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Restricting population growth is good for local workers

In the aftermath of the 1991 recession, which was the worst economic downturn in Australia since the Great Depression of the 1930s, I wrote a series of articles that we published in academic journals. In part, they were theoretical pieces that conjectured about the impact of rapid population growth on the labour market, which at the time was characterised by persistently high unemployment and rising underemployment (the recession had replaced full-time with part-time work). My conjecture was that high rates of immigration at a time of slow employment growth would lock unemployed workers into long-term unemployment. Of course, I could not test that proposition because the government maintained the relatively high immigration levels and other factors might have been responsible for the rising long-term unemployment. Last week’s Australian Labour Force data showed that unemployment and the unemployment rate has fallen rather quickly in recent months as the economy recovers slowly from the pandemic recession. Historical comparisons show the unemployment response this time has been much larger than in the previous recessions. The other key point is that the working age population has grown at historically low rates as a result of the border closures. It seems that my conjectures in the early 1990s were correct, despite getting flack at the time from mainstream economists who were pushing the line that immigration is always good for the labour market.

Some history …

In 1993, I had an article – The impact of immigration in the trades’ labour market – published in the journal – People and Place (Vol 1(2), pp. 23-24).

In the aftermath of the 1991, the federal government was under pressure to reduce the high immigration levels to ease the supply of workers and allow the pools of unemployment to dissipate as the economy struggled to recover.

Mainstream economists argued that high rates of immigration were essential for easing skill shortages and improving productivity growth.

The claimed that (quoting from that 1993 article):

1. Immigrants were “more mobile and more willing to accept stigma-laden jobs” but the evidence refuted that claim.

2. “By bringing in skills which are in short supply, migrants increase growth and stimulate competitiveness” – yet, at the time there was no evidence of skills shortages in the skilled labour market.

Which led me to write that:

… importing trades-qualified labour worsens the prospects of the long-term unemployed. The contention is two-fold. First, importing trades-qualified labour is damaging to the local labour force who are presently unemployed, and is likely to permanently increase the level of long-term unemployment. Second, importing trades-qualified labour is unnecessary, both in the short-term, due to the parlous state of the trades’ labour market, and, in the longer-term. This is because a combination of a national training strategy and workplace reform is a more efficient way of dealing with skill shortages than immigration.

I referred to another paper I had presented at the time to the ‘Second National Immigration Conference’ entitled ‘Skilled immigration and long term unemployment’.

Further, the pro-immigration lobby never really considered the problem of long-term unemployment, which became very visible during the 1991 recession.

Drawing on my doctoral research (on buffer stock dynamics), I wrote that “with expansion, unemployed workers will be offered employment, with on-the-job training opportunities attached. In addition, entry positions will be available for young, inexperienced persons leaving formal training.”

So it was critical to allow these dynamics to work effectively in an environment of relatively slow employment growth.

Recession always interrupts that sort of process.

Workers who lose their jobs typically also lose skills as new technology replaces old in the recovery.

School-leavers who cannot gain entry into the labour market ultimately become disadvantaged when the economy resumes growth.

I wrote:

If a recession overlaps graduations, the most recently trained persons will be preferred to the pool of unemployed remaining from previous years.

Skilled migration also exacerbates this situation.

I wrote:

If firms use migrant labour instead of training the local unemployed workers, then the long-term pool of unemployed remains above the levels that might normally follow the upgrading process.

I then provided some data analysis to support these conjectures and while the evidence was strong, I could obviously not conduct a counter-factual experiment because migration levels were high and on-going.

I mainly showed that there was an excess supply of skilled trades’ workers already available to the labour market, which was a contribution to the debate at the time.

In 1996, I published a related article – Why high levels of net migration present problems for unemployment and external debt stabilisation (published in People and Place, (Vol 4(1), pp. 40-46).

This was the result of further research I had been doing – which was one of several strands of research I was pursuing at the time.

I was trying to provide an evidence base to counter the relentless lobbying of the Business Council of Australia for increased rates of migration as a means of putting downward pressure on wages in the Australian labour market.

Their argument centred on the continued existence of skill shortages, which wer undermining economic growth.

At the time. unemployment remained very high and underemployment had become a major problem.

I argued in that article that “two key economic policy objectives of the Federal government are not compatible with the current immigration policies being pursued”.

First, the Federal government was trying to reduce the unemployment rate.

