Month: December 2020

Productivity, Productivity Commission, and all that

Michael Reddell New Zealand economic performance, pandemic, Productivity, Productivity Commission

I’ve written various pieces over the years on the Productivity Commission, both on specific papers and reports they have published, and on the Commission itself. I was quite keen on the idea of the Commission when it was first being mooted a decade or so ago. There was, after all, a serious productivity failure in New Zealand and across the Tasman the Australian Productivity Commission had become a fairly highly-regarded institution. But even from the early days I recall suggesting that it was hard to be too optimistic about the long-term prospects of the Commission, noting (among other things) the passing into history of the early Monetary and Economic Council, which had in its day (60s and early 70s) produced some worthwhile reports. In a small, no longer rich, country, maintaining critical mass was also always going to be a challenge, and agencies like The Treasury might be expected to have their beady eye on any budgetary resources allocated to the Commission, and on any good staff the Commission might attract or develop (a shift to another office block at bit further along The Terrace was unlikely to be much of a hurdle).

What I probably didn’t put enough weight on in those early days was the point that if governments weren’t at all interested in doing anything serious about New Zealand’s decades-long productivity failure, there really wasn’t much substantive point to a Productivity Commission at all, unless perhaps as something to distract the sceptics with (“see, we have a Productivity Commission”).

Ten years on, it isn’t obvious what the Commission has accomplished. There have been a few interesting research papers, some reports that may have clarified the understanding of a few policy points. But what difference have they made? Little, at least that I can see. Is the housing market disaster being substantively addressed? Is the state sector better managed? Is economywide productivity back on some sort of convergence path? Not as far as I can tell. Mostly that isn’t the Commission’s fault, although my impression is that the quality of the reports has deteriorated somewhat in recent years. But if politicians don’t care about fixing what ails this economy, why keep the Commission? It might be no more pointless than quite a few other government agencies and even ministries, but they all cost scarce real resources.

For the last 18 months I’ve been looking to appointment of the new chair of the Commission, replacing Murray Sherwin who has had the job for 10 years, as perhaps one last pointer to the seriousness – or otherwise – of Labour about productivity issues. There wasn’t much sign the Minister of Finance or Prime Minister cared much at all – or perhaps even understood the scale of our failure – but just possibly they might choose to appoint a new chair of the Productivity Commission who might lead really in-depth renewed intellectual efforts to address the failure, perhaps even in ways that might, by the force of their analysis and presentation, make it increasingly awkward for governments (Labour or National) to simply keep doing nothing. I wasn’t optimistic, partly because I’d watched Robertson and Ardern do nothing for several years, but also because – to be frank – it really wasn’t clear where they might find such an exceptional candidate even had they wanted one.

But then they removed all doubt last week when they announced the appointment of Ganesh Nana as the new chair. There is a strong sense that he is too close to the Labour Party. If that wasn’t ideal, it might not bother me much – especially given the thin pickings to choose a chair from among – if it were matched with a high and widespread regard among the economics and policy community for his rigour and intellectual leadership, including on productivity issues. Or even perhaps if he knew government and governent processes inside out (Sherwin, after all, was a senior public servant rather than himself being an intellectual leader). I don’t suppose the Nana commission is simply likely to parrot lines the Beehive would prefer – and can imagine some of Nana’s preferences being uncomfortable for them from the left – but this is someone who has spent 20+ years in the public economics debate in New Zealand, from his perch at BERL, and yet as far as I can tell his main two views of potential relevance are that (a) inflation targeting (of the sort adopted in most advanced economies) is a significant source of New Zealand’s economic underperformance, and (b) that a much larger population might make a big difference (notwithstanding use of that strategy for, just on this wave, the last 25 years or so.

Then there was this bumpf from the Minister’s press statement announcing the appointment

Ganesh Nana said he is excited to take up the position and looks forward to working with other Commission members and staff to focus on a broad perspective on productivity.

“Contributing to a transformation of the economic model and narrative towards one that values people and prioritises our role as kaitiaki o taonga is my kaupapa.  This perspective sees the delivery of wellbeing across several dimensions as critical measures of success of any economic model.

