Incentives and the 457 visa program

The Budget was tonight. I’m an ALP member/supporter and I think the vast majority of priorities are well considered. Hopefully the NDIS and Gonski have long, healthy futures. However my interest is immigration and one thing stood out to more than anything else to me.

According to this Budget paper, the Visa Application Charge will be raised to $900. It’s currently $455. This measure will raise $198.0m over four years.

There are two things that I find interesting about this. The first is how the forecasts over the four years differ. They are; 46.8m in 2013-14, 52.8m in 2014-15, 50.4m in 2015-16 and 48.0 2016-17. While we shouldn’t read too much into these predictions, the revenue estimates can also be used to estimate how many 457 visas DIAC believes will be granted. Now I want to state that I’m no budget costings expert. However, from what I understand about the 457 visa program, this is what assumptions have been made;

  • The increase in the fee is $445. If we divide $46.8m by this figure, we see 105,168.
  • This figure could be the estimated number of 457 visas granted in 2013-14 (primary and secondary). This would seem about right given the recent decrease in employer use of the program since about August 2012.
  • The forecasts then expect there to be a period of growth in 2014-15 of about 13 per cent (if my fuzzy maths is correct, $6m into $46.8m).

While it’s very difficult to predict budget revenues over four years, I would say it’s even more difficult to predict employer use of the 457 program. Here are visa grants in the program since the late 1990s;

Screen Shot 2013-05-14 at 9.00.15 PM

Basically no-one predicted the GFC and associated drop in visa grants. No-one I know of predicted the surge in demand from 2010 onwards. Regardless, I’m sure the option not to provide a figure is disallowed by Treasury. But broadly, we can see the Government expect that the program will fall slightly next year (continuing a trend that appeared about 10 months ago), the rising the next year.

Perhaps more interestingly is what the Government didn’t do. The visa charge is paid by the migrant. I’m sure there are instances where employers cover the costs, but I also believe that most would cover it themselves (I have no pieces of data to back up this claim). However, as part of the process, an employer must also pay a fee. This is called a ‘Nomination’ fee. It is currently $85.

There isn’t any reference to this fee in the budget papers. Ever since taking a (very) basic economics course last year, I can’t stop thinking about incentives. In this instance, the Government’s rhetoric does not seem to match up with policy decisions they are making in regards to incentives. Minister O’Connor has argued, rightly or wrongly, that there is a substantial level of rorting under the program. This morning he was on Fran Kelly’s show talking about the issue. Despite this, and a small number of regulatory fix ups recently announced, there is no evidence that perhaps the most crucial incentive for hiring Australians over 457 visa holders is being changed – the price. Raising the price employers pay to access the program to me is a ‘no-brainer’. Those employers who require it will still pay as the benefit will outweigh any increase in fees. However those at the margins will reconsider – perhaps by having another look (or, according to the programs critics, a first look) at possible Australian workers.

While my understanding of elasticity is poor, and some of this cost could be passed onto visa holders (despite being disallowed under the programs regulations), I still believe this would be a net positive in terms of; creating an additional incentive to hire Australians and raise more revenue to fund (possibly to support the provision of settlement services and more enforcement).

Considering who would be the ‘loser’ of this policy shift – larger businesses who employ the vast majority of visa holders – this is baffling to me. The CFEMU in a recent Senate Enquiry submission allude to the issue of costs in relation to the 457 program. They posit that one of the common arguments used in the debate by supporters of the 457 program – that is costs more to hire a 457 visa holder than an AUstralian –  is false. The submission says that this claim is ‘patently untrue’. While I disagree with this claim for the program as a whole, given it fails to account for different employment types, there is an element of truth in certain situations. Given this, it is surprising that the Budget did not raise the employer costs from $85 to something more substantial. In similar programs across the world, these costs are significantly higher. While there would be some disquiet from employers who use the program, I believe a one-off large increase in the nomination fee would be a sensible policy proposal, creating more incentive to hire Australian workers.

Very quickly on an unrelated note, I hope the Baby Bonus is phased out over time instead of withdrawn on a specific date. I had a look around the Budget papers and couldn’t find anything about it (this article says the payment will cease in March 2014) As Andrew Leigh and Joshua Gans state in the opening of this paper on the introduction of the Baby Bonus, “It is well understood that government policies can distort behaviour”. They concluded that;

In May 2004, the Australian government announced that it would provide a $3000 Baby Bonus to children born on or after July 1, 2004. This delay between the announcement and the introduction of the policy led to what we term an“introduction effect.”We estimate that over 1000 births were moved into the eligibility period, constituting 6% of the babies who would have been born in the month before the policy change. About three-quarters of the reduction in births in June occurred in the last week, and about three-quarters of the rise in births in July occurred in the first week. But around one-quarter of the births that were moved appear to have been moved by more than one week.

The obvious question is on any potential health implications from this type of behaviour. Let’s hope that the end of the Baby Bonus is handled better than the introduction and is gradually phased out over time to limit this type of behaviour.

Edit: Joshua Gans, an author of the study cited above, has an excellent blog post on this subject here. Looks like poor implementation will continue.

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