Second, they were worried about the growing external deficit.

I noted that the Long running debate about whether “Immigration promotes the deterioration in the unemployment rate” was largely unresolved.

It came down to whether increases in the labour supply outstripped the labour demand affects promoted by the increased spending that new entrants provided.

They had been no definitive study on that question.

The 1996 paper stated that:

Whether migrants add enough to aggregate demand to ensure the labour force growth they promote is absorbed is moot.

The point that the subsequent empirical work presented in the paper showed was that the likely labour force growth would be too strong, under current immigration policy, and feasible productivity growth assumptions, for the projected GDP growth rates to reduce unemployment.

In other words, long-term unemployment would rise because of the immigration impacts on labour force growth.

Now we can see the impact of reduced immigration

With the external border closures since March 2020 we now have a situation where immigration rates are at all time lows.

On June 17, 2021, the Australian Bureau of Statistics released their updated population estimates – National, state and territory population, December 2020.

In their media release – Population growth slowed due to falls in overseas migration – the ABS stated that:

2020 was a year of unusually low population growth in Australia, due to the effects of COVID-19 on overseas migration. During 2020, Australia’s population grew by 0.5 per cent (136,300 people) to 25.7 million, compared with a growth of 1.5 per cent in 2019 …

Natural increase accounted for 97.6 per cent of annual population growth, while net overseas migration accounted for the remaining 2.4 per cent. This is a shift from the long run trend of net overseas migration driving the majority of Australia’s population growth.

With COVID-19 international travel restrictions still in place, net overseas migration was down 98.7 per cent compared with the previous year, driven by a decrease in overseas migration arrivals (59.9 per cent).

The following graph is from the ABS site:

I also showed in last week’s labour force data commentary – Australian labour market – stronger as working age population flattens out (June 17, 2021) – that Australia’s working age population (Over 15 year olds) had flattened as a result of the external border closures (see graph below).

I indicated that this flattening out has forced employers to work harder to get workers and is one of the reasons unemployment is falling quite quickly, given the circumstances.

The changing unemployment responsiveness to immigration

Now we can see more definitively the impact of the slowing population growth has on the ability of the labour market to absorb unemployed workers back into productive employment following a recession.

I went back to the three major cyclical downturns since the modern labour force data series began (February 1978) for Australia.

I then found the employment troughs in those recessions and examined the period of recovery afterwards for 20 months in each instance.

Those periods were:

1. April 1983 to December 1984.

2. July 1991 to March 1993.

3. July 2009 to March 2011.

4. December 2020 to May 2021 – the current period of recovery is shorter obviously.

The following graph shows the relationship between monthly employment growth (horizontal axis) and the change in unemployment (vertical axis) for each of these periods, denoted separately by different coloured and shaped markers.

The thick line is a simple linear trend and the simple linear regression is displayed next to each line.

The number next to the x measures the responsiveness of the change in unemployment to the employment growth.

A larger number means the responsiveness is higher.

In each case, the slopes of the lines are negative as one would expect. Rising employment growth reduces unemployment.

But the respective slopes (measured by the number next to the x in each equation) show that the 1982 and 1991 responsiveness was very low.

It took a long time to reduce the unemployment rates (and they never came back down to the full employment levels).

The GFC downturn was different because the fiscal stimulus really prevented Australia from enduring a recession. There was a slowdown and unemployment did rise (as has never returned to the pre-GFC level).

But the responsiveness increased during this ‘recovery’.

However, the current recovery is very different – the slope of the blue line (and number on the x variable) is several times larger than the 1982 and 1991 recessions.

The major explanatory factor is the record low growth in the working age population as a result of the border closures.

The next graph shows the same data except that I replaced the change in unemployment with the change in the unemployment rate.

A similar tale, although with the added complexity of cyclical participation adjustments (which I won’t go into today).

The Black Death

I was reminded yesterday that the Black Death also had positive impacts on (some) workers.

The Encyclopedia Brittanica analysis of the – Effects and significance – of the Black Death tells us that:

A more lasting and serious consequence was the drastic reduction of the amount of land under cultivation, due to the deaths of so many labourers. This proved to be the ruin of many landowners. The shortage of labour compelled them to substitute wages or money rents in place of labour services in an effort to keep their tenants. There was also a general rise in wages for artisans and peasants. These changes brought a new fluidity to the hitherto rigid stratification of society.

