Scenarios using a computable general equilibrium model of the New Zealand economy
4 Scenario results
4.1 Increased immigration inflow - scenario A
Given the assumptions outlined in section 3.2, scenario A investigates the impact of an annual inflow of overseas born of 20,000 per annum additional to that in the baseline. The additional labour supply consistent with this further inflow is employed across various sectors, assuming no change in relative wage rates. In other words, the skill mix of the migrant inflow and the occupations and industries in which migrants work are fully demand (model) determined.
4.1.1 Macro effect of increased immigration
The additional 20,000 per annum inflow of migrants takes the resident New Zealand population in 2021 from its baseline figure of 4.54 million to 4.81 million, an increase of 6.1 percent. This adds another 7.4 percent to the labour force in 2021 or the equivalent of nearly 170,000 full-time equivalents for the workforce. The workforce grows by more than the population as migrants are more likely than the general population to be working age.
At the overall level, the impact of these additional labour resources is an increase in the size of the New Zealand economy. In real GDP terms, the economy is 7.6 percent larger, taking the average annual growth rate over 2006 and 2021 to 3.6 percent from the 3.1 percent in the baseline scenario. The combined impacts on GDP and population, give a GDP per capita that is 1.5 percent, or just over $800, above the baseline (see Table 4.1). More detailed results are tabulated in Appendix G.
The composition of this additional activity is tilted towards exporting because the extra resources ensure an improvement in the price competitiveness of New Zealand production (relative to baseline). In other words, New Zealand prices are lower in this 2021 scenario compared with in the baseline 2021 scenario. This is reflected, for example, in the overall GDP deflator (2.2 percent lower) and the gross output price index (2.0 percent lower). This improvement in competitiveness results in export volumes in 2021 being 8.5 percent higher than the baseline. In contrast, import volumes expand by a more modest 5.4 percent. Consequently, the 2021 trade balance improves by the equivalent of 0.3 percent of GDP.
On the domestic side of the economy, the additional income from the extra resources enables household real consumption expenditure to be 6.0 percent above the baseline. The total impact on government spending is tempered by the reduced cost of resources, so, along with additional tax revenues accruing from the extra resources, there is a net improvement in the government balance equivalent to 0.2 percent of GDP.
4.1.2 Industry effect of increased immigration[35]
The tilting of resource allocation towards export activities and relatively labour-intensive sectors is reflected in the industry composition of this scenario (see
Table 4.2). However, activity across all industries increases appreciably, indicating that all industries do benefit from the additional productive resources (both labour and capital) available in this increased immigration scenario.
The agriculture sector has relatively limited scope to expand despite its export focus. This is because of the relatively steep export demand curve facing dairy, meat, and horticultural products; that is, price does not have a great short-term impact on demand. This reflects a combination of market access issues as well as supply-side resource limitations. In addition, this sector is relatively capital intensive, so is not the main beneficiary of the expansion in labour supply arising from the additional immigration inflow. This impact in agriculture flows into the relative food and associated processing sector.
In contrast, the manufacturing sector is more advantaged from the increased immigration scenario due to its being a relatively more labour-intensive industry. In addition, it faces relatively flat export demand curves (a small drop in the price results in a larger increase in demand), enabling the export-oriented elements of this sector to obtain the maximum gain from improvements in price competitiveness. This is particularly so for the higher-value manufacturing sectors such as machinery and equipment manufacturing, increasing by 10.5 percent above baseline. In other words when the price of New Zealand manufactured goods fall, demand for these goods increases considerably.
The services sector comprises a mixture of these effects. Undoubtedly, this sector is dominated by labour-intensive activities, but the distinguishing feature among these activities is their relationship to exports or other exporting industries. For example, the combination of trade, restaurants, and accommodation industries fares well as a result of their direct relationship with export-oriented tourism activities. The transport and business services sectors similarly benefit because of their indirect association with export activities.
The other services, including government services, are predominantly non-tradable sectors and grow by less than the average. While benefiting through their relatively labour-intensive structures, these sectors are less advantaged from the increased immigration because of the relatively subdued impact on the domestic economy.
