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.

 

 

 

26 thoughts on “New Zealand Initiative on immigration: Part 8 Labour market

  1. Thank You again Michael, can’t fault your reasoned and lucid commentry.
    What I don’t understand is (help me here); why we are being subjected to this wall of pro immigration propaganda; NZ initiative, Fed Farmers, the Government, that Latta clown and so on. It feels like we are being bombarded with a huge one sided campaign with only a passing nod to the actual facts. Creepy!

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    • What is lacking however is any correlation studies that even remotely link the governments residence visa targets contribute to our productivity poverty. Targets are set by the Immigration department driven by industry requirements. If our top industries are service orientated from Tourism and International students then expect that the end result is lower productivity as service is based on more workers taking more time with a customer equates to excellent service but of course at diminishing returns because there is a ceiling that you can charge for a meal.

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    • It does not matter if you pay local natives or migrants, excellent service demands the same number of people which equates to the same poor productivity outcome. The difference is the profit that the business makes, cheaper migrants equate to higher profits for a native business.

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  2. Much of it comes down to two things, I think

    1. for an individual employer, or even a sector, immigration can seem like an answer. it really does ease their pressures, and prob keep their wage bill down a bit. There is a big difference between an individual’s perspective and good national policy

    2. there is a strong global educated-elite view, on left and right, that immigration is generally “a good thing”. It is very hard to step outside that consensus, esp if you have never looked into things closely yourself, if one fears being called a racist/xenophobe,neanderthal/nativist or whatever – to be looked at askance by ones peers. It is partly for that reason, that i keep stressing that my focus is one the specifics of NZ’s experience, rather than trying to take on the advanced world consensus about what migth be on average good for the advanced world. NZ has some unusual features, and I suspect that large scale immigration now is more adverse for us than it might be elsewhere – but give Nebraska control of its own immigration policy, bring in a couple of million migrants of the sort NZ has had, and you’d prob see much the same problems.

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  3. A lucid commentary saying much that you have said before.
    Isn’t it obvious that unskilled immigration is a recipe for corruption both by the foreign agencies and by NZ employers. For example reported today 97 mainly immigrant staff at a car wash company suffered breaches of the employment act. How many similar offenses are not detected and not prosecuted simply because immigrants are involved?
    This blog argues that NZ immigration over the last 25 years on balance has not been successful for native New Zealanders. My concern is for the exploitation of the low waged which taken to extreme becomes “modern slavery”. If all immigration had been high skilled and high paid I would still be interested in this blog but I wouldn’t follow it with much fervour.
    It is a moral issue; even if the evidence proved that on balance NZ individual productivity and wealth had blossomed it would still not justify exploitation of the unfortunate.

    Liked by 1 person

    • I should have specified from poor countries – bringing say low skilled workers from the Korea, UK or Singapore would not lead to the corruption problems that arise taking workers from India. Secondly having temporary workers would be less risky than having immigrants trying to qualify for citizenship. The latter can be blackmailed into almost anything such as my local restaurant that was paying staff $2 per hour. At least they were caught.

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    • NZ has always been very corrupt. It’s just in NZ the crooks issue invoices. I am currently doing a small development. I have been issued $5,000 worth of invoices for iwi monitoring on my site for sea shells and bones.

      Because it is a old state house, I have been issued an invoice for $11,000 to clean up the site by a worksafe contractor as the cladding contains 1% asbestos and a few pieces fell to the ground when the house was moved. I negotiated a reduction to $4,000 to vacuum the site.

      Watercare charge me $14,000 for a meter that costs $200 and it took the contractor 3 hours to install.

      My public drainage contractor charged me $60,000 and confirms on his certificate of assets of $16,000 as public drainage infrastructure for council.

      My electrician replaced all the wiring and switches for $6,000 but then wanted to charge me $5,000 to repair the extra big holes he cut into the gyp when he removed the older switches as the new switches could not now be screwed in.

      The plumber gave me a fixed price of $4,000 to reconnect all the plumbing and then kept sending invoices each month of another $6,000 for miscellaneous other repairs not in the fixed quote.

      Etc etc etc

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  4. Thanks for this well written post.

    My perspective is clearly from a single employer in Queenstown, a region notorious for transient workers and a low ratio of New Zealand residents. We are in the hospitality industry, also notorious for small margins and low wages.

    As part of our hiring process we cast far and wide looking for New Zealanders. I have managed to hire one in the two years we have been in business. He stayed for a year. Longer than we could have imagined.

    Recently, we are going through the process of applying for a work visa for one of our managers. A prerequisite for immigration NZ is to advertise to see if New Zealanders would take the job.

