modelling of immigration.

Ross Gittens made a neat synopsis of the Productivity Commission’s recent position paper (the full report is still to come) on the economic impacts of migration and population growth in the Age on Saturday 4 February. To summarise even further, the main point is that programs of skilled migration have little effects upon long term wages (positive or negative).

I particularly like his warning that;

these econometric modelling exercises are terribly dodgy.

Which is a fair point, except for the fact that it is not dodgy ‘econometric’ modelling, it is dodgy ‘computable general equilibrium’ modelling. Which is actually an oxymoron.

I have pasted the article overleaf for the sake of posterity.

Immigration adds up, but hard to find net result.
By Ross Gittins
February 4, 2006

AN ABIDING and unshakeable belief of Australian business is that immigration is good for the economy and we need a lot more of it than we’re getting.

But is the belief soundly based? According to a Productivity Commission paper on Economic Impacts of Migration and Population Growth, not really. The economic benefits are “very small”.

The first point to make is that, if you use immigration to add to our population, then obviously you make our economy bigger. After all, every extra person has to be fed, clothed and housed, and this adds to economic activity.

I guess if you’re from, say, the housing industry, that’s all you care about. Immigration adds to the demand for houses.

But we’re not running the economy for the benefit of the housing industry, or any other industry. We’re running it for the benefit of the people, not the producers.

So the real test of whether immigration is good for the economy is not whether it makes the economy bigger but whether it makes the people in the economy better off. By the same token, we’re not running an immigration program for the benefit of the immigrants, but for the benefit of the people already here.

And the test of whether the existing population is better off in narrow material terms, anyway is whether immigration leads to an increase in income per person (that is, gross domestic product divided by the population).

This requires that, on average, the immigrants make an above-average contribution to income per person. They have to add enough for themselves, plus a bit more for the rest of us.

Immigration has played a big part in the growth of Australia’s population and its economy. Had there been no net migration since World War II, our population

today would be not 20 million, but 13 million.

For most of that period, most immigrants were admitted on the basis of “family reunion”; that is, people who wanted to come here to join their relatives.

But the big change, particularly under the Howard Government, has been to increase greatly the emphasis on admitting people of working age with scarce skills. Increasingly, these are Asians who’ve just completed their (fully charged) educations at Australian universities.

At the most fundamental level, the main thing immigration does is add to the demand for labour.

It follows that the more skilled the immigrants are who add to the supply of labour, the more immigration is likely to add to GDP per person. This is why the experiment the Productivity Commission performed in its study was giving immigration every chance to get a good result.

It used an econometric model of the economy to get an idea of what would happen if we increased the skilled migrant intake by half (about 39,000 extra immigrants each year) for the next 20 years.

It found that, by 2024-25, this would cause annual real GDP to be 3.5 per cent greater than otherwise. But get this: by then, real GDP per person would be only $335 a year (or 0.6 per cent) higher than otherwise. In the report’s words, such a result is “neutral to mildly positive”. Translation: chicken feed.

Why are the benefits so small? There are two main reasons.

First, because relative to the size of our existing workforce, an increase of 39,000 skilled workers a year is quite small even though such an increase might be impossible to achieve in reality (because of ever-growing global competition for skilled immigrants as every rich country tries to use immigration to counter its population ageing).

What’s more, although on average the immigrants would be more highly skilled than the average existing Australian worker and so would contribute more to GDP per person, they’re not that much more highly skilled.

But, second, it’s because immigration has far more wide-ranging and complicated effects on the economy than most of us imagine. Economies are complex systems in which everything is connected to everything else, and changing one little bit ends up changing lots of things.

In the case of immigration, some of the changes add to the growth in real GDP per person, but some subtract from it.

The basic positive is that immigration would increase the rate of participation in the labour force and the average number of hours worked per worker. By itself, this effect would increase real GDP per person by 1.3 percentage points or $660 a year in 2024-25.

The first negative comes because, although the immigrants have higher personal productivity than the average existing worker, adding the immigrants causes the overall productivity of labour to fall.

Why? Because workers’ productivity comes mainly from the machines (the capital) they’re given to work with, and the capital equipment would now be spread more thinly between more workers. This “capital dilution” effect subtracts 0.5 percentage points (or $238 a year) from real GDP per person.

Be warned that these econometric modelling exercises are terribly dodgy. Even so, it’s clear increased immigration is a long way from the main game.

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