New Zealand Initiative on immigration: Part 8 Labour market

The New Zealand Initiative’s chapter four, on economic issues, includes most of their treatment of the labour market.   This isn’t going to be a long post, and in a number of key areas we agree.

In particular, they are quite right to push back against the suggestion that immigration “takes jobs” from natives: there is no fixed pool of jobs, and if anything in the short-run immigration has tended to boost demand more than supply, so that in the shorter-term, it acts as a boost to (net) demand, and something that lowers the unemployment rate a bit.  That is why, typically, the Reserve Bank is raising interest rates –  or lowering them less than otherwise – when immigration surprises on the upside.  In the medium-term, there is likely to be little or no impact on the unemployment rate, one way or the other.    Labour market and welfare system regulatory rules play a key role in influencing the normal, sustainable, rate of unemployment.

And the Initiative doesn’t seem to have signed on to the silly nonsense that we need lots of immigrants to ease “skill shortages” – a line touted by Business New Zealand and their affiliates, and by their predecessor organisations for many decades.   I’ve dealt with this issue in various posts (including here and here).  You have to wonder how other countries manage –  including the many richer and more productive countries than New Zealand that haven’t had anywhere near as much immigration over the years.  Here is some of how I responded to that argument in one of those earlier posts

Business sector advocates often try to have us believe that key sectors just couldn’t survive without reliance on large scale immigration.  Set aside the inherent implausibility of the argument –  how do firms in the rest of the world manage –  and think about some specifics.  Sure, it is probably hard to get New Zealanders with alternative options to work in rest homes at present.  So, absent the immigration channel, wage rates in that sector would have to rise.  Were they to do so, I can see no reason why in time plenty of New Zealanders would not gravitate to the sector.  It was New Zealanders who staffed the old people’s home my grandparents and great aunts were in 30 years ago.  Same goes for the dairy sector, or the tourism sector.


Of course, none of this is obvious to an individual employer.  They probably can’t raise their wages to attract New Zealand workers instead, even if they wanted to.  To do so would undermine that particular firm’s competitive position.  But again, this is the difference between an individual firm’s perspective, and a whole of economy perspective –  and the latter should be what shapes national policy.  Cut back the immigration target, along the lines I’ve suggested, and we’d see materially fewer resources needing to be spent on simply building to keep up with the infrastructure needs of a rising population.   We’d see materially low real interest rates, and with them a materially lower exchange rate.  The lower exchange rate would enable New Zealand dairy farmers, and tourism operators, to pay the higher wages that might be needed to recruit New Zealanders into their industries, and probably still be more competitive than they are now.  And plenty of New Zealanders now working in sectors totally reliant on an ever-growing population would, in any case, be looking for opportunities in other sectors.

The Initiative mostly stays away from this line of argument, and they are right to do so.  Markets take care of incipient “shortages”, whether of labour, tomatoes or whatever –  prices adjust and, if necessary, over time production and/or structures and patterns adjust.  The Initiative are generally supportive of letting markets work.

A lot of the empirical literature focuses on wages, and in particular on wages for those relatively more lowly-skilled natives who are, to some extent or other, in competition with relatively lowly-skilled migrants.  As even the Initiative notes, a big influx of migrants looking for work in one particular sector will probably lower wages in that sector in New Zealand.  They use “fruit pickers” as an example in their report.  But one could probably use aged-care workers as another concrete example.

The Initiative’s reaction to this, reasonably self-evident, proposition is to be (perhaps unconsciously) in two minds.  On the one hand, they like to cite what is probably the consensus of the international literature, that if there are adverse effects of immigration on lower-skilled natives they are, in aggregate, relatively small.  Perhaps that is true, although it probably isn’t much comfort to someone at the bottom end for whom every dollar in the weekly pay packet really counts.  And recall that survey of US academic economists I mentioned the other day.  Quite a few respondents were uncertain, but there wasn’t much dissent from the proposition that in the US context (one of the strongest and most productive economies around).

Question B: Unless they were compensated by others, many low-skilled American workers would be substantially worse off if a larger number of low-skilled foreign workers were legally allowed to enter the US each year.

But on the other hand, the Initiative seems to want to celebrate how helpful even low-skilled immigration can be, even though almost the only way –  even in theory – it can be helpful is by lowering domestic wages, at least for those who are near-substitutes for the migrants.

Here is what they say

Arguing for immigration restrictions to protect the incomes of New Zealand fruit pickers is as misguided as arguing for tariffs on fruit to serve the same purpose.

We cannot manipulate wages by distorting the market in the long run. Virtually anything can be imported today if there’s the will. Cheap foreign labour already competes with New Zealand labour even if workers don’t land on our shores. If wages in New Zealand for similar output rise much higher than foreign wages, we can only expect more outsourcing and exit of New Zealand firms.

