Wages and Immigration featuring @GrogsGamut and AI Group

Greg Jericho (@GrogsGamut) has a piece today about skills shortages. He takes AI Group to task for a policy submission which calls for an increase in the number of permanent migrants to 220,000, an increase of 30,000 for 2014-15 specifically to ease skills shortages.

Jericho shows wages growth and labour demand more generally has been pretty slack for mining and construction, two of the industries AI Group claim are contributing towards the skills shortage. His argument is also supported by growing apprenticeship numbers. Hopefully I am not slandering him by saying his argument boils down to lower labour demand in key industries that have recently experienced stronger labour demand. I agree with this completely.

(He could have also noted that temporary migration is uncapped via the 457 program and seek to ease skill shortages, perhaps limiting the need for more permanent migrants. I disagree with this approach as eventually temporary migrants become permanent migrants but it is effective in meeting skills shortages in the short term)

Unfortunately, instead of sticking to skills shortages, the article frames additional immigration as an either/or. The heading (which he may not have written) reads ‘is the skills shortage real or is industry trying to push down wages?’. The final paragraph:

Australia’s skills crisis is an ongoing challenge, but submissions such as this from Aig do little to suggest business groups are less concerned about the increasing labour costs and workers pay from possible skills shortages in the future, than they are about further reducing workers pay right now.”

It is intuitive to assume more labour will reduce wages in aggregate. But in the case of Australia, probably wrong. There is little evidence to support this claim in relation to well-run immigration programs. In fact, it is likely Australia’s immigration program actively encourages wages growth, especially for those in lower skilled jobs.

Most research in this field of labour economics is based in the U.S. where research has shown the wage effect of immigration is very small. There is a majority view immigration is either a net neutral or very slightly beneficial for wages. Even the most pessimistic claims see a 1-2 per cent reduction in wages over long time periods (sidenote: this NYTimes article on the wage effects of immigration is a fascinating read).

However immigration to the U.S. is mostly family based, together with a large irregular migration population. These groups tend to be relatively lower skilled than employer-sponsored or other skilled migrants. This means they have a greater impact on similarly skilled domestic workers. In Australia, highly skilled migrants dominate immigration policy, at least for the last two decades. By changing the composition of immigrant characteristics, the effect on wages can be substantial. This is because immigrants can be complements, not substitutes, within a labour market. The extent of complementary and supplementary migration determines the impact on domestic wages.

This table outlines one estimate of the effect of immigration on wages across the OECD between 1990-2000:

Wage effect of immigration: 1990-2000

The net effect on wages of all immigration and emigration to and from Australia was +1.5 per cent over the ten year period. This is admittedly pretty small over such a long period of time, but it is not negative. Further, if we only take the effect of immigration on lower skilled workers, this rises to +4.5 per cent. Given the decade 2000-10 saw large increase in skilled migrant combined with improvements to the human capital characteristics, it is likely (but not certain), these gains have accelerated recently.

The problem with any of this stuff comes back to economic fundamentals. The elasticity of both labour demand and supply, prices, the tax system, the role of government and the restrictions place on migration pathways. The statistics above would look radically different if Australia ran a low skilled migration program, however this would be much better for economic development in poorer nations due to remittances. Further, there is a counter argument to these statistics, opponents of whom claim the effects of terms of trade are not properly accounted for.

I really enjoy Jericho’s writing. It is typically informative and easy to get. In addition, it is a pretty safe bet to assume industry seeks to minimise wages growth through various means. However on this one, I think he has missed the mark and played into a common mistake. Immigration in Australia does not automatically limit wages growth. In fact, it may be helping grow wages through a variety of ways, such as complementarity, agglomeration and innovation. We would be well served in Australia with more research into this area but at the moment, I see claims about wage reduction from immigration as largely false.

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