4.1.3 Occupations and increased immigration[36]
The demand for the additional 7.4 percent in the workforce is divided among the occupations shown in Table 4.3. Demand for trades workers, managers, and technicians is relatively higher. In contrast, demand for professionals, primary sector workers, and machine operators expands but by less than the average.
The relationship between outcomes for occupations and industries is clear. Professionals do not benefit because of the impact on government and other services, while the result for primary sector workers is heavily dominated by the modest result for the agriculture sector.
Demand for technicians, trades workers, and managers benefits from the expansion in the manufacturing sector. The result for sales and clerical workers may seem surprising, but is due to the tourism-related sales and hospitality sectors faring well in this scenario.
Further details of the breakdown of occupation categories show that the result for professionals masks a larger impact on computing and engineering professionals. This fits with the noticeable impact on associated technicians, in particular, scientific technicians and computer equipment controllers. The increased demand for these occupation categories is closely linked to the expansion in the manufacturing sector (in particular, the higher-value machinery and equipment manufactures) noted earlier.
In contrast, demand for other categories within the professional occupations, in particular teaching and health professionals, increases by relatively less. This is associated with the increased immigration resulting in a relatively smaller impact on the population groups that underpin demand in the education and health sectors. That is, increased immigration results in a smaller proportion of the resident population in both the younger and older age groups that are more likely to require such services.
4.1.4 Exports with increased immigration[37]
On the export front, agricultural commodities expand by relatively little due to two factors. First, the primary sector compared with other sectors uses relatively less labour. Consequently, sectors producing agricultural products do not benefit as much from the increase in the availability of labour resources. Secondly, as noted earlier, agriculture export commodities face relatively steep demand curves that limit their ability to sell additional volumes on the world market when they are able to offer a lower price. This constraint reflects a combination of market access issues as well as supply-side resource limitations.
The export of base metals also expands by very little. Again, this can be linked to the production structure of the basic metals industry. In particular, this industry does not benefit from the additional labour resource available given its relatively capital-intensive activities.
At the other end of the spectrum are tourism and other service exports. These activities tend to be very labour-intensive and so benefit greatly from the increased labour. This is illustrated in the details of the occupational make-up of the additional labour. In particular, within the sales and clerical category noted in Table 4.3, there are greater than average increases in tourism-related retail, travel, restaurant, and accommodation occupations. Similarly, while there is only a small increase in school teaching professionals, demand for tertiary and other teaching professionals does increase in this scenario by more than the average. The increase here will be related to the expansion in education exports, which is a large component of the other services export category shown in Table 4.4.
While the tourism and other services have relatively few supply-side constraints, they do require more than their share of the increase in capital resources to facilitate these expansions in activity. This is confirmed on inspection of the detail of the scenario results. Capital requirements by these sectors do eventually limit the expansions achieved by other sectors.
4.1.5 Household consumption and income with increased immigration[38]
The additional immigration scenario A changes the structure of household income and consumption spending. Compared with the baseline, the income of the bottom quintile of households is only slightly higher as a result of the increased immigration (see Table 4.5). This result arises from the prevalence of those receiving welfare benefit and superannuation income in this group. Although the number of households receiving welfare benefits and superannuation does not increase compared with the number receiving employment income, benefits and superannuation are linked to consumer prices, which are both below their baseline levels. This limits the income growth of these groups.
Also noticeable is the proportionately greater increase in household income for those in the high and the top quintiles. This arises from the composition of the expansion in labour employment. The relatively larger expansion in the managerial, some professional, and technician categories, as noted earlier, is consistent with these higher-paying occupations being the primary determinants for incomes in the upper quintiles of the household sector.
With the exception of the top income earners, the impact on incomes is less than that on consumption spending. Because the savings ratio of the nation as a whole (ie, the savings-to-GNP ratio) is assumed unchanged compared with the baseline, the balance on government sector spending must improve compared with the baseline to compensate for this. This is indeed the case, as shown in Table 4.1. This is also consistent with the education and health components of government spending growing by less than the overall economy. In turn, this follows from the growth of the relevant population groups in scenario A compared with the baseline. Recall that education spending is linked to the population aged 15 and under. Health spending is linked to the population aged 15 and under and those not in the labour force, with the latter being a proxy for those aged 65 and over.
