1  Introduction

New Zealand entered the 21^st century with around 20 percent of the country’s total population born overseas. Such a significant migrant population[1] can have a range of impacts on a country, from influencing its national identity to changing the way that it interacts with the outside world. While the impact of migration on New Zealand society is clearly wide-ranging, a key question for Treasury is how immigration contributes to economic growth. This paper attempts to explain the main mechanisms through which immigration impacts on economic growth and investigates the available evidence to try and assess whether the economic impacts are positive or negative for New Zealand.

The New Zealand approach to immigration policy in recent times has assumed that immigration is good for economic growth. This is evidenced by the use of immigration to resolve particular labour market problems. But does the evidence back up this assumption? While there is extensive literature on the determinants of migration and its microeconomic effects, there is little New Zealand specific theoretical or empirical literature examining the effects of immigration on economic growth. The literature in this area is quite fragmented with no single definitive contribution. Micro-level studies tend to be context and migrant-specific.

Government has a strong influence over immigration policy as it ultimately determines who will be admitted to New Zealand and for how long. It is therefore important that the government ensures it has an evidence-based immigration policy programme designed to select migrants who will bring the greatest net benefits to New Zealand.

Thinking strategically about immigration issues requires a long-term perspective. Short-term data gives volatile results and it is difficult to see whether significant trends are emerging. Immigration policy, however, is often adjusted in response to current labour market conditions or immediate social or political concerns. It is also suggested in this paper that there has been a structural shift in immigration patterns over the last ten years to a system that focuses on temporary migration. Accordingly, this paper does not review the historical literature on economic growth and migration; instead it reviews the contemporary literature with a view to identifying how immigration policy could be adjusted to improve the returns to economic growth from migration in New Zealand today.

The original motivation underlying this paper was a desire to understand the extent to which immigration is a driver of economic growth. There is irrefutable evidence in New Zealand that migration has enabled our society to develop through exchange of ideas and an influx of people, and in this respect New Zealand is not alone. This is a story repeated throughout the world; the United States, Canada and Australia are all examples of what are sometimes termed ‘traditional immigration countries’. They have experienced massive inward migration as well as strong economic growth over the past century. Can the extent to which immigration is a cause of this growth be ascertained? Can a strong relationship between immigration and economic growth be found?

It is clear that international migration has major consequences for both source and host countries. Coppel, Dumond and Visco (2001) identify four main types of economic effect. First, migration has an effect on the host country’s labour market. It can reduce the wages and employment levels of natives; on the other hand it can reduce skill shortages. Secondly, it can have fiscal consequences, since the amount that immigrants pay in taxes may not exactly offset the costs of health and education that they receive. Thirdly, migration can affect the demographic composition of both the host and source countries. For example, it has been argued that immigration could be a solution to the problem of population ageing in many OECD countries.[2] Finally, migration may contribute directly to economic growth in both the host and source countries. Remittances by emigrants can be a major source of capital that drives development in the source country. On the other hand, the emigration of skilled workers can reduce productivity and economic growth.

This paper does not attempt to develop a new theory of migration and economic growth. Instead it surveys some of the highly aggregative existing models and then utilises a growth accounting framework to think about the mechanisms through which migration influences GDP per capita growth. To do this the paper primarily focuses on how migrants affect labour productivity and labour utilisation, and the results that this may have. The paper then moves to the implications for policy makers and suggests possible areas for adjustment.

In order to limit the scope of this task this paper only cursorily discusses the non-economic impacts of migration. The question at hand is the impact of migration on GDP per capita growth, not on society at large. Any conclusions reached here would then have to be considered in light of whether migration is desirable or undesirable for other reasons, such as social cohesion.

New Zealand’s migration context is described in Section 2, including a brief description of the existing migration framework and recent trends. Readers who are already familiar with this framework may wish to omit reading this section. There are a number of highly aggregative models for assessing the impact of migration as described in Section 3. A growth accounting framework is then used to identify the main pathways through which migration affects economic growth per capita. Section 4 discusses the impact of migration on labour force participation and employment. The productivity effects of migration are discussed in Section 5. Section 6 is used to briefly explore the wider implications of migration, including the fiscal impact. The policy implications are then discussed in Section 7. Section 8 concludes.