“Stepping into the Productivity Commission after more than 20 years at BERL will be a wrench for me and a move to outside my comfort zone.  However, this opportunity was not one I could ignore as the challenges facing 21st century Aotearoa become ever more intense.

“The role and nature of the work of the Commission is set to change in light of these pressing challenges.  I am committed to ensure the Commission will increasingly contribute to the wider strategic and policy kōrero,” Dr Nana said.

Whatever that means – and quite a bit isn’t at all clear to me – it doesn’t suggest any sort of laser-like focus on lifting, for example, economywide GDP per hour worked, in ways that might lift material living standards for New Zealanders as a whole.

(And then there was the unfortunate disclosure in the final part of the Minister’s press statement that the government has agreed that while functioning as a senior economic official, paid by the taxpayer, Nana is to be allowed to retain his almost half-share in his active economic consulting firm BERL. There is the small consolation that the Commission itself will not contract any business with BERL, but that should not be sufficient to reassure anyone concerned about what is left of the substance or appearance of good governance in New Zealand.)

A couple of weeks ago the Productivity Commission released a draft report on its “Frontier Firms” inquiry. The Commission does not control the inquiries it does – they are chosen by the government – and this one also seemed a bit daft to say the least, since “frontier firms” always seem much likely to arise from an overall economic policy environment that has been got right, rather than being something policymakers should be focusing on directly. But the Commission might still have made something useful, trying to craft something a bit more akin to a silk purse from the sow’s ear of a terms of reference.

I had thought of devoting a whole post to the draft report, and perhaps even making a formal submission on it, but since the report will be finalised under the Nana commission that mostly seems as though it would be a waste of time. And there is the odd useful point in the report, including the reminder that our productivity growth performance has remained dreadful by the standards of other modestly-productive advanced economies, and that we have relied on more hours worked, and the good fortune of the terms of trade, to avoid overall material living standards slipping much recently relative to other advanced economies. Productivity growth – much faster than we’ve achieved – remains central to any chance of sustainably lifting those material living standards and opening up other lifestyle etc choices.

But mostly the report is a bit of a dog’s breakfast. Just before the draft report was released the Commission released a short paper on immigration issues that they had commissioned. I wrote about that note, somewhat sceptically, at the time – sceptical even though the gist of the author’s case might not be thought totally out of line with some of my own ideas. It turned out that the Fry and Wilson work was the basis for the Commission’s own discussion of immigration in the draft report, a discussion that neither seems terribly robust nor at all well-connected to the “frontier firms” theme of the report. Perhaps the RSE scheme has problems, perhaps some low-skilled work visas are issued too readily, but…..apple orchards and vineyards didn’t really seem to be the sort of “frontier firms” the Commission had in mind in the rest of the report.

Perhaps my bigger concern was about their attempts to draw lessons from other countries. They, reasonably enough, suggest that there might be lessons from other small open advanced economies, perhaps especially relatively remote ones. But then they seem to end up mostly interested in places like Sweden, Finland, Denmark and the Netherlands – all of which are in common economic area that is the EU (two even with the euro currency, most with no disadvantages of remoteness). I don’t think there was a single reference to Iceland, Malta, or Cyprus. Or to Israel – that country with all the high-tech firms and a productivity performance almost as bad as ours. And – though it might not be small, it has many similar characteristics to New Zealand – no mention at all of Australia. Remote Chile, Argentina and Uruguay get no mention – even though two of those three have had strong productivity growth in recent times – and neither, perhaps more surprisingly, do any of the (mostly small) OECD/EU countries in central and eastern Europe, many of which are now passing New Zealand levels of average labour productivity.

There wasn’t any systematic cross-country economic historical analysis or a rigorous attempt to assess which examples might hold what lessons for New Zealand. Instead, there a mix of things that might be music to the ears of a government that wants to be more active, and perhaps to punt our money again on the emergence of some mega NZ excellent firm(s) – without any demonstrated evidence that it (or its officials) can do so wisely or usefully – plus the odd thing that must have appealed to someone (eg the material on immigration – a subject that might still usefully warrant a full inquiry of its own, if the government would allow it, and when better than when we are in any case in something of a hiatus).

