Why skilled migrants matter for growth

24 November 2017

More than 70 years ago, Australia’s first ever Minister of Immigration, Arthur Calwell, wrote:

In our expanding economy, and with the Government’s policy of full employment, immigrants will make jobs as well as take them.  We need more and more workers for our developing industries, and these new Australian citizens, by increasing the consumer population, will create extra work for others.  Side by side with this factor is the steadily increasing flow into Australia of new industries, which will provide vast employment fields for immigrant workers and for Australians as well. 

 

Source: A A Caldwell 1946, Immigration means more – not less – work, Information for the Sydney Standard.

 

The Minister got a lot of things right.  His wisdom and foresight that migrants can expand the productive capacity of the nation, increase consumption and create jobs would appear to be lost on many of today’s public and public-appeasing politicians.  But this is only part of the story of how migrants can fuel growth. 

Arthur Calwell also got some things very wrong.  During his second term, he was a staunch advocate of the White Australia Policy: while the British were welcomed to Australia, Calwell attempted to deport many Malayan, Indochinese and Chinese wartime refugees.  It would be nice to think that we are now more enlightened. 

So what is the correct and full story?  Let’s deal first with how migrants can and have expanded productive capacity, and turn next to consumption-stimulated growth.  As we proceed, let’s also address what Arthur Caldwell got right, omitted, and got wrong.

 

Skilled migrants have expanded the productive capacity of the nation

What Arthur Calwell understood was that to gain maximum benefit from our land and resources Australia needed more people.  In his first and nation changing speech to the House of Representatives, delivered in a barely unfolding post-war era, Arthur Calwell articulated his vision:

If Australians have learned one lesson from the Pacific War … it is surely that we cannot continue to hold our island continent for ourselves and our descendants unless we greatly increase our numbers.  We are but 7,000,000 people and we hold 3,000,000 square miles of this earth's surface … and our density of population is only 2.5 persons per square mile … much development and settlement have yet to be undertaken.  Our need to undertake it is urgent and imperative if we are to survive.

In 1945 the fertility rate was 2.7 births per woman and rising in the post war era.  Today the rate is below replacement level at 1.8.  That is, without migration, Australia’s population would dwindle.  Those who subscribe to Malthusian’s teachings might argue that that is a good thing; that a population count of over 23 million is quite enough thank you very much.  I beg to differ.  But within reason.

While the population has tripled, Australia remains a large, resource rich and relatively sparsely populated continental island.  This is not to say that we should let in everyone who wishes to enter.  To grow the wellbeing of all necessitates that the Government is selective in who it allows to migrate, and influences migrant settlement patterns.  The focus here is on the former. 

For many decades border controls were light as the tyranny of distance limited flows of migrants to those who could afford to come, thereby availing Australia of their wealth.  As travel costs have fallen more stringent entry criteria emerged.  This led to Australia increasingly preferencing skilled migrants from the mid 1980s.  In 1983-84 the number of skilled migrants to Australia numbered less than 10,000 and accounted for less than a fifth of all migrants.  Today closer to 128,000 of migrants enter through the skilled stream, representing more than two thirds of the total.  This is a good thing, as skilled migrants have expanded the productive capacity of the nation by lifting all three of the “Ps” of Intergenerational Report fame – Population, Participation and Productivity.  Here’s how.

With regards to the first “P” for Population, it is not just size that matters, but composition, notably age.  (Ethnicity also matters, but that discussion is best left for later under the third “P” for Productivity.)  It is no secret that Australia’s population is ageing.  An ageing population, if left unchecked, will reduce a nation’s productive capacity by decreasing labour utilisation.  That is, as more and more people retire, either in part or in full, the number of hours worked per capita declines.  Skilled migrants act to alleviate this.  Three quarters of skilled migrants who have settled in Australia over the last 10 years were aged between 25 and 44 years on arrival (derived from Australian Bureau of Statistic survey data).  This has increased the proportions of the population of working and child-bearing age, and brought about an immediate as well as longer-term benefit to labour utilisation. 

Arthur Calwell’s speeches and writings suggest that he understood this as his focus was on the need for more workers.  What he may not have fully appreciated is that migrant workers have provided an added boost to labour utilisation by working longer hours.  A Productivity Commission report on the benefits and costs of migration evidences that since at least the mid-1980s migrants have persistently worked on average for longer hours each week than Australian born workers.  This work ethic is not consistent across the different streams.  Primary applicants under the skilled stream have worked the longest hours, averaging 38.5 hours a week compared to 35 hours by Australian born workers.

