The economic impact of a general increase in skilled immigration.

Author:Giesecke, James
 
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The paper uses MONASH, a dynamic computable general equilibrium model, to investigate the impact on the Australian economy of a 50 per cent increase in the skilled migrant intake over the period 2005-2025. The main effect of the policy is to increase the scale of the economy. There is a small transient gain in the average income of incumbents. Underlying this average are large distributional effects.

INTRODUCTION

The paper uses MONASH, a model of the Australian economy, to investigate the economic effects over the period 2005-25 of a hypothetical policy in which the level of skilled visa immigration is increased by 50 per cent over its 2004-05 level. (1) This is equivalent to increasing the migrant intake by approximately 39,000 persons per annum. The paper proceeds as follows. The section below describes the MONASH model, and presents two diagrams (Figures 1 and 2) describing the macroeconomic linkages in the model that are important in the present analysis. These diagrams are used in the results section to discuss the key features of the simulation results. As we shall see, the main effect of the policy is to increase the long-run size of the economy (relative to the size it would otherwise have been) approximately in proportion to the increase in skilled labour. But for this to happen, investment must grow strongly so that the capital stock can grow approximately in proportion to employment growth.

With the economy larger, so too are export volumes. The expansion in export volumes causes the terms of trade to decline. The boom in investment causes the prices of inputs to capital formation to rise. Together, these two effects cause the cost of capital to rise relative to that of labour, resulting in a long-run increase in the labour/capital ratio. This causes average wages to fall relative to what they would otherwise have been. However average capital income rises. Together, these effects lift average income of the incumbent (2) population by approximately $60 per annum for the first sixteen years of the policy.

SIMULATING A SKILLED MIGRATION PROGRAM USING MONASH

Overview of the MONASH model

MONASH (3) is a dynamic computable general equilibrium (CGE) model of the Australian economy. It features detailed sectoral disaggregation, with the version employed in this paper covering 106 industries and commodities. Familiar neoclassical assumptions govern the behaviour of the model's economic agents. Decision-making by firms and households is governed by maximising behaviour. Each representative industry is assumed to minimise costs subject to constant returns to scale production technologies and to given input prices. Household commodity demands are modelled via a representative utility-maximising household. Units of new industry-specific capital are assumed to be cost minimising combinations of commodities sourced from Australia and overseas. Imperfect substitutability between imported and domestic varieties of each commodity are modelled using the CES (constant elasticity of substitution) assumption of Armington. The export demand for any given Australian commodity is assumed to be inversely related to its foreign-currency export price.

The model recognises the consumption of commodities by government, and a variety of direct and indirect taxation instruments. In general, markets are assumed to clear and to be competitive. Purchasers' prices differ from basic prices by the value of indirect taxes and margin services. Dynamic equations describe stock-flow relationships, such as those between capital and investment, and debt and savings.

Since MONASH is too large and detailed to describe in a paper of this size, Figures 1 and 2 are provided as a guide to the model's main routes of macroeconomic causation in the short-run and long-run. (4) These diagrams will be used in the results section to describe the MONASH results. The arrows show the direction of causation between variables. Variables within boxes are determined outside of the model (that is, they are exogenous). Variables within ovals are determined by the model (that is, they are endogenous). The economic mechanisms represented by each arrow are described, as required, in the results section.

[FIGURE 1 OMITTED]

Implementing the skilled migration policy in MONASH

The skilled immigration policy is implemented in MONASH through a set of shocks that can be broadly divided into three components. First, the intake of skilled migrants is increased by 39,000 persons per annum above basecase. (5) In terms of Figures 1 and 2, this is represented as an increase in effective employment, L. (6) However the implementation of this shock in MONASH is far more disaggregated than a simple increase in aggregate effective employment; employment of labour distinguished by 64 skill categories is increased. Here a skill category is defined as a qualification level (for example, post graduate degree, bachelor degree, graduate diploma) cross-classified by a qualification field (for example, information technology, health, education). Holders of each of the 64 types of skill can potentially apply their skill to the supply of labour distinguished by 81 types of occupation, (7) although the ease with which this can be done is constrained by a recognition that some skills are more relevant to some occupations than others. (8) Economy-wide labour supply to any one of the model's 81 occupations is the sum of labour supplies to that occupation by all 64 skill types. The model's 106 industries use labour distinguished by occupation. Each industry faces imperfect substitution possibilities between labour distinguished by occupation. (9)

Economy-wide demand for labour distinguished by any one of the model's 81 occupations is the sum of demands for that occupation across all 106 industries. Economy-wide occupation-specific labour demands and labour supplies are equated via endogenous occupation-specific wage rates.

[FIGURE 2 OMITTED]

The second component of the shocks relates to the speed of short-run capital accumulation. Connection (c) in Figure 1 describes a positive relationship between the rate of return on capital ([P.sub.K]/[P.sub.I]) and investment (I). The strength of this relationship is increased in the first few years of the simulation to give added impetus to capital formation. This reflects a scenario of cautious acceptance on the part of investors that the labour supply shock is permanent. The third component relates to the net assets of skilled migrants at the time they enter the country.

The Productivity Commission provided an estimate of net assets per skilled immigrant. This is used as the basis for calculating a shock to net foreign liability accumulation each year to reflect the net asset position of each cohort of new arrivals. In terms of Figure 2, this is represented by a positive shock to INA (immigrants' net assets) which, via connection (o), reduces the accumulation of net foreign liabilities (NFL) relative to what would otherwise have occurred.

RESULTS

Selected results from the MONASH simulation are shown in Figures 3 to 12. All results are expressed as changes away from where the economy would otherwise have been in the absence of the increase in skilled immigration (that is, the basecase). Using Figures 1 and 2 as summary descriptions of the operation of MONASH, the remainder of this section discusses these results via a sequence of cross-referenced points.

Employment rises, causing investment and capital to rise

The level of immigration is above basecase throughout the simulation period. Hence, relative to basecase, the level of employment (hours) is positive and increasing (Figure 3). The 50 per cent increase in the skilled migration intake lifts average annual employment growth by 0.21 percentage points. This lifts employment (hours) relative to the basecase by 4.6 per cent by 2025.

[FIGURE 3 OMITTED]

By design, the policy encourages the immigration of workers with post graduate degrees, bachelor degrees and advanced diplomas, relative to workers with, inter alia, graduate diplomas, and no post-school qualifications (Figure 4). (10)...

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