    We have had over 60 applicants, all but one are Indian nationals living in Auckland needing visa renewal. With no long term accommodation in Queenstown they cannot be considered, let alone whether they would be approved by Immigration NZ.

    Talking to similar businesses in Queenstown, all invariably are screaming out for workers but with no NZers applying.

    The simple answer is to increase prices so you can pay higher wages to attract the elusive Kiwi.

    But we are finding higher rents and large mortgages are eating into disposable income of Queenstown people and the first to get hit is takeaways. So how much would sales drop if we were to raise prices by 10% or 20%? Every business owner’s concern.

    Keep prices low and get that volume seems to be the strategy.

    We must question the very viability of takeaways in a town like Queenstown, which is reliant on immigrant labour for cheap wages. Maybe it is not a service the community sees worth paying high prices for and Sunday night takeaways should become a thing of the past?

    I know one thing for sure, if I put my prices up the neighboring takeaway place certainly would not, and would in turn take that slice of the limited pie.

    I guess the minimum wage is one way of getting everyone to raise prices at the same time.

    Another solution we are working on is to go more high end. We are the only takeaway joint that cooks with organic vegetables and offers free delivery. Not good for margins but hopefully setting us up for a price increase in the future. But we must be aware of the ceiling on disposable income and whether that is lowering or not. And of course higher the price the smaller the target market. So volume drops. Not helpful when fixed costs are high.

    Aged care, yes, full of immigrants. Hospitality industry is certainly there too. If there was a way to increase wages in these two sectors, would our immigrant overrun problem be solved?

    Or would Kiwis go the way of the Japanese, where young Japanese stay away from the Ks like he plague

    Kiken= dangerous Kitsui = hard physically Kitanai = dirty

    My thoughts are that we are already there.

    On Wed, Mar 15, 2017 at 12:21 PM croaking cassandra wrote:

    > Michael Reddell posted: “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 th” >

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    • Thanks James. NIce to hear from you, and an interesting perspective.

      And, of course, I agree that from an individual employer’s perspective immigrant labour often seems quite indispensable, and no one employer can raise wages/prices much without losing a lot of market share. the thrust of my analysis is really about the way in which large scale immigration has changed the face (“skewed”) the entire economy. sharply reducing the permitted inflow of migrants would also, over time, change the shape of the economy. It probably would involve higher wages in tourism service sectors, but then the resulting lower exchange rate would make that more affordable for NZ employers, and potential employees who were no longer servicing population growth would need to be looking for jobs in other sectors/districts.

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      • I am starting to pin the tail on the interest rates donkey as the trigger point as the cause of our industries uncompetitive and being relegated to niche industries that can handle the higher NZD and the large variability in interest rates usually on the higher end of the interest rate scale when compared with our major trading partners

        Although there are many banks that suggests there is competition, in reality there is very competition. The big Aussie banks dominate. New Zealanders are very lethargic when it comes to moving banks. Most people dont bother.

        The 60% LVR rules put in by Wheeler has also created uncompetitive behaviour amongst banks as it makes it very difficult for a lot of individuals that have bought on 80% LVR and 70% LVR to change to 60% LVR with a new bank. The lack of competition due to a captive client base has allowed the Aussie banks to aggresively move interest rates up even when the RB is signalling the OCR at 1.75% and even when the HSBC is offering 3.99% interest rates.

        This suggests that the Commerce Commission is asleep and not doing what they should be doing. Investigate the monopoly barriers that currently exist. New Zealanders are losing out year after year.

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    • Your problem has been in the news;

      http://www.radionz.co.nz/news/national/326526/queenstown-housing-project-fails

      A differential minimum wage as a regional initiative, coupled with the above type of development going forward with council assistance on getting the specs (and hence the cost) right – would I’m sure attract a great deal of young NZers who would probably rather do their “OE/gap year” in Queenstown! No where more beautiful in the world :-). Kiwis just see it as too expensive – that is all that is holding them back.

      I think that type of dual mandate initiative is what Aspen did.

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    • I have to wonder if there would be a market for relatively low-cost workers accommodation in Queenstown?

      Also, do Kiwi’s avoid trying to get jobs in Queenstown because they think foreign workers would be preferred?

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      • Low cost workers accommodation is usually called the converted garage.

        Kiwis get the dole so the pay needs to substantially exceed the dole before local kiwis get interested in working. Why work when you can get the same pay doing nothing all day? Foreign workers do not have that dole support and have no choice but to work to survive.

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      • Net dole for a single person in Auckland (highest rate) including the accommodation supplement = $300. Perhaps $90 left after paying for accommodation. Net minimum wage = $510. Dole bludging is something of a myth, there were only 14k log term unemployed in 2008 – less than 0.5% of the workforce!