As the table above evidences, recent skilled migrants also have higher rates of labour market Participation – the second “P” -  than the general populous.  Approaching three quarters are employed.  And while the unemployment rate looks high, this is due to proportionally larger share of skilled migrants actively looking for work rather than opting out of the labour force.

The current approach to skilled migration policy supports the entry of migrants in occupations that are assessed to be in short supply either currently, under temporary visa arrangements, or anticipated over the medium to long term, through permanent migration pathways.  While this is a legitimate policy focus, it should be neither the primary nor the dominant focus, given the important others ways that skilled migrants have been catalysts for growth.  This is an important point that I will return to in the last section on policy implications.

While it is hard to say whether Arthur Calwell foresaw the differences between how the skilled migrant and Australian born working aged population have participated in the labour market, it is pretty much a certainty that he didn’t when it comes to the third “P” – Productivity.  That is because economists were still trying to understand why some countries outperform others who have similar labour and capital endowments.  Endogenous growth theory, which did not emerge until the 1980s, provided an answer.  It was simply that economic growth is primarily the result of endogenous forces: that investment in human capital, innovation, and knowledge are significant contributors to economic growth.  The theory holds that the long run growth rate of an economy depends on policy measures notably, in this case, migration.

A CEDA report on migration released around this time last year dedicated an entire chapter to skilled migration and Australia’s productivity.  Its authors find that the emphasis given to skills in the migration program has had a noticeable and positive effect on Australia’s productivity performance.  They identified a raft of both immediate and underlying determinants.  What follows is a selection of just three.

Skilled migrants’ level of education is the first.  A recent research briefing on Australia’s degree or higher qualified workforce finds that while the majority of those holding such qualifications were born and educated in Australia, it is a slim majority of 57 percent.  Close to all of the rest either were born overseas and studied in Australia, or born and educated overseas.  The growth in the total stock of people with degree or higher qualifications has been strongest for these latter groups.

Second is the specialist skills and knowledge of many skilled migrants.  This is why supporting the migration of professionals matters.  By definition, they embody and apply specialist knowledge acquired over an extended period, are experienced and are required to continually invest in their currency and professional development.  Employment forecasts recently released by Victoria University’s Centre of Policy Studies predicts future job growth to be greatest in the professions. 

The third determinant is networks.  Skilled migrants have networks back into their home and neighbouring countries, and the cultural and linguistic skills necessary to extend them.  Compare the growth economies with the source countries of Australia’s skilled migrants in the two deliberately juxtapositioned charts below.  India and China are high growth economies.  India and China are now the top two sources of skilled migrants, with India accounting for more than a fifth, and China now ranking just ahead of Australia’s historical source of migrants, the United Kingdom.  Other South Asian countries are also growing both in the economic sense and as a source of skilled migrants to Australia.

Skilled migrants from these countries hold the keys to unlocking and sustaining opportunities for Australia to share in the growth in the region.  They facilitate networks, trade and investment with growth economies, and provide Australia with the cultural and linguistic diversity to transact and do business in the region.  Arthur Calwell’s White Australia policies would have those keys taken away.  Australia must be careful of any suggestion that its migration and citizenship policies are reminiscent of this past. 

 

 

Skilled migrants have contributed to growth through consumption

 

Economies grow either through policies that expand he nation’s productive capacity and/or on the back of policies that stimulate consumption.  Policies that support skilled migration can do both.  We have just seen how skilled migrants expand productive capacity via the three “Ps”.

Arthur Calwell understood at least the basics that more people means more is consumed.  Particularly if migrants are of child bearing age, as they need to support their families in addition to themselves.

Given his support from White Australia, it is not likely that Arthur Calwell had any appreciation for the benefits arising for all from the diversity and sophistication of demands of a more multicultural consumer base.

Nor will he have likely predicted the importance of international education to Australia’s export earnings, or how the opportunity to migrate permanently post-graduation is a key driver of this outcome. 

International education is a large and growing export sector.  It is Australia’s third ranked export earner, contributing $22 billion in earnings in 2016.  Most of those earnings - 69% - are from higher education. 

Based on a survey of over 4000 internationally mobile students’ motivations for choosing where they studied, the desire to work in the destination country after graduation was fourth ranked, and the visa situation eighth.  Both motivations increased in significance since the survey was first undertaken in 2009.

A study by Deakin academics found that post study migration opportunities are a major factor behind choice of study destination by international students of Australian programs of accounting, engineering and nursing.  Employment opportunities and the desire to gain international work experience are the main reasons participants cited for remaining in Australia after graduating.