4.2 Zero immigration inflow - scenario B
Given the same core assumptions as in the baseline scenario, scenario B simulates the impact of a cessation of the inflow of overseas born. Taking into account an ongoing outflow of 16,000 overseas born per annum, this is 36,000 below that of the baseline. As presented in Table 3.2, when combined with a net PLT outflow of 10,000 New Zealand born this implies an average net PLT outflow of 26,000 people per annum (compared with an average net PLT inflow of 10,000 per annum in the baseline). With an average natural increase of 25,000 per annum, scenario B implies a reduction in the total New Zealand population not only compared with baseline, but also compared with 2006.
Note, as for scenario A, relative wage rates are also assumed unchanged from those in the baseline. This implies that the skill mix of the available labour resource, so the migrant outflow, is fully determined by the model. More detailed results are tabulated in Appendix H.
4.2.1 Macro effect of zero immigration
The cessation of migrant inflow takes the resident New Zealand population in 2021 from its baseline figure of 4.5 million to just under 4.1 million. This means the labour force in 2021 is close to 11 percent smaller than in the baseline (see Table 4.6). The larger impact on the labour force is due to immigrants being more likely to be working age than the New Zealand-born population.
At the overall level, this scenario sees a much smaller New Zealand economy in 2021. In real GDP terms, the economy is 11.3 percent smaller, with the average annual growth rate between 2006 and 2021 down to 2.3 percent from the 3.1 percent in the baseline scenario. This results in GDP per capita of 1.8 percent or $1,000 below the baseline level.
Undoubtedly, the sectors disadvantaged in this scenario are those oriented towards exports. The smaller quantity of productive resources available to producers in this scenario means the cost of these resources is higher than in the baseline. Accordingly, the price levels rise, for example, in the overall GDP deflator (3.7 percent higher) and the gross output price index (3.5 percent higher). The higher prices cause the competitiveness of New Zealand products to deteriorate, which results in a significantly lower level of exports compared with the baseline (-12.9 percent).
Despite the reduced demand for imports consistent with the smaller economy, there is a consequential worsening (compared with baseline) of the balance of trade. This is because imports fall by 4.7 percentage points less than exports.
4.2.2 Occupation impact of zero immigration inflow[39]
The reduced labour resource arising from the cessation of the migrant inflow is concentrated in the managerial, technical, and trade worker categories. This follows from the dependence of these employment groups on exporting activities. In contrast, the reduction is least in the primary sector workers category where there is less impact on the demand for education and health services consistent with the impact on the relevant groups in the population. (See Table 4.7.)
However, within these broad groupings variations are noticeable. The largest declines are noted for engineering professionals, computer equipment technicians, and metal, machinery, and precision trades workers. At the other end of the spectrum, school teaching professionals register the lowest decline. Demand for tertiary and other teaching professionals, however, declines further, which is consistent with their relationship with the education export sector noted earlier.
4.2.3 Impact of current immigration inflow
The difference between the baseline and the results for scenario B can be viewed as the impact of the current level of immigration inflow continuing over 2006 to 2021; that is, in scenario B with no further immigration inflow the New Zealand population is projected to be 4.1 million with annual GDP of approximately $220 billion.[40] However, the baseline picture, which assumes a continuation of current immigration inflows, results in a 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[41] arising from the current inflow of immigrants over the 15-year period yields an extra $28 billion in annual GDP in 2021. That is $1.9 billion per year less than the baseline. At the margin, this equates to additional GDP per capita of the order of $64,000. This marginal GDP per capita, corresponding to the continuation of the current inflows, is higher than the average GDP per capita of $53,500 recorded in scenario B. As a result, the overall average GDP per capita in 2021 is higher in the baseline than in scenario B.
4.3 Increased immigration targeting skills - scenario C
This scenario assumes the same increase as in scenario A (a net annual inflow of 20,000 above the baseline), but further assumes the addition to the labour supply is concentrated among skilled labour categories similar to the average inflow over 2001 to 2006. These categories include managers, professionals, associate professionals, and technicians, and trades workers.
