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Memo to Recessionberg: mass immigration is destroying productivity
By Unconventional Economist in Australian Economy
November 19, 2019 | 9 comments
Treasurer Josh Frydenberg has penned an op-ed in the AFR championing the “three P’s” of 1) boosting productivity; 2) raising workforce participation; and 3) increasing the population via immigration, to see off the nation’s ageing population:
As a nation, we need to effectively leverage the three P’s – population, participation and productivity – to meet this challenge.
When it comes to workforce participation, we are at record highs and the participation rate for those aged 65 and over has increased from 12.3 per cent to 14.6 per cent over the past five years.
The participation rate for this cohort was less than 6 per cent 20 years ago.
However, with Australians in work currently undertaking 80 per cent of their training before the age of 21, this will have to change if we want to continue to see more Australians stay engaged in work for longer.
When it comes to population, our migration program has served us well. With the median age of migrants being 20 to 25, or 10 years less than that of the broader population, immigration has helped to soften the economic impacts of an ageing population.
Productivity is, however, one area where we must do better. Tracking at less than half the long-term average, our focus is on deregulation, skills, industrial relations and other micro-economic reforms to improve service delivery.
Boosting productivity is by far the most important driver of rising living standards over the long-term, since it allows more goods/services to be produced (consumed) from less effort.
Raising labour force participation can also raise living standards.
However, working more hours (increasing participation) can mean that less time is available for other pursuits, such as relaxing or meeting-up with friends.
So while working more will, other things equal, raise incomes and GDP, it can also take away from the other pleasures in life, reducing its benefit.
By contrast, population growth’s impact on living standards is highly questionable. While it certainly does raise headline GDP (more inputs equals more outputs), there are significant doubts over whether it raises per capita GDP, while also placing greater pressure on the environment, pre-existing infrastructure and housing, and Australia’s fixed endowment of mineral resources.
*In fact, there are strong reasons to believe that Australia’s mass immigration program is crushing the nation’s productivity.
*First, Australia’s mass immigration model is crush-loading our major cities, stifling productivity through rising congestion costs, as well as encouraging growth in low productivity people-servicing industries and debt creation, rather than higher productivity tradables.
*The infrastructure investment required to keep pace with population growth is also much higher cost than in the past, due to diseconomies of scale (e.g. tunnelling and land buy-backs), alongside government corruption in infrastructure selection.
Allowing employers to pluck cheap migrants in lieu of granting wage rises to local workers also discourages companies from innovating and adopting labour saving technologies, while also preventing creative destruction by enabling low productivity companies to remain in business.
Indeed, Australia’s productivity slump has occurred alongside the massive lift in immigration from the early-2003, which speaks volumes:
Of course, there are other drivers of Australia’s sluggish productivity growth.
Australia’s ghastly energy policy (especially around LNG exports) has sent Australian power prices through the roof, raising input costs, making Australian industry uncompetitive, and forcing higher productivity firms in tradable industries to close.
*Third, Australia’s tax system encourages speculation and investment into non-productive housing, and has also helped bias bank lending towards housing over businesses.
Fourth, Australia’s economy is ruled by oligopolies and rent-seekers, whom bend the political decision-making process at their whim.
*Currently, there is no economic plan other than to flood Australia with hundreds-of-thousands of extra people each year to stoke overall economic growth (but not growth per person), to support big business (e.g. the property industry), and to prevent Australia from going into recession (despite growth and income per person stagnating).
Meanwhile, productivity and individual living standards are being eroded through rising congestion costs, declining housing affordability, paying more for infrastructure (e.g. toll roads and water desalination), environmental degradation, and overall reduced amenity.
Josh Frydendberg and his cronies are part of the problem.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.