In the EH.net article – The Economic Impact of the Black Death – notes that it was the “Black Death’s socioeconomic impact stemmed, however, from sudden mortality on a staggering scale”.

The major impact was on the agricultural sector where 90 per cent of the labour worked.

We read:

Before the plague, rising population had kept wages low and rents and prices high, an economic reality advantageous to the lord in dealing with the peasant and inclining many a peasant to cleave to demeaning yet secure dependent tenure …

… the Black Death swung the balance in the peasant’s favor … the rural worker indeed demanded and received higher payments in cash (nominal wages) in the plague’s aftermath …

A pool of labor services greatly reduced by the Black Death enabled the servile peasant to bargain for less onerous responsibilities and better conditions …

Ultimately, the plague ended serfdom in Western Europe and the manorial system, which had already been struggling, was destroyed.

A whole range of other beneficial consequences occurred.

The research by Jane Humphries and Jacob Weisdorf – Unreal Wages? Real Income and Economic Growth in England, 1260–1850 – (published in the Economic Journal, Vol 129, Issue 623, October 2019, pp. 2867-2887) demonstrates, that males fared better than women during the plague in terms of wages growth and jobs.

Conclusion

The hope is that the tighter labour supply conditions will drive unemployment down much lower given that it is unlikely the external border will open until at least mid-2020.

The border closure will endure because of the disastrous vaccination strategy of the federal government and it is highly unlikely that the Australian population will be fully vaccinated before the first quarter 2022.

The other hope is that the tighter labour supply conditions will drive up wages as occurred during the Black Death.

Reflecting back on work I did in the 1990s on these sorts of issues, which was subjected to widespread criticism from the mainstream economists, in one way, it is good finally to be able to see that the my conjectures had substance.

But, what I have written today should not be taken as an anti-immigration stance. Far from it.

The problem is that governments have not been prepared to use their fiscal capacity to ensure everyone has a job and so the labour supply has outstripped labour demand.

That is enough for today!

(c) Copyright 2021 William Mitchell. All Rights Reserved.

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    This Post Has 21 Comments
    1. While I agree with your conclusions, I think you might want to review and reword the last few paragraphs of the post. Starting with unlikely to be vaccinated before first quarter 2020. I would suggest that is is also not good to be able to show you were right because a pandemic occurred. There has to be a better way to state that.

    2. Good on you Bill.

      Most people who identify as progressives are too gutless to speak the truth here.

      It is in no way “racist” to point out that mass immigration policies have been used to smother the wages of local workers.

      We have nothing at all against those seeking a better life in coming to this country – but we do need to acknowledge that they have often been used as pawns by capital in order to give them the greatest advantage over labour.

    3. I hope this blogpost will not be used to endorse blanket anti-immigrant policies.

      Surely there is a level of fiscal stimulus and labour programs including the JG that would enable a compassionate immigration level as well as full employment.

      As Bill has previously written:

      Full employment a choice PM can make

      https://www.theaustralian.com.au/inquirer/full-employment-is-a-policy-choice-scott-morrison-must-make/news-story/d58e4674b218f4b0728732826507eafa

      “In the real world, currency-issuing governments have no ­intrinsic financial spending constraint. They can purchase whatever is for sale in their own currency, including all unemployed labour desiring work. Mass unemployment is a ­political choice.

    4. We are experiencing similar in UK with the departure of migrant workers since Brexit. We had an unprecedented (and unpredicted) increase in immigration with the access of the former Eastern Bloc countries, especially Poland, to the EU in 2004. Polish is now the most common foreign language spoken here. It was one of the reasons I voted to Leave for the second time. I have good Polish friends and well understood why they were here. But I saw the way that employers preferred East Europeans to British workers because they were ‘good workers’, in other words they accepted poor wages and conditions. This led to resentment by British workers.
      There is now a labour shortage in some sectors, especially hospitality and social and health care. There was a TV report yesterday about the shortage of lorry drivers. Private Eye has been highlighting the shortage of qualified veterinary workers. Wages are increasing and unemployment is decreasing.
      Dependence on importing skilled labour had to end some time.

    5. The immigrants are not the problem, they are highly valuable “imports” (a benefit, not a cost), I’d say the highest value resource we can get. The problem is the flawed government response to immigration, supporting capitalists rather than workers.

      Never confuse a productivity gain story to an unemployment story.