This will probably be the last post for this year, so I thought I’d leave you with a couple of charts to ponder.

The first is a reminder of just how little we know about what is going on with productivity – or probably most other aggregate economic measures – right now. As regular readers will know, I have updated every so often an economywide measure of labour productivity growth that averages the two different real GDP series (production and expenditure) and indexes of the two measures of hours (HLFS hours worked, QES hours paid).

mix of econ data

First, there is the huge difference in the two GDP measures. Whichever one one uses – but especially the expenditure measure – suggests a reasonable lift in average labour productivity this year (on one combination as much as 5 per cent). In the period to June there was an argument about low productivity workers losing their jobs, averaging up productivity for the remainder, but how plausible is that when hours are now estimated to be down only 1% or so on where they were at the end of last year (much less than, say, the fall in the last recession)? And thus how plausible is the notion of an acceleration in productivity growth given all the roadblocks the virus, and responses to it, have put in place this year. And although SNZ’s official population estimates have the population up 1.5 per cent this year (to September), if we take the natural increase data and the total net arrivals across the border data, they suggest a very slight drop this year in the number of people actually in New Zealand. I’m not sure, then, which of the economic data we can have any confidence in, although I’ll take a punt that the single least plausible of these numbers is the expenditure GDP one, and any resulting implication of any sort of real lift in productivity this year. SNZ has an unenviable job trying to get this year’s data straight.

But, of course, the real productivity challenge for New Zealand was there before Covid was heard of, and most likely be there still when Covid is but a memory. As we all know, New Zealand languishes miles behind the OECD productivity leaders (a bunch of northern European countries and the US), but in this chart I’ve shown how we’ve done over the full economic cycle from 2007 to 2019 relative not to the OECD leaders but to the countries that in 2007 either had low labour productivity than we did, or were not more than 10 per cent ahead of us then. For New Zealand I’ve shown both the number in the OECD database, and my average measure (which has the advantage of being updated for last week’s GDP release).

productivity 07 to 19

Whichever of the two NZ measures one uses, we’ve done better only than Greece and Mexico. Over decades Mexico has done so badly that the OECD suggests labour productivity in 2019 was less than 5 per cent higher than it had been in 1990. Even Greece has done less badly than that.

(As a quick cross-check, I also looked at the growth rates for this group of countries for this century to date. We’ve still done third-worst, beating the same two countries, over that period.)

It is a dismal performance. And there isn’t slightest sign that our government cares, or is at all interested in getting to the bottom of the problem, let alone reversing the decades of failure. Talking blithely about alternative measures of wellbeing etc shouldn’t be allowed to disguise that failure, which blights the living standards of this generation and the prospects of the next.

(And, sadly, there is no sign any political opposition party is really any better.)

Monetary policy in 2020

Michael Reddell Monetary policy, pandemic

On Saturday I did a guest lecture to the Master of Applied Finance course at Victoria University. Martien Lubberink, who runs the course, invited me along to talk to the students about the Reserve Bank’s monetary policy this year (as it happens, most years for the best part of two decades I used to do a lecture to this same course articulating and championing the monetary policy framework and the Bank’s conduct of policy).

There wasn’t a great deal in the lecture that hasn’t already been covered in one or (many) more posts over the course of the year, but if anyone is interested here are the slides I used

Activity over substance VUW presentation 12 Dec 2020

and this is the story I was trying to tell

Notes for VUW MAF lecture on 2020 mon pol 12 Dec 2020

For the most part, I tried to look at what the Bank has, and hasn’t, done on their own terms. I didn’t, for example, spend lots of time on whether negative OCRs would “work”, but rather took as given the Bank’s repeatedly stated view that they would. I didn’t challenge the “least regrets” approach they have claimed, since the second half of last year, to be guiding them, but looked at how they had done relative to that worthy aspiration. I took for granted their embrace of the notion that in downturns when both inflation forecasts undershoot and unemployment forecasts overshoot aggressive monetary action is warranted. And against the backdrop of all that sort of thing I suggested that the year was best characterised as one of lots of activity, and rhetoric, and not a great deal of monetary policy substance.