Policy implications

So what is that point of walking you through what is little more than the Economics of Skilled Migration 101?  There is nothing new here.  The recent reports by the Productivity Commission and CEDA referenced above, together with other informed commentaries, provide much more depth on many of the points argued.

The point is, that while much has been learned since Arthur Calwell first championed the imperative of growing the economy through migration, Australia’s approach to skilled migration not only fails to take account of the full range of economic benefits, recent changes risks us losing out as the best and the brightest to countries with more progressive approaches.

I appreciate that that is a loaded and bold statement to make particularly when many other countries have looked to Australia to emulate our policies.  Indeed there is much that is good about Australia’s approach that needs to be maintained, if not reinforced.  This includes the preferencing of skilled people in the total migration mix.  Big tick.  A points system that favours the entry of people who are young.  Tick, given the population and consumption benefits argued above.  And the awarding of more points the more highly qualified and experienced the prospective migrant.  Tick and tick, given the benefits to participation and productivity.

However, changes to migration and citizenship policies designed to “put Australia first”, whether intentioned or not, play to the xenophobic sentiments of some, legitimised in the era of Trump and Brexit.  If similarly interpreted by prospective migrants, Australia risks missing out on migrants who could otherwise make a positive contribution.  As the centre of economic growth shifts east, welcoming our Asia Pacific neighbours is central to success. 

For prospective migrants who have not already been deterred by “Australian first” policies, before they can even start to count migration points, their occupation must first be on a list of eligible occupations.  There are two lists – the Short Term Skilled Occupation List (STSOL) and Medium and Long-Term Strategic Skills List (MLTSSL).  While the lists per se are not the issue, issues arise first from the means of determining occupational eligibility, and second from the updating process.

Occupational eligibility has everything to do with one aspect of only one of the “Ps” – Participation.  That is, for the STSOL and MLTSSL what matters is whether there are respectively current or predicted future shortages in the occupational labour force.

This plays to a public perception that migrants are taking jobs that would otherwise go to Australians.  The data in the figure on the left below is derived from responses to an annual survey conducted by the Scanlon Foundation, which receives between 1500 and 2000 respondents each year.  It demonstrates that the public perception of migration is closely linked to the rate of unemployment.  That is, if the unemployment rate is high, the majority of those surveyed hold the view that immigration intake is ‘too high’.  If its low, then fewer take this view.

The reality is that this perception could not be further from the truth.  The reality, evidenced by the chart on the right, is that as the number of skilled migrants has increased, the rate of unemployment has decreased.  This is a consequence of all the other economic benefits of skilled migration we have just talked about:  not only can skilled migrants serve to address gaps in occupational labour markets, they boost productivity and buy things, and thereby stimulate job growth. 

Given these benefits, the Government’s approach to skilled migration should be to attract the best and the brightest to Australia.  What has occurred in recent years, however, has been the relative expansion of lesser skilled occupations, such as the trades, on the skilled migration occupational lists, and the reducing numbers of at least one profession, accountants, that are permitted to migrate independent of families or employers.  This is when the human capital considerations set out above suggest the opposite should occur.

Of greater concern is that recent changes to the Government’s approach have served only to exacerbate an already uncertain and unstable environment.  The Government now reviews on a six-monthly cycle what stays, goes, is added or is moved between skilled migration occupation lists.  Previously it was an annual cycle.  While many will have breathed a collective sigh of relief when the just released outcome of the current cycle was awash with green traffic lights, their relief will be a short lived as the next cycle of review is just around the corner.  This creates uncertainties for international students with plans to migrate following the completion of their studies in Australia and, thereby, to education providers who cannot predict international student choices more than six months in advance.  Employers are hampered from taking account of skilled migrants in their workforce planning.  And migration assessment authorities have every incentive not to invest in efficiency enhancing technologies for fear of them becoming redundant overnight. 

The good news is that it does not have to be this way.  The Government and the economy have everything to gain from taking a broader and less blunt approach to its assessment of occupational eligibility.  A whole-of-government approach would factor in the productivity and consumption enhancing attributes of skilled migration.  It also allows weight to be given to the social and political benefits, which we have not discussed here.  Greater certainty and stability is possible by making better use of an existing policy lever – migration points – and disbanding with the six monthly risk of significant change.  For instance, rather than an occupation coming off a list overnight, the points threshold could simply be lifted.  It is then arguable that the level of migration is irrelevant, given the reality that clever, entrepreneurial migrants “crowd in” rather than “crowd out” jobs.  It is time for a proper review.

Mary Clarke

Principal

DXP Consulting

M: +61 401 088 571

E:  mary.clarke@dxpconsulting.com.au