The Productivity Commission's recent Position Paper on the Economic Impacts of Migration and Population Growth examines the effects on productivity (output per hour worked) and GNP per capita of higher migration. It concludes that the effect of a 50 per cent increase in the numbers of skilled migrants over the twenty year period to 2024-25 will be to reduce average productivity slightly but increase GNP per capita slightly relative to current migration levels. However, the Position Paper does not assess the implications of the extra migrants for Australian residents (or incumbents). This paper argues that GNP per capita for incumbents will be to lower under the high migration scenario than if current migration levels are maintained.
The Productivity Commission (PC) has produced a 319 page Position Paper on the Economic Impacts of Migration and Population Growth. The report is a valuable compendium of recent information on Australia's migration trends and an objective review of relevant theory and opinion on the economic implications of these trends. It can also be downloaded freely from the PC website.
The report was commissioned by the Treasurer, Peter Costello. The terms of reference ask the PC to assess the relationship between population growth (including immigration) and productivity. These terms of reference leave open the possibility that boosting or pruning immigration could be associated with higher or lower productivity. However, the PC chose only to look at the implications for productivity of higher immigration. It did so by comparing the implications of two scenarios, one where the current immigration level is maintained to 2024-2025 (current migration), and the other where the skilled component of the program was increased by 50 per cent, thus adding an additional 39,000 migrants each year between 2004-05 and 2024-25 (high migration). Under the current migration assumption, Australia's population will increase from 20.2 million in 2004-05 to 24.85 million in 2024-25, and under the high migration assumption it will increase from 20.2 million to 25.54 million in 2024-25. (1) Thus the high migration assumption adds an extra 700,000 residents to Australia's population by 2024-25.
The economic modelling in the PC Report was based on the work of the Monash University Centre for Policy Studies (COPS). COPS used its model of the Australian economy to examine the implications for the Australian economy over the projection period of the demographic scenarios the PC wished to investigate.
According to the Position Paper, productivity (defined as output per hour worked) would be slightly lower by 2024-25 under the high migration scenario than it would be if current migration levels were maintained. Since productivity is the key to Australians' standard of living it could be concluded that we, the existing residents of Australia (or incumbents), would be better off with lower rather than higher migration.
The main reason why productivity is lower under the high migration scenario is that, under the assumptions embodied in the model, the growth in the economy due to extra population will require an increase in imports. This in turn will require an increase in exports (to balance Australia's external account). The result of this is a decline in Australia's terms of trade. This is because the COPS model assumes exporters face downward sloping demand curves, and therefore that they must accept slightly lower prices for the extra product they sell overseas. The consequence is a lowering of the value of output relative to the cost of capital, and thus a decrease in the capital to labour ratio. (2)
The PC Position Paper considers that these productivity findings have little significance for Australians' living standards, since the difference in productivity levels between the two scenarios is slight and is dwarfed by the overall productivity gains expected under both scenarios. These gains are attributable to high levels of capital investment and technological progress, both of which are assumed to continue over the projection period.
It might have been expected that the PC's Position Paper would have been interpreted in the media as a challenge to the economic case for high migration. This was not generally the case. Rather, the media chose to focus on the PC's findings concerning projected growth in per capita GNP. Because of the anticipated jump in overall productivity referred to above, GNP per capita is projected to be some 36 to 37 per cent higher in 2024-25 than at present, no matter which migration scenario occurs. (3) However, the PC findings indicate that, under the high migration scenario, there is a marginal gain. Each Australian will be some $335 (or 0.6 per cent) richer on average than under the current assumption. (4) Again, the PC acknowledges that this difference is not significant. However, it was the focus of most media...