New Zealand Research on the Economic Impacts of Immigration 2005–2010 - Synthesis and research agenda
In recent decades, immigration has become a greater feature of the NewZealand labour market. In 2006, 25percent of the working-age population were born overseas. This was up from 22percent in 2001 and 18percent in 1981. Between 2001 and 2006 the working-age population grew by around 271,000 people and, of these, about 60percent were overseas born.
In many cases, immigrants are not direct substitutes for NewZealand workers. Immigrants initially tend to have lower employment rates and incomes than the NewZealand born with similar characteristics, and it can take time to integrate into the labour market. Higher-skilled immigrants tend to converge faster, and those with lower skills take much longer. Interestingly, immigrants who arrive while they are still children have outcomes that are indistinguishable from those of comparable NewZealand-born individuals.
In theory, immigrants are more likely to settle in areas with one of two features: a strong labour market, or where they know people or there are plenty of people from their country of origin. The evidence for NewZealand shows that recent migrants are more likely to settle in areas where a larger proportion of previous migrant populations from their region of origin are present and less likely to settle in areas with greater-than-average numbers from other regions. Surprisingly, no evidence is found that recent migrants choose to settle in areas with better-than-average labour market outcomes. However, there is some evidence that earlier migrants are more likely to have relocated to areas with better-than-average labour market outcomes for the general population. This suggests that labour market conditions become a more important determinant of settlement location in the longer term. However, migrant networks remain the dominant factor over time.
Microeconomic or sectoral impacts
Often, the general question is asked, 'Do immigrants compete with NewZealanders for jobs and subsequently displace NewZealanders or impact upon conditions such as wages?'. The evidence points to immigration as having no adverse impact on the labour market outcomes of the native-born population. There is general agreement that, with all else being equal, an increase in the supply of labour would lower wages. However, in practice, all else is not equal: an increase in immigration triggers a range of effects both in the short term and the long term, and these may offset the negative impact of a positive labour supply shock. The greatest impact found was that of very recent migrants on other recent migrants.
An immediate impact that immigrants can have is in the demand for housing. Real house prices went up by almost 80percent between March 2002 and March 2007. At the same time, there was a net increase of 130,000 permanent long-term migrants. It should also be considered that generally the demographic profile of the inflow of immigrants is different to the outflow of NewZealanders; with immigrants frequently being slightly older and having children. This, along with cultural differences, means that immigrant housing demand may differ to the housing stock vacated by those leaving the country.
All of the studies included in this report found a relationship between immigration and house prices at the national level. However, the studies that included analysis at the local level found much weaker relationships. Further, when the composition of the inflows was disaggregated, the impact of an inflow of immigrants to an area was negligible, but positive for returning NewZealanders. Given the uneven distribution of immigrants across NewZealand, if immigration were the key driver of recent house price inflation, then it would stand to reason that areas with higher inflows of immigrants would also have incurred the highest levels of house price appreciation. This was found not to be the case, so suggests that the relationship at the national level may be a consequence of omitted factors that raise both immigration and house prices.
Another sector of the economy that immigration can impact on is external trade. Generally, immigration stimulates trade in two ways. The first is through immigrants demanding 'ethnic' goods from their country of origin that are not made locally (or not made to the same standard). The more different the source and host country are, the greater this effect. The second way that immigration stimulates trade is through migrants lowering the transaction costs of trade through networks, language, or local knowledge. Overall, results confirm that migration stimulates trade in NewZealand. However, it stimulates imports more than exports-that is, the first impact dominates the second. Some other countries are similar to NewZealand in this respect, in others the net effect is the opposite (see Gen etal 2010). The conclusion for NewZealand is that policy makers must take into account that an increase in immigration may contribute to an increase in the current account deficit. The impact of expatriate NewZealanders on trade was small. This can be explained, as NewZealanders are more likely to emigrate to countries that are culturally similar, hence their impact on trade may be comparatively small.
A common method used to illustrate the contribution (or otherwise) of migrants is to estimate the impact they have on public finances. Like other members of society, migrants pay taxes (including income tax, goods and services tax, excise, and duties), can claim benefits, and are immediately or after some time eligible for government-funded goods and services. It was estimated that the immigrant population, of 927,000, had a positive net fiscal impact of $3,288million in 2005/06. The NewZealand-born population of 3.1million had a lower net fiscal impact of $2,838million. In total, migrants contributed 40percent more to government revenue than they received in government expenditure.
The study showed that all sub-groups of the migrant population had positive net impacts, although the scale differed by the duration of residence, region of origin, and region of residence in NewZealand. The net fiscal impact of migrants increased with duration of residence.
The demographic profile of migrants was the main reason the net impact is larger for immigrants than for the NewZealand-born population. However, it should be noted that in the long term it is likely that the net fiscal contribution of a migrant will remain greater than that of a NewZealand-born person. This is because working-age migrants who enter NewZealand do not cost NewZealand in terms of their education and training. As a result, migration to NewZealand is likely to mean a net fiscal transfer to NewZealand.
Only two factors were found to have a strong predictive power in explaining the variation in innovation across firms: firm size and firm research and development (R&D) expenditure. Large firms and/or those that devote money to R&D generate more product and/or process innovations. The presence of migrants and the characteristics of the labour force (such as skill levels) more generally do not have statistically discernable influences on innovation outcomes. This finding holds, even when controlling for different subgroups of enterprises, such as those that have positive R&D expenditure, are in high R&D industries, or have a highly skilled workforce.
NewZealand's relatively small size and low population density may limit the scope for innovative spillovers between firms and for dense networks of innovators to which immigrants might contribute. The importance of land-based activities that have shaped NewZealand's innovation and R&D system (with concentration of research activity in the rural Waikato, Manawatu, and Canterbury) may also limit the influence of immigrants, who are disproportionately located in the larger urban areas. Given that manufacturing in NewZealand accounts for only 11percent of total employment, the main issue is what drives primary sector and services innovation.
A computer model was used to take account of the myriad ways in which various immigration levels might influence the economy. An average annual net permanent and long-term inflow of 40,000 non-NewZealand-born migrants (which represents twice the inflow of the recent historical average of 20,000 in the baseline) was found to add 6.1percent to the resident population in 2021. This also meant that by 2021 the population increased from a projected 4.5million using the baseline scenario to 4.8million, and in terms of labour available added 7.4percent more than offered by the baseline. Real GDP in 2021 would be 7.6percent higher, increasing GDP per capita by 1.5percent or $800 above the baseline. Differences in the composition of this larger economy are most noticed in the external sector, with export volumes 8.5percent above baseline.
The impact of a total cessation of the current net immigrant inflow, while allowing an ongoing outflow of NewZealand and overseas born at current levels, was also tested by the model. This scenario results in a NewZealand resident population of 4.1million in 2021, 9.6percent below the 2021 baseline population. Consequently, the labour available in 2021 is 10.9percent below the 2021 baseline figure. The results for this scenario record GDP in 2021 at 11.3percent below the baseline. Consequently, GDP per capita is 1.8percent or $1,000 below the baseline level. The impact of this smaller economy is most severe upon the export sector, where volumes in 2021 are 12.9percent below the baseline. This effect arises from a higher price level, which in turn leads to reduced competitiveness-all of which results from the smaller supply of available labour.
Overall: positive contribution to economic outcomes
We conclude that immigration has made a positive contribution to economic outcomes in NewZealand, and that fears for negative economic impacts such as net fiscal costs, house price inflation, and increasing unemployment are largely unfounded.
Future research should focus on the path of adjustment over time, induced physical and human capital investment in the economy, the consequences of greater diversity, and differences in impacts between temporary and long-term migration.