As shown in Table 4.8, the overall GDP impact of this scenario is similar to that for the earlier increased immigration scenario A. Indeed, scenario C records GDP of 7.7 percent above the 2021 baseline level, and slightly above the 7.6 percent for scenario A. In scenario C, GDP per capita is 1.5 percent above baseline.
There are noticeable differences in the make-up of economic activity in this scenario compared with in scenario A where the model allocated the labour entirely. In particular, the assumed concentration of skills in the categories listed above benefits the services sector relatively more than other sectors. In concentrating the skills inflow in these categories while holding the total increase in labour the same, we also lower the availability of other labour types compared with scenario A.
As a consequence, the results for employment in finance and other services sectors, as shown in Table 4.9, are much higher than the result for scenario A. It is also reflected in the relatively greater increases in the household and government consumption components of GDP.
Noticeably, the manufacturing and food processing sectors fare relatively worse compared with the scenario A outcome. This arises, in part, from their relatively higher need for general labour occupation categories at a range of skill levels. As a result, while export volumes are considerably higher than the baseline, the impact is below the impact estimated in scenario A. In particular, the assumed smaller expansion in primary sector workers in this increased immigration scenario penalises the agricultural sector and its export products. In contrast, activities that fare better in this scenario (compared with scenario A) are those in the other services and trade sectors.
This result illustrates how export competitiveness requires semi-skilled, as well as skilled, labour resources when export activities are expanded. For example, occupation categories 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 required to enable expansion of these sectors.
The slightly higher result for domestic consumption spending in scenario C restrains the export sector expansion. This restraint operates, in a general equilibrium sense, through the competition for labour and capital resources. The increased competition for these resources for domestic consumption (scenario C compared with scenario A) causes a higher cost of these resources to all producers. This higher cost, in turn, limits the competitiveness gains for export activities, so constrains the expansion in external markets.
Table 4.10 summarises the changes in employment by occupation resulting from scenario C. The skill composition is tilted towards the mangers, technicians, and sales and clerical categories compared with the demand-determined scenario A outcome. In contrast, the primary sector workers, trades workers, and machine operators and labourers categories are less represented in the scenario C immigration inflow. The figures for these latter categories help explain the sector employment results noted above. In particular, the agriculture, other primary, food processing, manufacturing, and building and construction sectors require these labour types for expansion.
4.4 Increased immigration with accompanying elements - scenarios D and E
The next two scenarios are similar to scenario A, but test the impact of immigration and its interaction with additional influences. First, the situation where an increased immigration inflow is accompanied by improved productivity across the New Zealand economy (scenario D). Secondly, the increase in immigration inflows further encourages the openness of the New Zealand economy to external trade (scenario E).
4.4.1 Additional productivity
An increase in the absolute size of an economy accompanying an increase in immigration may also result in economies of scale. Poot et al (1988) outlined a correlation between periods of high immigration and high productivity growth.[42] Those authors were at pains to point out that it was difficult to establish causality in this regard.
Scenario D assumes the same immigration inflow as in scenario A (an annual average of 20,000 above the baseline). In addition, this scenario assumes productivity across the economy is 1 percent above the baseline. Productivity in this context means output per unit of labour input, as well as output per unit of capital input. Alternatively, this productivity improvement can be described as follows: the same level of output can be produced with a 1 percent smaller (than baseline) quantity of labour and capital resource.
Consequently, the composition of the immigration inflow in this scenario will be different from that in scenario A, as it will not only respond to the changed demand for labour from an increase in the supply of labour but also from the different level of productivity across the economy.
Table 4.11 shows that the additional immigration accompanied by improved productivity pushes GDP to 8.7 percent above the baseline, with GDP per capita 2.5 percent higher. Further, this impact is noticeably greater than that for scenario A. The results for scenario D also include larger gains for exporting activities as well as household consumption.
The productivity improvements translate into lower per unit resource costs for New Zealand producers. The lower costs are reflected in the results for gross output prices, which are 2.4 percent below baseline in scenario D. This compares with 2.0 percent below the 2021 baseline for scenario A. These lower costs, in turn, mean competitiveness gains for exporters.
Such gains flow through to income gains to the household sector, thus facilitating their consumption gains. The gains here are reflected in the result for real wage rates. In scenario D real wage rates are 0.9 percent above the baseline, while they are 0.2 percent below baseline in scenario A.
