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.

Sometimes I wonder whether senior government figures, apparently determined to defend their immigration policy, just make up defences on the fly.

I wasn’t so much thinking of Steven Joyce’s assertions that I critiqued earlier in the week.  The Minister cited an apparently-reputable OECD report which shows that, on a particular (plausible) test measure, the skills level of the immigrant workforce in New Zealand are higher than those in the other OECD countries (included in the survey).  Of course, he omitted to mention two things from the same survey:

• New Zealanders’ skill levels, on these OECD metrics, are already among the highest in the world, and
• In every single country in the survey, including New Zealand, the skills levels of the average immigrant worker were below those of the average “native” worker.

But at least Joyce cited statistics that were reasonable when taken in isolation.  Of course, one might reasonably wonder where the evidence is that (a) shortage of skills is a major structural issue in New Zealand, and (b) that actual plausible immigration policies are able to ease those shortages, at a whole economy level.

John Key’s latest claims reach new levels of implausibility –  indeed, if one were oneself unemployed, one might well think them simply offensive.  Bernard Hickey reported the other day that in pushing back against calls for a review of immigration policy setting, the Prime Minister had said:

Key said he acknowledged high migration “put pressure on the system.”

“On the other side, we need these people in an environment where unemployment is 5.2% and where growth is still very, very strong. You’ve just got to be careful when you play around with these things that you don’t hamstring certain industries that need these workers,” Key said.

In the last year, per capita growth in real GDP has been less than 1 per cent.  In quite which state of small ambitions and diminished expectations that qualifies as “very very strong” growth is a bit beyond me.

Even based on New Zealand’s own (internationally underwhelming) record, I’d have been looking for something more like 3 per cent per capita growth before I’d accept a description of New Zealand having “very very strong” growth.

But what really irked me was the suggestion that an unemployment rate of 5.2 per cent suggested that we needed lots of immigrants, as if the entire labour market were overheating.  Of course, even if it was overheating, we know that immigration adds more to overall demand pressures in the short-term than it does to supply.  But even accepting the Prime Minister’s story in its own term, by what possible criteria does he regard 5.2 per cent unemployment as low?

Wage inflation is low, and if anything surprising on the low side.  And his own Treasury only a few days previously had published a nice short note on the implications of the recent revision to the HLFS.   In that piece they succinctly noted

Treasury takes the view that the unemployment rate consistent with full employment (the non-accelerating inflation rate of unemployment or NAIRU) has also fallen over time, so that, as in Figure 4 above, it would be closer to 4.0% than our Budget Update estimate of 4.5%.  Our view is that while the data definition and published data have changed, people’s behaviour has not.

So the Treasury – the government’s principal macroeconomic adviser –  reckons that practical full employment is around 4 per cent.  We don’t know what the other main macroeconomic forecasting agency –  the Reserve Bank – thinks, as they didn’t give us anything on that in this week’s MPS.  But it would be surprising if their estimate was much different –  it had also been something like 4.5 per cent before the HLFS revisions.  There are reasonable grounds for thinking the NAIRU has been trending downward (I outlined some reasons here) –  and perhaps on this measure it might have been 4.5 per cent prior to the recession.

But there is no reason to think that at any time since the start of 2009 –  any time, that is, in the Prime Minister’s 7.5 years in office –  that the unemployment rate has been anywhere near the NAIRU.  We’ve not had anything remotely close to practical “full employment” (and recall that the “full employment” term is Treasury’s not mine).

So, given New Zealand’s relatively liberalized labour market, we’ve had excess unemployment  – more than the economy might need to sustain – for years now.  Those are real people, out there actively looking for work.

And as I showed the other day, our unemployment rate has fallen more slowly since the recession than typical other advanced economies. But somehow the Prime Minister seems to think that our unemployment rate is already so low that we need record numbers of new migrants.

There might be good arguments for a large scale immigration programme –  although it is hard to find them in the government’s flailing attempts to defend the system –  but our “low” unemployment rate just isn’t one of them.   And in case the Prime Minister is indifferent to an unemployment rate of 5.2 per cent, it is worth reminding him that over a 45 year working life, a 5.2 per cent unemployment rate is equivalent to every person spending 2.3 years unemployed –  out of work, and actively looking for a new job.  And yet the PM apparently thinks this is low unemployment. Talk about small ambitions.

Still on immigration, the FT’s Alphaville blog had a substantial piece yesterday on New Zealand’s immigration patterns, prompted by the Reserve Bank Deputy Governor’s recent suggestion that it might be time to look again at the parameters of the immigration programme (a stance, incidentally, not backed by the Governor in his press conference this week).  For foreign readers there was quite an extensive set of charts, although most of it will familiar to New Zealanders.  But what caught my eye was this line

Looking at all these facts, it’s hard to see how New Zealand’s migration policy could be modified to meaningfully reduce net inflows without draconian controls.

“These facts” means, of course, the significant variability in the net outflow of New Zealanders –  swings in that flow being often at least as large as swings in non-citizen numbers.  But this is simply dealing with a straw man. No one I know thinks that the net permanent and long-term migration flow could, or even should, be targeted, at least on an annual basis. New Zealanders will do what they want.  But as readers will know, the centerpiece on New Zealand’s immigration policy is the residence approvals programme, where we aim to hand out 45000 to 50000 approvals a year.  It requires no more than stroke of a ministerial pen to lower that target, and our points system helps ensure that if the target were lowered we would generally cut out the relatively less skilled applicants before the more highly-skilled applicants. We could, for example, cut the target to around 10000 to 15000 people per annum –  which would be similar to the residence approvals (per capita) granted each year in the US.  There might be good reasons not to make such a change all in one go, but even if we did it would hardly require ‘draconian controls’, just a recalibration of the dials, on a system set up to be managed against a numerical target

Of course, changing the residence approvals target wouldn’t immediately cut actual inflows – as most residence approvals are granted to people who first come on temporary visas – but it would make a material difference to actual inflows over time.  And (importantly, since markets work on expectations) it would make an immediate substantial change to expected future inflows, and the associated pressures (whether on heavily regulated urban land markets, or on real interest rates and the real exchange rate).   Exporters might, finally, have a chance to lift exports towards the government’s target.

The residence approvals programme –  the most stable part of the immigration system –  is my focus.  But if we wanted to do something about the record number of work visas granted, that wouldn’t be hard either –  impose a requirement that any job employing a non-resident must generally pay at least, say, $100000 per annum would keep the door open for those pockets of highly-skilled jobs where there is a strong case for short-term foreign labour – and it is those highly-skilled people who are asserted to offer the biggest gains to New Zealand – while easing the pressure on less-skilled New Zealanders’ wages.  Nothing very draconian about that either –  and probably the sort of system voters might think quite reasonable, unlike the most recent poll results (National voters as much as others) that suggest material unease about the current immigration arrangements.

Finally, Statistics New Zealand put out new population estimates yesterday trumpeting the increase in the population over the last year as the largest ever.   An annual increase of 2.1 per cent is certainly large, and rather recklessly so in my view.  But citing the absolute increase in the total number of people as the basis for a “largest ever increase” claim seems a bit too cute, and also rather meaningless. Most trending series have such “record increases” every few years.   Back in the 19th century, for example, the base level of New Zealand’s population was much lower.  In fact, here are the population growth rates pre 1914 from the (unofficial) annual estimates reported on SNZ’s own website.

Both the gold rushes and the Vogel immigration programme rather shade the most recent annual population growth rate.