Executive summary

Background to this study

This study is part of the Department of Labour's wider Economic Impacts of Immigration research programme, which is funded by the Cross-Departmental Research Pool. It reports on the application of a Computable General Equilibrium (CGE) model of the New Zealand economy to investigate the economy-wide impacts of immigration.

Objectives

The objective of this study is to better understand the impact of immigration on the New Zealand economy overall and on different parts of the economy. This is achieved by modelling changes to the scale of the immigrant inflow and by changing the focus of immigration to target higher skilled immigrants. The model also tests the impact of additional influences that immigrants might have on productivity and trade. Finally, results from the model are compared with those from a similar study conducted in the 1980s and a more recent study undertaken for the Australian economy.

General findings

From an economy-wide perspective, the increased immigration scenarios investigated resulted in qualitatively similar impacts. In general, the results of the model scenarios found that increased immigration:

• reduces production costs
• improves the competitiveness of New Zealand goods and services, benefiting exports
• benefits domestic investment and/or consumer spending, depending on the skills composition of the immigration inflow
• results in higher revenues to government, which outweigh the impact on spending, so translate into an improvement in the balance of the government's accounts.

The four results listed above combine to improve both real gross domestic product (GDP) and real GDP per capita.

Findings from the different scenarios

The following sections describe the major findings from the different scenarios that were modelled. The scenarios predict outcomes for 2021 compared with a baseline-level that is interpreted as a business-as-usual scenario with no major policy changes. Many core economic factors, such as productivity, export demand, terms of trade, and demographic changes, are held similar to recent historical levels.

Impact of increasing immigration flows

An average annual net permanent and long-term inflow of 40,000 non-New Zealand-born migrants, double the inflow of the recent historical average of 20,000 in the baseline, was found to add 6.1 percent to the resident population in 2021. This took the population from 4.5 million in the baseline to 4.8 million in 2021, and added 7.4 percent to the labour available to the 2021 economy compared with that in the baseline.

Real GDP would be 7.6 percent higher, taking GDP per capita up 1.5 percent or $800 above the baseline in 2021. Differences in the make-up of this larger economy are most noticed in the external sector, with export volumes 8.5 percent above baseline.^[1]

Economic impact in 2021 of doubling net immigration inflow

View the data table for this image.

Impact of zero immigration

A total cessation of the current net immigrant inflow was also tested that allowed an ongoing outflow of New Zealand and overseas born at current levels. This scenario gives a New Zealand resident population of 4.1 million in 2021, 9.6 percent below the 2021 baseline population. Consequently, the labour available in 2021 is 10.9 percent below the 2021 baseline figure.

The results for this scenario record GDP in 2021 at 11.3 percent below that of the baseline. Consequently, GDP per capita is 1.8 percent or $1,000 below the baseline level.

The impact of this smaller economy is felt most by the export sector, where volumes in 2021 are 12.9 percent below the baseline. This effect arises from a higher price level, so reduced competitiveness, which results from the smaller quantity of labour available.

Economic impact in 2021 of a zero immigration inflow

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Impact of current levels of immigration inflows

The difference between the baseline and the results for a zero net immigration inflow can be viewed as the value of the current level of immigration. Compared with a zero immigration inflow, net immigration at recent levels results in a significantly larger New Zealand population of 4.5 million and annual GDP of $248 billion in 2021.

Consequently, the aggregate addition to the population of 437,000^[2] arising from the current inflow of immigrants over the 15-year period yields an extra $28 billion in annual GDP in 2021. That is, the inflow of immigrants at recent historical levels is estimated to be worth around $1.9 billion per year to GDP and $1,000 per capita GDP in 2021.

Impact of skill composition

Experiments were also undertaken where the composition of the additional labour was specified in favour of particular higher-skilled categories. Such a scenario can be seen as some change in policy direction or external impetus.

Overall, this scenario resulted in a slightly higher impact on GDP with GDP 0.1 percent higher than in the scenario that did not specify the skill mix of the inflow. Additionally, there were small, but noticeable, differences in the make-up of the impact on GDP. In particular, the benefit to the export sector where the additional immigration inflow was of specific skills totalled 8.3 percent above baseline. This impact is not as large as the 8.5 percent recorded in the scenario where the composition of the inflow was demand determined. An increase in domestic consumption made up the difference.

The fact the result was not a great deal higher than when the skill level was not directly specified illustrates how the export sector requires semi-skilled, as well as skilled, labour resources in order to expand its activities. For example, occupations such as machine operators and clerical staff in manufacturing, drivers in the transport sector, and sales and restaurant workers in tourism-related industries are also export-related requirements.

Associated influences

A scenario was modelled that assumed productivity in 2021 is 1 percent above the baseline accompanying the increased immigration. This assumption pushes the impact on GDP to 8.7 percent above the baseline, with GDP per capita 2.5 percent higher. The productivity improvements translate into lower per unit resource costs for New Zealand producers. This, in turn, means competitiveness gains for exporters. Such gains also flow through to income gains to the household sector, thus facilitating consumption gains.

Another scenario was motivated by the argument that increased immigration might assist New Zealand producers to develop new products, contacts, and export-market opportunities. This argument, however, suggests there may also be an increased openness to importing activities. Consequently, this scenario models an increase in immigration accompanied by expanded world markets for New Zealand exports as well as an increased market share for imports. The impact on GDP is similar to the impact without these assumptions, with GDP per capita 1.5 percent higher than in the baseline. Undoubtedly, there is an additional benefit to exports, with volumes 9.1 percent above baseline compared with the 8.5 percent recorded in the absence of these assumptions. This impact, however, is countered by a similarly larger impact on the import side of the GDP equation, although the expansion of exports is greater than of imports.

Conclusion

Increased immigration inflows result in a larger economy. Further, under the assumptions adopted for the scenarios presented here, increased immigration inflows result in a positive effect on GDP per capita. The current net inflow of around 20,000 overseas born per year results in a significantly larger and more externally focused economy than if there were no inflow of immigrants.

The modelling experiments do not support arguments in favour of entirely high-skill focused or targeted immigration inflows. Such targeting does not appear to significantly increase the overall benefits to increased immigration flows. When an economy grows labour is required at all levels. This finding supports the need for a demand driven policy aimed at filling genuine shortages and not just focusing on the highly skilled. Although this result highlights the need for a range of skill levels to enable the economy to grow, it does not tell us about the appropriate policy to attract the potential immigrants (eg, different types of permits might be required to attract immigrants with varying skill levels).

Of the assumptions tested, additional benefits increase significantly only when productivity improvements accompany the increased immigration inflow. This suggests that if immigration policies or programmes were to target particular skill categories, the focus should be directed to those skills that have significant potential to improve overall productivity.

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Footnotes

^[1] This scenario let the model determine the skill composition of the inflow.

^[2] As explained in section 3.1, although there is a 36,000 difference in the net annual inflows between scenario B and the baseline, this difference is imposed gradually over the 15-year period. Thus, the 437,000 figure is less than 36,000 multiplied by 15.