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    • Thank you James, you do have my sympathy, I’m sure you are having problems recruiting staff into Queenstown. My Nephew was a well paid young builder there a few years ago and even he found the accommodation situation very difficult so that is probably a large part of the problem. Short stay/backpacker types maybe not so much.

      It’s getting to be a bit of a theme now; how useless young Kiwis are, especially the three “Ds” dirty, dangerous and difficult jobs. Some highly offensive and probably racist comments for sure (thank you Bill English) but how much truth is there in it. The huge number of young Kiwis working in one of the worlds worst environments ( a social, sexual (for the blokes anyway) and physical dessert); outback Australia tends to suggest that it’s complete nonsense. Perhaps one of the reasons our productivity is so lacklustre is low wages; why be more efficient or mechanised when you can drag in a $14/hour slave. It’s looking like a race to the bottom with desperate $2/hour third worlder immigrants and no company or wages taxes paid as per the recent Masala case. I don’t know how prevalent these types of outfit are in Queenstown (yet) but look out below!

      If there really is a genuine labour shortage here in New Zealand requiring more immigration where are the high and rising wages that would prove it? .

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  5. I understand your perspective, but it is where i am a bit torn. For many of the low-skilled migrants, even when “exploited” in the terms of law/custom, are often better off economically here than back home. It is, after all, why people crowd into the urban slums of India or Africa (or back in the day Manchester) because, awful as things often look in city, on average it offers better outcomes than where they came from.

    In that sense, I’m probably more concerned about what the low-skilled immigration may be doing, adversely, to low skilled New Zealanders, who making no choice to move but simply to remain in the land of their birth may still end up worse off.

    Don’t get me wrong. I’m not defending the exploitation. It isn’t the way we do – or should do – things here. And at times people are genuinely deceived/tricked. But there is also often an element of “gains from trade” too.

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    • ” may be doing, adversely, to low skilled New Zealanders”. I would confidently remove your “may”. The first time I became aware of this issue was last year when a 75 year old NZ woman (NZ by birth but Chinese by ethnicity) told me that she had run a fish and chip shop in Auckland over 20 years ago: “hard work but good money but she wouldn’t do it now because there is no way she could compete with the recent immigrants”.

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    • quote – “For many of the low-skilled migrants, even when “exploited” in the terms of law/custom, are often better off economically here (in NZ) than back home”

      It is more than likely the “exploited” exist in a world of hurt during their internship or period of exploitation and they are willing to run the gauntlet and accept the risk they run at the end of their “education” the promises are not fulfilled and they are required to return back to whence they came with a boatload of debt

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  6. There is an interesting book by Amy Chua (she of the Tiger Mother fame) where she cites a number of countries that have become tinder boxes because of tensions between an economically dominant ethinc minority and the rest of the population: https://en.wikipedia.org/wiki/World_on_Fire_(book). Having cheap child care would be great, but personally I wouldn’t want NZ to become as unequal as Singapore or HK in order to get it.

    Unrelated, there was a very funny video on The Economist’s twitter feed yesterday where they asked people who they thought were the happiest people in Europe. No one guessed the answer, which is Eastern Europeans aged 16-24. I wonder what could have changed to leave young Eastern Europeans the happiest in Europe?

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      • and memories told by the old folks – E Europe 40 years ago was not a pleasant, prosperous or remotely free place. These days – with doubts perhaps about Hungary and Poland’s taste for western democracy – it is mostly all three. Still poorer than us of course.

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  7. Good point about the summary giving the game away :-).

    Their reference to “creative destruction” promoted me to check out Schumpeter’s “Capitalism Socialism and Democracy”. Great book – excellent read – but I’m not sure it advances their cause. I did read elsewhere that neoliberalism had adopted it as a means to put positive spin on downsizing and restructuring as a necessary consequence of progress. I think that is their intent.

    As Lukes theory on the ‘three faces of power’ points out, ideological power it is:

    “The ability to define reality for others so that they either internalise the existing order as ‘divinely ordained and beneficial’ or simply acquiesce to it because they can ‘imagine no alternative’ (Lukes, 1974).

    Thank goodness some people still seek empirical evidence.

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  8. Together with almost everything which seems to be developing within this particular subject material, all your viewpoints are fairly refreshing. Even so, I am sorry, because I can not give credence to your entire idea, all be it refreshing none the less. It appears to everybody that your opinions are not completely rationalized and in fact you are generally your self not even wholly confident of the argument. In any event I did enjoy looking at it.

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