the focus mostly on the medium-term issues –  the connection with our longer-term productivity performance.  The editor has chosen for her “Quote of the Issue” this line from me.

There’s just no evidence over 25 years –  indeed over the whole 70 years since WWII – that we’ve had gains for New Zealanders across the board from immigration.

Rereading the interview there are a few things I’d word differently –  and when I spoke to the journalist, I wasn’t really appreciating that she wanted to run pages of text verbatim – but it provides a reasonable flavour of some of the issues, and the political puzzles (why, for example, are the Green and Maori parties apparently so much on board with the status quo).

In one of other articles, this passage caught my eye.

Matthew Hooton admits he might have backed the wrong horse for the past two decades. …..he opined in the comments section of the Dim-Post blog site that he was reconsidering his long-held stance on immigration:  “There is also the argument on immigration that the liberal globalists (of which I count myself one) have spent at least 20 years arguing. ‘Immigration is good for you because it makes a country more cosmopolitan and internationally connected and also a moral duty, and if you are against it you are racist’.

“My regular use of this argument over many years (or at least one like it) was a reaction to the vile way Winston Peters raised the issue in the early 1990s……But it is a false argument.  Immigration is a choice. No country has to take anyone if they don’t want to….But for 20 years, no one in authority in New Zealand has really made the case for why immigration is good for us –  just if you’re agin it, you’re a racist, provincial xenophobe.  Yet as I look back over the last 25 years in New Zealand, I’m not sure that Peters was wrong on the substance of the issue.”

Hooton is a politics and PR guy, not someone with a strong economics orientation, and yet his natural home is on the (market) liberal right of politics.  At a time when the latest poll suggested that even 60 per cent of National voters think something needs to be done about immigration, I thought it was a telling acknowledgement of how the ground might be shifting on this (really large large scale government intervention) issue in New Zealand.  It isn’t even now a conventional left-right issue –  people of the centre-right orientation of Kerry McDonald and Don Brash are also calling for change. If anything, the fault lines now seem to fall along these lines: individual employers with a firm-level perspective, and academics/bureaucrats on one side.  The rest of New Zealand is considerably more skeptical as to quite what they are gaining from this programme that John Key, Steven Joyce, Michael Woodhouse and Bill English still seem ready –  perhaps ever more out on a limb –  to defend.