For example, I included these two indicative charts comparing (real) interest rate and (nominal) exchange rates this year and in each of the three previous recessions since inflation targeting was adopted.

activity over substance

Whatever the impact of the LSAP and the funding for lending programme etc, the bottom line remains that key financial market prices just haven’t moved very much (and that is another area where I take as given – but also agree with the Bank – that to the extent those programmes work they do so largely by altering interest and exchange rates).

I ended the lecture with some thoughts on how we should evaluate the Bank’s monetary policy performance this year. From my notes

How should we evaluate the Bank’s performance?

We always have to be careful, when evaluating government agencies, not to hold them to unreasonable standards.  In this talk I’ve tried to ensure that I use either information that was available to them when they made decisions, their own rhetoric and arguments, or common international central banking practices and standards.   We can’t blame the RB, for example, for not pre-emptively easing a year ago in anticipation of a pandemic no one –  no central banker anyway –  could reasonably know about.

But we, and should, criticise them for:

  • The failure to recognise and respond to the emerging risks early (monetary policy works with a lag, risks around being near the lower bound were well known),
  • The failure, having decided that the negative OCR was a preferred option, to have ensured the bulk of the system was operationally ready (almost inexcusable, and has meant we have had monetary conditions tighter than otherwise for most of the year,
  • The failure to operate as if “least regrets” was actually guiding policy – the evidence for this not being my independent analysis, but their own numbers,
  • Falling back on exuberant spin regarding the impact of the LSAP, when realistically the effective impact is likely to have been small,
  • Opening the way to the “$100bn money printing” rhetoric by adopting LSAP rather than a mod-point on the yield curve target (as the RBA initially did, and even the LSAP the RBA is now doing is much smaller relative to the size of the economy),
  • Allowing the (second-best) sensible FFL instrument to also be framed as some dangerous money printing exercise,
  • Lack of serious transparency – whether the utter refusal to publish background analysis/research behind the mon policy choices/instruments, even in extremely unsettled times and when the rest of govt was being proactively transparent, or the continued invisibility and silence of the non-executive members of the MPC, and
  • The lack of effective communications and framing. There have been few speeches all year, hardly any published research, nothing from the non-exec MPC members.  Instead, they’ve largely left the framing of issues to critics –  notably the ones who think the Bank has done too much and is to blame either for house price inflation and some looming general inflation.  There has been nothing authoritative from the Bank, and they seem constantly to have been running to catch up.

    It has been a poor performance, that reflects poorly on all those involved: the Governor, his senior staff, the invisible non-exec MPC members, the Board (paid to hold management to account) and the Minister with responsibility for management and the Board.

    Of course, it is fair to ask how much difference a better monetary policy –  substance and presentation –  might have made.  By now, perhaps not a lot substantively – the mon pol lags are longer –  but into next year it would have helped lay the foundations for a strong recovery, a lift in inflation, and a rapid return to full employment (we can’t afford the 10 years it took after 2007).  And, agree with them or not, the RB would stand higher in informed opinion, and if we value the idea of an operationally independent central bank, that would have to have been a good thing.  It would truly have been a least regrets strategy.

At the end of the lecture, we had some time for questions. Perhaps the best question was the one I could not give a compelling answer to: why – given their projections, given their avowed “least regrets” approach – has the Bank and MPC not been willing to do more?

I had noted that there were similar issues with central banks in a number of other countries, and indeed that it was striking how relatively little monetary policy had done in this downturn and period of greatly-heightened uncertainty. You can see it in, for example, the published projections of the Reserve Bank of Australia, the ECB, and probably others too – where for several years to come not only is inflation expected to be below target, but unemployment is above general estimates of the respective NAIRUs. As our Governor notes, that is a combination that points in the direction of a lot of monetary policy support.

(As just one example of what is going on elsewhere, the ECB released its latest projections late last week.

ECB inflation

Three years out inflation is still barely back to 1.5 per cent, compared with a target of just under 2 per cent. In these same projections, the unemployment rate rises further from here.)

Central banks could do more to boost the recovery in activity and employment. The quiescent inflation numbers – their own projections – tell us that. In fact, those projections (and market and survey expectations) are best seen as a constraint limiting how much central banks can do; a constraint that when inflation projections are below target should be thought of as a non-binding constraint (especially when central banks around the world have had an upward bias to their inflation forecasts for the last decade).

