Brian Fallow on the economy

Brian Fallow is the Herald's Economics Editor

Brian Fallow: Immigration good - up to a point

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With a quarter of NZ's population born overseas it's hard to argue against migrants, but there must be limits.

In 2013 there was a net inflow of 22,000 migrants to New Zealand which has seen a rise in house prices. Photo / Dean Purcell
In 2013 there was a net inflow of 22,000 migrants to New Zealand which has seen a rise in house prices. Photo / Dean Purcell

Migration is a big deal in the New Zealand economy.

In such a small, open and mobile country changes in the net flow of permanent and long-term migrants are a major influence on the economic cycle.

The cumulative effect in terms of stocks - immigrants as a share of the total population - is large by international standards. Nearly a quarter of the population was born overseas, a proportion exceeded among OECD countries only by Switzerland, whose people have just voted for new curbs, and Australia.

Right now there is a strong upsurge in net immigration, which will boost the demand and the supply sides of the economy but, if history is any guide, demand faster than supply. In 2013 there was a net inflow of 22,000, a turnaround from a net loss of 1000 in 2012.

Two recent studies shed light on the impacts of migration on the housing market and on incomes of the population as a whole.

Reserve Bank economist Chris McDonald, in a paper published last December, reports the results of modelling which incorporates historical data on migration, house prices, residential building consents, mortgage rates and the estimated output gap.

He found that a net inflow of migrants - this includes departing and returning New Zealanders - which adds 1 per cent to the population is associated with an 8 per cent increase in real house prices over the following three years.

One additional house gets built for every six migrants but that compares with an average household size of fewer than three people nationwide.

He also found that when the net flow is broken down into arrivals and departures, the former have a bigger effect on house prices than the latter.

As the current upsurge in net immigration is more a case of fewer people leaving it looks like the upward impact on house prices would be more like 7 per cent and it should increase building permit issuance by about 150 a month this year.

McDonald cautions, however, that the strong relationship between migration and the housing market is not necessarily the result of migration itself. Some other factors - in the other 99.8 per cent of the world economy, for example - may be causing migration and house prices to increase at the same time.

Also, any direct impact of migration on house prices might be amplified by its effects on people's expectations of house price inflation.

The other modelling exercise, by Kirdan Lees of the New Zealand Institute of Economic Research, estimates the impact of immigration on per capita gross domestic product, a proxy for incomes. It is positive, as you would expect.

Immigrants deepen the labour pool and, if the points system works properly, widen its range of skills.

They lower the per capita cost of expensive physical infrastructure, such as motorways or the national grid, and institutional infrastructure like Parliament.

By increasing the population they make it a bit easier (or less difficult) to achieve economies of scale.

Larger domestic markets increase competitive pressures that encourage firms to innovate and lift productivity.

Lees cites a study by the Australian Productivity Commission which concluded that skilled migrants lift labour force participation - the proportion of the working age population either employed or seeking work - and increase the capability of the workforce, providing a "small but positive" increase in productivity.

For immigrants themselves it can take a frustratingly long time for the country to take full advantage of their skills and for their incomes to match those of the native population.

Lees asked his model what would the effect on per capita GDP be if New Zealand were to ramp up immigration gradually over 10 years to the point where the net migration gain was 40,000 a year higher than it is now.

He found it would increase GDP per capita by $410 each year even after accounting for the inflationary impact.

The cumulative effect after 25 years is to raise per capita GDP by nearly a quarter.

But if immigration is demonstrably a good thing, would an increase of the magnitude NZIER is advocating be too much of a good thing?

The current target of 135,000 to 150,000 immigrants over three years appears to be driven more by a perception of what is politically tenable than by economics, Lees says.

"We can boost incomes by growing our population and should look to an immigration target that achieves more ambitious population growth. The target should be tuned to population outflows, so the New Zealand population grows each year," he said.

He acknowledges that politically there is no easy time to increase immigration.

In bad times migrants are seen as taking jobs and increasing unemployment even though there is little evidence that immigrants negatively affect either the wages or employment opportunities of New Zealand-born workers, he says, citing research by David Mare and Steven Stillman at Motu.

Right now with unemployment on the way down and employers again looking for skilled labour, this should not be a worry.

In boom times some worry about the pressure immigration seems to put on housing, infrastructure and publicly funded services, such as education and health care.

"We should expect some impact of immigration on the price of housing from the need to home more people and partly because incomes are higher. But our work shows immigration raises incomes of the native population above and beyond any requirement to boost infrastructure or the need to divert resources towards building houses," Lees said.

However, here are some round numbers to bear in mind when considering the political digestibility of such an ambitious target.

What is being proposed is a situation where a substantial majority of the people being added to the population arrive through an airport, rather than a maternity ward.

Just over 60,000 babies are born in New Zealand every year.

On average over the past 10 years, 60,000 non-New Zealand citizens a year arrived as permanent or long-term migrants, that is declaring an intention of staying for at least a year.

Meanwhile, the population is being reduced by around 30,000 people a year dying and a further 75,000 emigrating (the 10-year average again), 69 per cent of whom are New Zealand citizens.

Clearly then what NZIER is proposing would significantly alter the composition of the population, as well as boosting its size and average income.

It is hard to argue that a country a quarter of whose population is foreign-born is hostile to immigration. That is about twice the United States ratio, despite all that Statue of Liberty, send us your huddled masses stuff.

But there are limits and we may not be too far from them already.

The better policy response is surely to give Kiwis fewer reasons to leave.

- NZ Herald

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