    6. @Carol,

      One of the reasons for the shortage of HGV drivers in the UK is the backlog of 30,000 HGV Licence tests that have been postponed due to Covid.

      I despise Dido Harding and all her doings with a vengeance, and heaven forbid that she gets the job of NHS England Chief, but her point on training more UK medical staff and not to rely so highly on immigrant labour in the NHS is spot on; it’s immoral to poach expensively trained staff from poorer countries – with the possible exception of the Phillippines, where they train nurses for export, in the quest for remittances.

    7. “The immigrants are not the problem, they are highly valuable “imports” (a benefit, not a cost), I’d say the highest value resource we can get. ”

      Which is stealing resources from another country. Colonial appropriation you might say.

      Why not build the factory where people live rather than pulling them halfway around the world. Why not ‘outbound investment’ rather than ‘inbound’?

      That way you get the profit from the output from the workers without the firm being able to outsource the cost of integration to the rest of society.

      You don’t create new people. You just move them around the globe. Increasing your GDP means decreasing somewhere else. Usually somewhere with far more need for development investment and growth than the West.

    8. @ Carol and Mr Shigemitsu

      The driver shortage for HGVs has been an issue for ages and not just in the UK. The US also has a serious shortage and causes us all sorts of headaches over there as well.

      Seems the problem could be the automation claims, why train and pay for something that could go with autonomous vehicles? (not that I think they will be here anytime soon as they are overhyped IMO).

    9. Dear Larry Kazdan (at 2021/06/22 at 5:56 pm)

      I revised the conclusion to ensure the post should not be interpreted as anti-immigration but rather to sheet the blame for unemployment onto defective fiscal policy.

      best wishes
      bill

    10. The rednecks will seize on this and twist it six ways to Sunday. Your opponents will have yet more things to call you, Bill, since they obviously have lost most arguments to date.

      There is an excellent paper by Peter and Verikios (both Australian economists) on labour market impacts of migration written about twenty or so years ago.

      Typo alert – first sentence in conclusion should say 2022, not 2020.

    11. Another possible reason for the shortage of HGV drivers in the UK/US could be the tightening of health checks on older drivers (or maybe a less healthy population?). I had my third (five-yearly) check for HGV license renewal last week and my eyesight is getting close to the minimum standard now. I’m fortunate that I’m otherwise healthy but a lot of drivers my age and older must have to give up their specialist licenses long before they are in a position to retire.

    12. There is nothing wrong, and much right, with any nation reasonably and humanely controlling the number of immigrants (as opposed to refugees) so as to maximize the employment opportunities of its existing citizens. This kind of responsible, benevolent nationalism, explained and embraced in “Reclaiming the State,” is commonsensical to the vast majority of voters everywhere…always has been, always will be. The unfortunate fact that this necessary, universally recognized policy has been twisted into a cover for racism, exploitation, or xenophobia does nothing to detract from its obvious truth. One can’t reclaim a state with open borders, because there isn’t one, in much the same way that there isn’t a full-blown state without control of its currency.

    13. I wrote years ago a blog which I understood that the E.U.’s “freedom of movement” gave no incentive for richer countries such as the U.K. to invest in its own people.
      Who needs to train doctors when you can poach one from Greece at the Greek taxpayers expense. This doctor is skilled at no cost, moreover, they are taxable.
      The freedom of movement has come back to bite some of these countries that relied heavily on migrant workers.

      I want to share something which reflects the disorder in England.
      My sister is a trained musculoskeletal sonographer, trained in the UK. She has years of experience, had a two year break raising her son.
      When she returned back to work she was turned down by the NHS just as covid lockdowns hit.
      They had given her a position, however, the management said that they did not need her specialisation, as diagnosis was not their priority.
      It seems the government don’t even want skilled workers either from home or abroad. My sister has now taken her skillset to Malta and next year to Switzerland.
      The NHS chose to deny these skills. This continues to add to the “Skill shortage”.

      I say this, because, the “skill shortage” argument is not to be confused with a lack of investment argument. In this case with my sister, it was a choice made by the NHS to pass on these skills.
      The lack of investment can be seen in education. The UK government originally said it would increase spending for each pupil. They misinformed the public, the spending was not an increase of £5150, rather, £150 (secondary school pupils).

      They have changed this and have said that schools in England will have an increase of £7 billion, however, after inflation this turns out to be £4.3 billion.