Ultimately, wages are determined by the value of a worker’s production at the margin and the willingness of the worker to forgo leisure for consumption. Bringing in productive migrants more willing to work than New Zealanders may lower wages for some in the short run, but it also means New Zealand can produce more goods and services cheaper.

For a start, it is simply incorrect that “virtually anything can be imported today” –  try it for a hair cut, a cafe meal or coffee, aged care for your mother, or the bus trip home tonight.  The boundaries between tradables and non-tradables are fuzzy, but it doesn’t make the distinction economically irrelevant.

But what really staggered me was the starkness of the way they put it –  we should be competing internationally on the basis of lots of migrants lowering wage costs.     They really can’t have it both ways: lower-skilled immigration might be largely harmless (if it doesn’t have any obvious effects on wages for natives), or there might be gains from trade from bringing lots of these people in, but if so only through a mechanism that involves lower wages (than otherwise) for the natives they are competing with.  It surely has to be one or the other?  No one pretends these people are where all the ideas and productivity spillovers are coming from.

Despite the literature they cite, the Initiative seems to be in the latter camp.  Here was another comment on lower-skilled migrants, and why we shouldn’t just focus on highly-skilled migrants.

Hiring migrant workers in the service industry, especially home production (childcare, cleaning, gardening), can free up time for workers in other sectors of the economy. This way, they can be an important complement to highly skilled workers.

It does that by lowering the relative cost of that type of work.

Earlier in the year, I wrote about an op-ed by a British economics academic that had run in the local papers, where she argued that low-skilled immigrants had been a great boon for professional women and their husbands.  I summed up my reaction to that this way

Perhaps this wouldn’t be (as) morally offensive if there was an entirely separable class of temporary guest workers, who didn’t substitute at all for low-skilled domestic workers.   The temporary workers would gain from the trade, and so would those employing them. But that (separability) isn’t how labour markets operate.  What Bateman is in fact arguing for is a policy designed to explicitly help people like her, at the expense of poorer less highly-skilled Britons (in fact, in the roles she talks of typically poorer relatively unskilled British women).  No one person is ever an exact substitute for another, but there is a great deal of overlap.    Even though she never says it, what Bateman is arguing for is a policy designed to increase the differences in incomes between the highly-skilled and the less-skilled –  for the comfort of the highly-skilled (women and their spouses).

I don’t see any gap between Bateman’s stance and that of the Initiative.

In their conclusion to their economics chapter, the Initiative try to sum up.  They begin

The overall impact of immigration on the labour market is small, but with a multitude of individual effects. Some individuals may experience wage reduction, some wage growth, and some may remain unaffected. The effect for each individual will depend on their own skills, the skills of the migrants, and the demands from the migrants.

I suspect that isn’t too far wrong, especially when we recognise that much of the immigration to New Zealand isn’t very skilled at all, and that those at the lower end of skill spectrum are those mostly likely to be losing.

But here’s the thing.  That summary really gives the game away.  If even the key advocates of large-scale immigration can only end up arguing that the impact on the labour market is small, what happened to those large gains they were citing a few pages earlier in their report.  Recall the recent IMF study they cited

The study finds that a 1 percentage point increase in the share of migrants in the adult population can raise GDP per capita by up to 2% in the longer run

If that was even remotely true, we’d have seen a massive increase in productivity, GDP per capita, and almost certainly wages as a result of the scale of immigration New Zealand has had over the last 25 years.    Perhaps the lower-skilled would still have done relatively less well, but  pretty much everyone’s incomes should have lifted, and by quite a lot.  The differences really should be quite easily discernible.  As it is, even the advocates haven’t been able to show those sorts of gains.  In New Zealand’s case –  and recall that that is my focus –  they just don’t seem to be there, and there is a plausible case –  weak productivity growth, high interest and exchange rates, weak business investment, weak exports, and a remote island location as personal connections have become more important –  that we might mostly be worse off.   Some people  –  some natives –  are better off (anyone, for example, holding regulatorily-restricted land in Auckland 25 years ago), but a best guess –  a best read of the New Zealand experience –  is that the country as a whole isn’t better off, and quite probably is worse off.

The economics chapter of the report ends with a line I quoted in one of the earlier of this series of posts

Free movement of labour is a fundamental driver of the creative destruction
process, just like free movement of goods and capital. It can be painful for some but it improves outcomes for many. And if managed well, the pain can be short-lived and the benefits perpetual.

It is a statement of faith at best.    We haven’t had “free movement of labour” but we’ve had a lot more of an inflow of non-citizens –  all policy controlled –  than almost any other advanced country.   And the perpetual benefits still seem, to put it mildly, very hard to spot.  Perhaps they are there in theory, in particular specifications (models), of how economies work generally, but the challenge for the Initiative should surely to have been to demonstrate that those gains are actually there for New Zealanders, amid the specifics  of how this economy has actually worked in recent decades.