At the sector level, the productivity improvement assists the export-oriented sections of manufacturing to expand further. This is seen in the employment results shown in Table 4.12. In particular, the machinery and equipment manufacturing sector demands even more labour, compared with scenario A, as its productivity improvement enables it to compete better in export markets. This in turn causes employment in transport and communication to increase.
It is noticeable that this additional labour demand is met through a lower impact (compared with scenario A) on the agriculture sector and on government, education, health, and other services. The lower result for agriculture can be explained by the effect of the steeper export demand curves facing traditional agricultural products. Mimicking supply and market access constraints, such demand curves do limit expansion in this sector. In scenario D, this constraint becomes more relevant as other sectors (eg, machinery and equipment manufacturing) can take advantage of improved productivity. These other sectors are now able to attract (or demand) more labour resources to their industries.
4.4.2 Improved external trade environment
The scenario E experiment reflects another feature that could accompany increased immigration. This feature focuses on the openness of the economy to external trade opportunities. This is motivated by the argument that increased immigration may assist New Zealand producers in developing new products, contacts, and export-market opportunities. On the other side of this argument, however, when migrants come to a new country they tend to demand goods from their country of origin. This is especially strong if the two countries are culturally quite different. The impact of this is an increased openness to importing activities. Law et al (2009) found that migration increases trade. They found that for New Zealand the impact was greater for imports than exports. For example, a 10 percent increase in the number of migrants from a specific country increases merchandise imports from that country by 1.9 percent and merchandise exports to that country by 0.6 percent. They then found the impact of migrants demanding 'ethnic' goods outweighed the effect of using migrant networks to gain market access. It should be noted that the methodology used logs, so numerically small increases of migrants from countries that New Zealand has little contact with have a much larger impact on the results than countries where New Zealand has an established relationship.
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. As found in Law et al (2009) the impact on imports is assumed to be larger than that on exports. The increased exposure can be interpreted as a 2 percent (horizontal) shift in the demand for imports and a 1 percent shift (horizontal) in the demand for exports by consumers only (ie, the demand for capital and intermediate imports was not directly subjected by this scenario).
The impact on GDP in scenario E is similar to that for scenario A, as shown in Table 4.13. GDP per capita in this scenario is 1.3 percent higher than in the baseline. The added focus on the external sector in scenario E results in the domestic sector being slightly more subdued compared with the scenario A outcome. This is reflected in the result for household consumption, which registers a gain smaller than that recorded in scenario A.
4.4.3 Comparing the accompanying influences
Comparing the results for the scenarios with accompanying influences shows that the major benefits additional to an increased inflow of migrants would come from increases in productivity. While exports are higher for the increased trade scenario so are imports, resulting in slightly less growth in GDP (see Figure 4.1). Productivity, on the other hand, results in much lower production costs, which increase exports by much more than the increased trade scenario. In turn, this results in a much higher (1.2 percent) GDP.
Figure 4.1 Impact of increased immigration with additional features - 2021
View the data table for Figure 4.1.
4.5 Immigration scenario with refinements - scenario F
As noted earlier, in all increased immigration scenarios the relative shifts are in favour of export and labour-intensive activities. A further exploration of this finding is undertaken in scenario F. This scenario mimics the impact of the combined influences of the various features discussed in some of the individual scenarios above. In particular, this refined scenario assumes:
- the composition of the labour supply increase from immigration is concentrated in selected professional and trade occupations[43]
- a boost to productivity in selected sectors[44]
- an improvement in export market opportunities for New Zealand producers
- an increase in the market share of imports into New Zealand.
The outcome of scenario F is summarised in Table 4.14 and results in a lower level of GDP than scenario A and a 0.9 percent increase in GDP per capita compared with baseline. Within this impact, is a more export-oriented economy. The 7.1 percent addition, above baseline, to real GDP in scenario F includes a 9.3 percent increase in export volumes in 2021. The improved competitiveness of New Zealand products also helps hold the expansion in imports to 4.4 percent despite its assumed increased market share. This helps improve the external trade balance further (compared with both the baseline and scenario A) by 0.6 percent of GDP.