      England has plenty of room for improvement. Of children aged 10-11 25% of them failed to meet an average standard in their SAT reading tests (2018).

      We would think that after many children have lost effectively a year of education due to a questionable lockdown of schools, that government would invest heavily in education. An increase of £4 billion is not going to do anything meaningful.

      And again I am reminded of MMT, why is it that government acts in such a detrimental way to education. The treasury spends £850 million for 12 days feeding people on the eat out to help out scheme. Those who can afford to eat out get paid to eat out. But a mere £4 billion for schools in 2022/23. It demonstrates the priorities of the UK government, it invests in peoples all ready full bellies, over children struggling to read. Why anyone would give these politicians power I have no idea.

    14. The skilled migration programme in Australia has been used as a way to address private capital’s naturally poor ability to invest in skilling the labour force.

      From the point of view of the individual capitalist, it often does not make sense to make large investments of time and finance in something that they can never have legal ownership of or control over (unless slavery is re-instated). If they spend time and money training someone to do a particular skilled job, they cannot “take back” their investment when that person leaves.

      In fact, they may have simply provided a free skilled worker for somebody else when that person takes the skills that have been invested in them and goes and works for that capitalists competitor.

      So not much incentive there without some significant government provision.

      Much simpler and easier to take advantage of a policy that allows them to tap into an enormous global pool of labour that comes pre-trained, compliant (since permanent residency is not automatically a given) and with no unions in the way to complicate things – from their point of view, what’s not to like?

      But just as giving a heroin addict more heroin does not actually resolve the problem, Australia’s ability to invest in training it’s own skilled workers has no doubt been further eroded by 15-plus years worth of allowing capital to ditch training local workers for shipping them in from abroad.

      We might actually see real economy-wide skill shortages begin to develop as foreign imports remain cut off and employers fail to come to the party.

    15. Thanks for this piece Bill. I have been saying similar things for years. I wasn’t aware that you had done work in this area in the distant past.

      For all those people who like to label anyone who sings the praises of low immigration as racist, immigration is a policy. Immigrants are people. High immigration of mainly white people (deliberately) would be racist. Low immigration of people regardless of their colour or religion would not. A low immigration policy favouring refugees (people in need) is not anti-immigrant. I also dislike the fact that a high immigration intake of skilled people insidiously deprives many countries of the people they so badly need. Since a strong country should be able to produce the quantity and quality of stuff it requires (some international trade needed to alter the mix of goods), every country has as many people as it needs. After all, every working person is both a producer and a consumer and thus adds nothing in net terms to the people already in a country. It simply comes down to a country appropriately educating/training and utilising the people it already has. If people think Australia needs more skilled people, that is an admission that Australia’s education/training and employment policy is failing. It also reflects that the wages on offer for some jobs are not high enough to attract people to take them on. Why do the ‘leave things to market forces’ advocates turn to the government every time they can’t get people to work for them? A simple solution – offer higher wages. Once upon a time, when workers were better represented (unions and institutional wage setting), employers in this situation were forced to raise wages to obtain labour. No wonder there is no wage growth anymore and certainly no wage growth while a country is importing hordes of skilled migrants, as Bill has pointed out.

      The other interesting thing that has happened during the past year of low population growth is the sharp rise in property prices. I happen to think that rising property prices is a bad thing, but no-one can now claim that population growth is necessary to boost property prices.

    16. “If people think Australia needs more skilled people, that is an admission that Australia’s education/training and employment policy is failing. It also reflects that the wages on offer for some jobs are not high enough to attract people to take them on. ”

      Exactly.

    17. Philip Lawn: “… every country has as many people as it needs. After all, every working person is both a producer and a consumer and thus adds nothing in net terms to the people already in a country.”
      Exactly.

    18. Bill

      Don’t be cowed by Larry kazdan and others handwringing in the comments

      The best intentions and goodwill of immigration enthusiasts has been infiltrated and coopted by capital a long time ago (as was the case with the feminist movement)

      As has been mentioned by others here, immigration steals the best people from other countries

      Additionally, Australia does not have unlimited carrying capacity in terms of water and arable land – the lifestyle here is very carbon intensive

      Plenty of problems we need to fix here first
      And the same can be said of the countries of potential migrants

    19. Careful, no discussion of immigration is permitted in Australia- our elites have determined that its automatically ‘racist’, not because they care about race, but because they care, very passionately, about getting cheaper compliant workers.

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