So why don’t they do more? I don’t know. They don’t say – especially not our Reserve Bank which talks one set of rhetoric (often quite good rhetoric) and acts inconsistently with that rhetoric. Perhaps there is something in the story that active-government left-liberal Governor doesn’t want to use monetary policy because he wants to put pressure on the government to run bigger deficits and further increase public spending. I hope that isn’t a part of the story – it would be profoundly inconsistent with our democratic institutions of government for a non-elected official (and his lackeys on the MPC) to refuse to do their job simply to try to advance their personal political preferences in other areas. Perhaps they don’t believe the rhetoric (they themselves use) and doubt that monetary policy can do much more good in stabilising the economy. Perhaps there is some secure-public-employee indifference to the scandal of prolonged and unnecessarily high unemployment (which never affects senior central bankers, and probably rarely their children): it did, after all, take 10 long years after 2007 to get unemployment in New Zealand back down again. Perhaps there is some embarrassment that with all those years of advance notice they didn’t get their act together and ensure that banks were operationally ready for negative OCRs? Perhaps, globally, there is some discomfort that with all those years advance notice – most having got to the lower bound in the last recession – nothing (repeat nothing) has been done anywhere to make the lower bound less binding, and enable the sorts of deeply negative interest rates that (for example) former IMF chief economist Ken Rogoff has called for.

Sure, it is easy for people to talk about all the fiscal stimulus that has been provided instead of monetary policy. But those published central bank forecasts – here or in other countries – capture all those effects. It is the job of monetary policy to estimate all the other effects and then, if the inflation outlook is below target and the unemployment outlook is above NAIRU-type estimates, to do more, to do what it takes. with monetary policy. That is what we have discretionary monetary policy for. (There are, of course, hard cases where the inflation and unemployment strands aren’t aligned, but as our own Governor has repeatedly pointed out this year, this isn’t one of those times.)

So, I really don’t know the answer to the student’s question. But I should (as should anyone who follows central banks closely), because they should be telling us. Instead, we’ve had a year of few speeches, no visibility (still) for the non-executive MPC members, little or no published research, a refusal to release background documents and analysis, and little or no attempt to articulate and defend a robust framework. 10 days or so ago, for example, the Governor gave a speech to an Australian audience on New Zealand monetary policy this year. As far it went, and by Orr’s standards, it wasn’t a bad speech but it addressed none of these questions. That isn’t good enough, and reflects poorly on everyone involved – the Governor, the MPC, the Board supposed to hold them to account, and the Minister of Finance with overall responsibility for the Bank, for monetary policy, and for economic performance more broadly.

There has been a lot of rhetoric, a lot of busy-work, but not a lot of monetary policy doing what it is there for, and not much transparency and accountability either.

Could do better?

Michael Reddell Immigration, New Zealand economic performance

Minus the question mark, that is the title of a new and fairly short report undertaken for the Productivity Commission by economists Julie Fry and Peter Wilson on “Migration and New Zealand’s frontier firms”. The Commission itself has been charged by the Minister of Finance with reporting on what could be done about so-called “frontier firms”, and has been casting about for various possible angles (apparently their draft report is due later this week). There is a Stuff article on the Fry and Wilson paper here, which begins this way

Despite its best efforts to become the next Silicon Valley, New Zealand has instead attracted a lot of nice people but very few trailblazers.

There probably have been – and still are – a few with that “next Silicon Valley” type of aspiration, but the key point is more like “lots of individually nice people, but probably not much economic gain to New Zealanders as a whole”.

Fry and Wilson’s own summary runs this way

Fry and Wilson key points

Fry and Wilson themselves seem a bit more sceptical on the economic value (to New Zealanders) of New Zealand’s large-scale immigration programme than they were in their short 2018 book that I wrote about here.