In addition, the impact on the domestic sector sees a restrained impact on consumption spending and a slightly greater impact on investment. This facet ties in with building trades workers being specifically included in the set of skilled occupations targeted by the immigration inflow. Consequently, the construction sector gains directly from this inflow, which makes investment, as opposed to consumer, spending more attractive.
The sector and occupation mix of employment in the refined scenario are shown in Table 4.15 and Table 4.16. It is clear that the sectors to enjoy the greatest gains in this scenario are those requiring professional, technical, or trade-related skills. In particular, the building and construction sector and the higher-value machinery and equipment manufacturing sector stand most to gain from such a scenario.
It is informative to note that most other sectors also gain noticeably from the increase in this mix of occupations. The exceptions to this observation are the agriculture and related food processing sectors, which are heavily penalised by the assumed absence of primary sector workers from the increase in immigration.
4.6 Comparison with 1988 simulations
Poot et al's (1988) study into international migration and the New Zealand economy used a 22-sector CGE model to explore the long-run impacts of various immigration scenarios. The framework of the static CGE model used in that study was similar to that used in this study. In addition, the macroeconomic assumptions for the baseline were similar, allowing comparison.[45] The main difference in model structure was the lack of disaggregation in the household sector in the 1988 study, and a more detailed sectoral breakdown of industry in the current model.
Table 4.17 compares the macroeconomic impact findings from this study with those of the 1988 study (Poot et al, 1988). The scenario A results are compared with the results for the simulation labelled VW in the 1988 study, as that simulation had a comparable labour market closure.
This study records higher gains to immigration compared with those in the 1988 study. These higher gains are in terms of real GDP, household consumption, and, importantly, export volumes. Two factors can be highlighted to explain these higher gains.
First, the increased labour available relative to the similar change in population provides the later study with a head start. This, in turn, arises from the differing composition of the assumed immigration inflow, along with higher labour force participation rates.
Secondly, the sectoral structure of the New Zealand economy has changed since the mid 1980s. The economy is much more diverse and the increased importance of non-agricultural commodities in overall exports (eg, tourism and forestry) ensures exports record a greater gain. This arises because of the relatively steep demand curve facing agricultural commodity exports (eg, dairy and meat) and the relatively flatter curves facing other exports. In other words, supply and demand of non-agricultural commodities are more price responsive than agricultural commodities. This allows these sectors to gain much more when per unit production costs fall. It should also be noted that the impact on imports is similar to that found in the 1988 work. This means the balance of trade is better in the latest findings.
Interestingly, the impact on per capita consumption is similar between the two studies (slightly higher in the later study). This implies immigration is not a shock that increases the amount of consumption per person. The only way to increase per capita consumption is to increase productivity, such as in scenario D.
Note
- See Poot et al (1988).
Footnotes
[35] More detailed results are presented in Table G1 in Appendix G.
[36] More detailed results are presented in Table G4 in Appendix G.
[37] More detailed results are presented in Table G3 in Appendix G.
[38] More detailed results are presented in Table G2 in Appendix G.
[39] More detailed results are presented in Table H4 in Appendix H.
[40] All GDP measures are expressed in constant 2006 dollars.
[41] Note, 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.
[42] In particular, the periods 1962–1967, 1971–1975, and 1983–1985 recorded average growth in total factor productivity well above the 25-year average of 0.8 percent per annum.
[43] The occupations included in this immigration scenario are physicists, chemists, mathematicians and related professionals; life science professionals; computing professionals; architects, engineers, and related professionals; Health professionals, nursing and midwifery; other teaching professionals; physical science and engineering technicians; life science and related technicians; computer equipment controllers; optical and electronic equipment controllers; health associate professionals; building trades workers; and metal and machinery trades workers.
[44] Sectors assumed to have improved productivity in this scenario are paper; printing, publishing and recorded media; non-metallic mineral products; fabricated metal product manufacturing; machinery and other equipment manufacturing; furniture and other manufacturing; residential construction; other construction; communication services; and scientific research and computer services.
[45] With an unchanged (compared with baseline) aggregate labour–to–capital ratio, fixed investment–to GDP ratio and government consumption spending–to–GDP ratio.