3.2 Growth accounting
3.2.1 Framework for Growth Accounting
Output growth can be broken down into different sources, such as labour inputs. This approach is known as growth accounting. Previous Treasury work has used a growth accounting framework to examine the impact of different policy areas on GDP per capita growth (see “New Zealand economic growth: An analysis of performance and policy”). The framework is not a model of economic growth. However, it does provide a useful means of organising ideas about how migration affects growth.
In this framework, growth in GDP per capita is driven by growth in labour productivity and growth in labour utilisation. Migration, in turn, can affect growth through one (or both) of these two channels.
3.2.2 The effect of migration on labour productivity and utilisation
Migration clearly affects labour utilisation through the labour force participation rate and the unemployment rate. The extent to which migration affects these rates has a direct effect upon labour utilisation and thus on output. Differing groups of migrants, with different labour market characteristics, will have varying effects on participation. The literature provides solid data on the participation of various groups of migrants and this is discussed in section 4.
Migration is also likely to affect productivity. In particular, the human capital of migrants is expected to affect the productivity of the labour force. The emigration of highly skilled workers (a “brain drain”) could be expected to reduce labour force productivity and vice versa (see Glass and Choy 2001). Other productivity effects are also possible. Migration can affect capital flows, either through migrants bringing with them investment capital or through remittances abroad. Migrants can also affect multifactor productivity, for example there can be spill over effects by having migrants share their knowledge and skills within the firm which can encourage innovation.
Our investigation into the relationship between migration and economic growth can be assisted by using the elements in the growth accounting framework to attempt to reach propositions of causality.
Growth accounting frameworks do not appear to have been widely used in migration analysis. Blattner and Sheldon (1989) use a growth accounting framework to identify the contribution of immigration to economic growth in Switzerland between 1961 and 1982. They find that while foreign workers accounted for 0.3 percentage points of the 2.7 percent average growth rates during this period, immigrants reduced per capita growth over this period, due to their lower productivity.
It can be difficult, from the data available, to isolate the economic impacts that migration has on the native population. To ascertain the impact on natives, consideration must be given to whether migrants impact negatively or positively on native labour utilisation or native labour productivity. Migrants could also have distributional effects which would also need to be separated out. There is often a general assumption that highly skilled immigrants will have a positive impact but it is possible, if only natives are considered, that if immigrants retain all or most of the gains from their skills then their impact could be to make the native population worse off, for example by driving down native wages. In the analysis it is important to ensure that gains or losses to natives, which can be assessed in terms of average incomes, are not confused with gains or losses evaluated in terms of GDP per capita which includes both natives and new immigrants.
This paper does not seek to model the returns to natives, but where possible the varying effects on the native population are highlighted. The discussion will now focus on the New Zealand evidence in relation to the factors identified in the growth accounting framework.
- See “New Zealand Economic Growth: An analysis of performance and policy”, 2004 http://www.treasury.govt.nz/release/economicgrowth/nzeg-app-apr04.pdf
- It is recognised that there are limitations to using GDP per capita. An alternative measure is GDP per working age person. One reason for using this latter measure is that the total population is influenced by demographic change—an increase in the birth rate or number of elderly will reduce GDP per capita, making it harder to isolate the effects of economic variables on growth. The counter argument is that this ignores the economic effects of the dependency ratio on the overall economic well-being and prosperity of a nation. GDP has well-known limitations as a measure of well-being. However, some of the factors that drive GDP also have important implications for well-being. In particular, employment has important effects on both income and well-being as it provides social inclusion and protects against poverty. It also has intergenerational effects, and entering employment from welfare can break the cycle of disadvantage and poverty for the worker and his or her children (Blank 2000).