Treasury on immigration, productivity and real wages

Michael Reddell Immigration, Treasury

I’m still under the weather with the after effects of a bad cold, so this won’t be a long post.

Treausry has long been a champion of New Zealand’s large scale non-citizen immigration programme, going all the way back to when the system was opened up in the earlier 1990s.   But more recently, there have signs of some differences of view even within the organisation.  in 2014, they published (consultant) Julie Fry’s working paper on migration and macroeconomic performance in New Zealand, which was a pretty sceptical, but careful, assessment of whether there had been any material gains to New Zealanders.  Fry’s conclusion was that any gains had been “modest”.     There was, I gather, quite a difference of view within the organisation as to whether the paper should even be published.

Treasury has also been on record as having some concerns about possible adverse labour market outcomes for lower-skilled New Zealanders from, for example, the big increase in the number of working holiday schemes New Zealand has signed up to.  They noted, in a presentation released last year,

Our key judgment is that migrant labour is increasingly likely to be a substitute for local low -skill labour, and this is an impact that we should try and mitigate.

But they have remain upbeat about the potential contribution from genuinely highly-skilled immigrants.

And at the top of the organisation, the public view on New Zealand’s immigration from the Secretary to the Treasury, in a succession of speeches and interviews, has been relentlessly positive –  and equally relentlessly devoid of evidence.

In the Treasury’s Long-Term Fiscal Statement released late last year they were apparently torn between creedal statements, and a grudging engagement with the evidence, notably a recognition that “we are not seeing the agglomeration effects we would expect from Auckland’s size and scale”.

So I was interested to see that in the Budget Economic and Fiscal Update last week, Treasury looked at a scenario in which the overall net migration inflows stay even larger for longer than Treasury’s central projection.   As it is, their central projection numbers are already high: after growth in working age population of 2.4 per cent in the year to June 2016, they expect to have seen growth of 2.7 per cent in the year to this June, and 2.4 and 2.1 per cent increases for the next two years.

The scenario is as follows

This scenario illustrates the impact of higher migration on the economic and fiscal outlook when capacity constraints arise. In this scenario, net migration is assumed to remain around its current level of 70,000 per annum through to the end of the forecast period.

The results include

In this scenario, stronger population growth drives faster growth in household consumption, residential investment and business investment. Stronger domestic demand is reflected in faster employment growth. However, in the construction sector, it becomes increasingly difficult to access labour and materials. As a consequence, there is additional upward price pressure on construction costs, which leads to higher headline inflation. The policy interest rate rises earlier and the exchange rate is higher as monetary policy seeks to stabilise inflation.

So far, so conventional in many ways.  This is the standard experience in New Zealand when there are large migration inflows.  There is nothing here of the lines the Reserve Bank has been running for the last year or so, in which increased net migration somehow eases overall inflation pressures.

But what really caught my eye was the next sentence

Reflecting these conditions, growth in labour productivity, real wages and real GDP per capita is more moderate than in the main forecast.

They didn’t need to include that observation at all.  The scenario would have made perfect sense without it.  But here is the government’s premier economic advisory telling them –  and us –  that if net migration remains at current levels it would be expected to have detrimental effects on productivity (and wages).      I wonder what the Secretary to the Treasury makes of that?

After all, it is not as if there has been much productivity growth for the last few years.  Treasury uses a measure of GDP per hour worked that simply uses production GDP (I usually use an average of the two GDP measures in charts here).  Here is what their measure looks like.

tsy productivity measure

No growth in labour productivity at all for the last five years (the last year’s drop is largely just a series break in the HLFS hours worked, consequent on survey question changes).

Perhaps coincidentally, that happens to have been the period over which we’ve had big increases in, and persistent very high levels of, net PLT migration (much of it a reduction in the annual outflow of New Zealanders).    And, as I noted, the other day, on Treasury’s own estimates, there have been no economywide capacity constraints at play in that period –  the output gap is estimated to have been (and still to be) negative.  For enthusiasts for large scale migration, it should have been a good time for seeing lots of productivity growth.

For some reason, in their central forecasts Treasury expects quite an increase in productivity growth from about now.  They never explain what (about the economy or policy) is changing that will end now the run of five years of zero productivity growth.  These are their central forecasts (on page 6 here) for labour productivity growth.

Forecast annual growth in labour productivity,

June years
2018 1.3
2019 1.9
2020 1.1
2021 1.1

Perhaps as puzzling, are their real wage forecasts.  Even though Treasury expects the unemployment rate to fall, and the rate of productivity growth to accelerate, these are the real wage growth forecasts.

Forecast annual growth in real wages, June years
2017 (est) 0.0
2018 0.7
2019 0.6
2020 0.0
2021 0.0

Five years and a forecast growth in total real wages of  only 1.3 per cent.  It is enough to make one glad not to be in the paid workforce.   Workers will surely be hoping that Treasury’s alternative immigration scenario –  with those adverse productivity and real wage effects they talked about –  don’t come to pass.    (And I am a little surprised that no Opposition party seems to have pointed out how bleak the outlook for workers’ incomes is under the central Treasury forecasts.)

It would be interesting to have an updated honest and considered assessment from Treasury as to what our immigration policy is doing for New Zealanders.  I suspect there is still a tension between the textbooks and the “ideology”, and the growing accumulation of reasons to doubt that, in these remote islands, in an age when personal connections matter more than ever, simply piling up more people here –  many of the newcomers not even being that highly-skilled –  is making us better off, not worse off.   It is a strategy that is great for owners of business in the non-tradables sectors –  more people means more demand –  but not for the economy as a whole.  Our living standards depend heavily on the ability of firms here to find ever more ways of successfully selling stuff to the rest of the world.  That simply hasn’t been happening on anything like the necessary scale, and the absence of aggregate productivity growth is just one reflection of that.