RBA pushes old myths on migration and wages

Economic commentators could scarcely contain themselves last week. Was it the Federal Budget? No. The Intergenerational Report? Not quite. It was a speech by Reserve Bank of Australia (RBA) Governor Philip Lowe at the Economic Society of Australia (QLD).

The circumspect and considered Governor finally gave them the little hit many were hoping for. You could see it in the articles over the last few weeks. The pressure was building, and then finally he did it – suggesting higher immigration leads to lower wages.

It would be great if this question, which has plagued labour economists for decades, was resolved with such certainty. But there’s no evidence to suggest this is true.

Dr Lowe’s talk was titled The Labour Market and Monetary Policy. Reading this, I expected a discussion of the impact of bond purchases and changes to interest rates on business confidence in the economy, and how that affects the labour market and firms’ hiring decisions. What we got, however, was a few charts and a narrative littered with banal statistics that read like an introduction to the concentration of temporary migrants in the labour market. In doing so, the analysis ignored the vast literature on migration and the labour market.

Understanding the interaction between migration and labour markets is complex. Migrants supply labour, but they also consume goods and services, and in so doing they add to broader economic activity. Luckily, we have some cool natural experiments in the form of sudden policy changes that have allowed economists and other social scientists to attempt to explain the impacts of migration on the wages and employment prospects of local-born workers.

The most famous paper is The Impact Of The Mariel Boatlift On The Miami Labor Market, from US-based labour economist David Card in 1990, which analysed the labour market impact of the sudden influx of about 125,000 migrants from Cuba into Miami in 1980. Card found there was virtually no impact on the employment outcomes of workers in Miami as a result of this sudden influx.

More recent research using other techniques, including modelling I did for the 2019 report Effects of temporary migration, has backed these findings – immigration does not harm the employment prospects of local workers.

And yet the myth persists.

In addition to a lack of understanding of the contemporary literature, the RBA’s analysis missed a few things. For example, in calculating the number of temporary workers, it did not include New Zealand citizens, who are considered temporary because they do not have permanent visa status. But why treat citizens of New Zealand differently?

Dr Lowe notes there has been a drop of roughly 250,000 temporary-visa holders in Australia since the start of the COVID-19 pandemic, most of which came from the loss of international students and working-holiday makers. However, not everyone on a student visa decides to work. In 2016, the employment-to-population ratio for international students was about 51 per cent. For working-holiday makers, it was closer to 71 per cent.

More broadly, this episode has shown us how narrow the thinking of some of our most critical institutions can be when it comes to issues of national importance. This kind of analysis is what economists call partial equilibrium. It involves looking at one aspect of the economy (in this case, the labour market) without considering other flow-on effects or benefits.

This is particularly crucial on the subject of immigration. So much of Australia’s economy, including our ability to invest in capital and business’ confidence that projects can go ahead, depends on the know-how and skills of our often carefully-selected migrants.

At best, this analysis was naïve, at worst ill-informed. For an organisation with the analytical heft of the RBA this speech was disappointing. It ignored the existing body of research in this field, which has shown migration to have a small-to-negligible positive effect on aggregate wages in the economy.

In addition to this, skilled primary migrants have a positive impact on the budget. The Federal Government’s latest Intergenerational Report, released just last month, estimates that the net fiscal impact of skilled primary migrants nets the Federal Government $319,000 over their lifetime.

They also add to the level of economic activity in the economy to the tune of $4.2 million over the course of their lifetime (in net present value terms) through consumption of goods and services. In addition to effects like these we can measure, there are also likely to be other spillover benefits that we can’t yet measure.

This has been a year like no other. We’ve shut our borders in response to the pandemic, and the effects of this decision won’t be known for years to come. It’s also a year in which the Federal Government has pumped almost $270 billion into the economy. As the body largely responsible for administering these funds to the bank accounts that needed them, and performing some stimulatory spending of its own, the RBA should know that this will have had an impact on employment growth and wages, particularly in some sectors. Extra money sloshing around an economy always will.

Economists know that the true underlying driver of real wage growth will be productivity. Governments and businesses need to consider what levers they can pull to increase productivity to fuel wage growth. Playing around with immigration targets won’t get us there. In fact, it could move us further away from this ultimate goal.