Higher immigration not an economic magic bullet

Ross Gittins, Sydney Morning Herald, February 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).

In other words, whether it increases our material standard of living. And, as a matter of arithmetic, 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 ...

At the most fundamental level, the main thing immigration does is add to the demand for labour (because of the additional demand for food, clothing, shelter and all the rest), but also add to the supply of labour (by those immigrants of working age who want to work).

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. Which is why the experiment the Productivity Commission performed in its study was giving immigration every chance to get a good result ...

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.

... it's clear increased immigration is a long way from the main game.

More: SMH