I’m a bit ambivalent about the report, even though – considered broadly – it goes in somewhat the same policy direction as the approach I’ve been championing for much of the last decade. Perhaps that is mostly because the Productivity Commission didn’t offer to pay very much for a report, and so the authors didn’t have the time or resource to consider the issues around the economics of New Zealand immigration in any great depth. A serious look at New Zealand’s immigration policy and the connection to New Zealand’s underwhelming economic performance would require, for example, a full Productivity Commission inquiry devoted just to that issue, but the government determines inquiry topics and I gather they’ve refused to have an immigration policy one done, even though immigration policy is one of the larger discretionary government structural policy interventions in the economy. But I can’t blame Fry and Wilson for that.

But unfortunately the (presumed resource) constraint means that the report really isn’t much more than an initial view that large scale immigration over the last 30 years probably hasn’t done much good for New Zealanders, and that hence somewhat less in future would more likely be beneficial. I don’t disagree – and, of course, have gone further than the authors in my hypothesis about the damage large scale immigration may have done (a story they describe as “plausible but untested”) – but who is the report going to persuade? The report doesn’t seek to engage with a broader academic literature that tends to be quite positive about economic gains from immigration, at least in the advanced world as a whole, or with the advocacy for it – including in a New Zealand context – by outfits like the IMF or the OECD. They might – as I do – think many of these results don’t stand up to close scrutiny (eg on the IMF here, or the OECD here), or may not have much application to a single extraordinarily-remote location, but they neither engage with the papers, not articulate their critiques. There isn’t much New Zealand specific formal research, but somewhat to my surprise, there wasn’t even a reference to the big advocacy piece the New Zealand Initiative did in 2017 (reviewed and critiqued at length here).

But in the rest of this post I wanted to comment mostly on two areas where I wasn’t particularly convinced, even as someone generally somewhat sympathetic to the thrust of the report. The first is the claim – also in those Key Points above – that New Zealand’s policy for attracting skilled migrants is “close to international best practice already”. The authors seem to offer little or no support for this proposition, but even if it were true it would not be particularly reassuring given that (a) we take a lot of migrants, as a percentage of New Zealand’s population, and (b) the evidence suggests that on average migrants are no more skilled than comparable New Zealand cohorts. The large numbers of people who have managed skilled migrant entry as low-level retail or cafe managers, for example, suggests that if this is world best practice, world practice is pretty poor (which in many cases is true no doubt, but that is their problem not ours). But more specifically, we also know that the New Zealand system for granting residency to “skilled migrants” is now strongly skewed in favour of people who are already in New Zealand – explicitly favouring people from abroad with New Zealand qualifications and New Zealand work experience (with bonus points for living in remote corners of this remote country). That favours absorption and integration, but generally not outstanding excellence: our universities generally not being top-tier, and our economy not being some global centre of excellence. It simply isn’t that easy for, say, a young family – parents perhaps good graduates of top 20 overseas universities – to just get residency in New Zealand, not without first relocating temporarily to the ends of the earth on a short-term visa in the hope residency eventually works out. To the extent there is benefit for New Zealand putative “frontier firms” in migration, it some of those sorts of people – with some proven work experience globally – who are likely to be more valuable than some 21 year old student studying at Massey who couldn’t get into Stanford or Cambridge.

Of course – and here I think Fry and Wilson probably agree – not that many top tier foreign people are likely to want to live and work here (as distinct from the boltholers), but lets not get complacent that our current skilled migration system is really fit for purpose, whether as to target number or conditions of entry (and although it isn’t dealt with in this report, a lot of our residency grantees don’t even come in via the skilled migrant pathway).

(On that “not that many top tier foreign people are likely to want to live and work here”, see my doubts expressed a few years ago about the the-new Global Impact Visas. Rereading that old post yesterday, nothing in what we have seen and heard of the scheme’s operation so far would lead me to materially alter my view of the prospects.)

The Productivity Commission over the last couple of years has emphasised quite a bit a desire to see New Zealand-based firms investing more beavily in technology. I’ve been uneasy about this line of argument because at times the Commission has seemed to put the cart before the horse, not digging deeply enough to understand why the New Zealand economy is underperforming and more profitable business opportunities aren’t apparent. This emphasis seems to carry over to the Fry and Wilson report – no doubt delivering something consistent with what the client was looking for. There are several pages (in what is really only a 30 page report) on opportunities (“very significant upside productivity potential”) if only we made it materially harder for firms to hire foreigners.

The predominant mechanism they seem to have in mind – whether in relation to students, working holidaymakers, or RSE workers (there is a whole section on the fruit industry) – is that if labour is harder and more expensive to get, firms will invest in technology. On the one hand, they seem to be buying into a model in which immigration has driven down wage rates (for which the evidence, considered broadly – as opposed to a few concentrated subsectors – is quite thin; in New Zealand wages have risen faster than GDP per hour worked over the last few decades). But there are also disconcerting parallels with a couple of very shaky arguments. Back in the disinflationary 1980s there was sometimes an argument used (in the UK and here) that a high real exchange rate – pretty much an inevitable part of a transition towards low inflation – was really quite good because it would encourage strong firms to invest more heavily in advanced technology etc to retain competitiveness. There was never much sign of that in the aggregate. And more recently we here claims that materially increasing minimum wages, from already quite high (relative to median wages) levels, will itself boost productivity and stimulate investment in technology. There might be some of that – firms will look for ways to mitigate the forced increase in labour costs – but there is no evidence in support of it as some sort of economywide pro-productivity strategy. And so I’m also uneasy when this argument is applied so simply to immigration. Perhaps there is something to it at an individual firm level, but it is unlikely to hold much at an economywide level. (Relatedly, much of the discussion in the paper seems to be about average labour productivity, and very little about the – conceptually more important – total factor productivity. One can raise labour productivity in ways that still leave the overall economy worse off – Think Big in the 1980s was probably such an example.)

The authors seem to favour a much lower level of non-citizen immigration to New Zealand (on average over time), not just nipping and tucking in a few individual migration approval streams. But if so, then their paper seems to neglect a rather important adjustment channel. As they note, historically New Zealand economists tended to emphasise the significance of the short-run demand effects of migration (and the well-established point that the short-run demand effects tend to outweigh near-term supply effects plays an important part in my own story). But if immigration by non-citizens is cut back markedly and for a prolonged period we would expect to see a reduction (perhaps a quite significant one) in the real exchange rate. And – to take the fruit industry as an example – a lower exchange rate might well more than outweigh any sector-specific wage effects from reduced access to migrant workers, leaving no particular incentive for the industry to invest more aggressively in technology to replace labour (for the existing tradables sector this is my story of how adjustment works once reform is done not just to an indvidual firm – deprived of access to labour – but at an economywide level). It isn’t that I really disagree with the Fry and Wilson direction of policy, but their analysis seems a bit too simple, and also inclined to treat the existing structure of the economy as a given (whereas on my argument I think we would, over time, see quite a different mix of sectors).

Fry and Wilson end their paper with some specific post-Covid suggestions for the government

fry and wilson 2

I’m sceptical that the 4th bullet has any content to it, although the broad direction of their recommendations isn’t one I’m uncomfortable with. My own suggestions (from a speech a few years ago) are along somewhat similar lines.

reddell immigration specifics

Finally, in their paper Fry and Wilson note of my views

While plausible, Reddell’s hypothesis has not been tested empirically. However, it is
possible that the natural experiment provided by the Covid-19-induced border closure will
enable more solid conclusions to be drawn.

I don’t think that is so. Most importantly, for a natural experiment you really want New Zealand immigration policy changed with all else unchanged, but this year too much has changed all at once for any sort of read, let alone a clean one. Among those changes, the differential ways different countries have handled Covid, massive fiscal stimulus (which, all else equal, tends to put upward pressure on the real exchange rate), most other countries also closing their borders to a greater or lesser extent, and a big disruption to key elements of our tradables sector. Oh, and all parties expect – political parties seem to champion – a return to the immigration status quo ante just as soon as possible.

For anyone wanting to read more of my story, there is this older paper from 2013, a speech on related topics from 2017, and a chapter in a recent book on New Zealand policymaking in which I look at some of the issues around New Zealand’s long-term economic underperformance, with an emphasis on the notion that however sensible large scale immigration may be for some countries, it seems not to have been more recently so for a remote land heavily reliant on a fixed stock of natural resources, and with few or no asymmetric shocks having worked in our favour for 100 years or more.