5  Productivity

Productivity measures the relationship between the output of goods and services and the inputs of resources used to produce them. Labour productivity is output per hour worked. Labour productivity is a result of physical capital (machinery, equipment, infrastructure etc) per worker and multifactor productivity (the overall efficiency with which resources are used including the effects of changing technologies). There is typically little direct evidence on the productivity of migrants relative to the native population. However, there is evidence of underemployment of skilled migrants, who are operating at a salary lower than their native counterpart, suggesting a productivity differential. By underemployment we mean migrants not being employed in positions commensurate with their skills and training.

This section discusses productivity issues that may arise from the underemployment of migrants, and skills transfers within firms that may have productivity effects.

It is assumed that migrants are likely to make the greatest contribution to economic growth when they are fully employed in a position commensurate with their skills and training. The education levels of migrants can be of greatest benefit to the economy when migrants can be employed in a job that makes the most of their skills. In some occupations, occupational licensing can act as a barrier to employment, creating difficulties for some migrants in obtaining long-term, sustainable employment and/or employment that uses their skills to the full.

Estimates of GDP for each extra migrant employed should allow for the possibility that the new employees work different hours, and have different productivity, from existing employees. While highly skilled migrants employed in a position commensurate to their skills are likely to have higher labour productivity than the national average, conversely migrants with skills lower than the native average, or migrants employed in a position that does not utilise their skills can have lower than average labour productivity. The skill level of migrants is discussed further below.

There is also a question as to whether economies of scale can be created as a result of migration. There is doubt as to whether migration creates economies of scale at the economy-wide level (OECD 2003a). There is the possibility that clustering effects may increase productivity in large cities although there is a lack of empirical evidence to back up this theory conclusively. Empirical studies done in other countries suggest that an estimated scale elasticity is unlikely to be greater than 1.2. In other words, net migration raises output by more than the increase in population. The OECD suggests that these figures are “highly speculative” but do imply that migration could have a notably positive effect on the economy.

5.1  Income convergence

Income convergence is affected by labour utilisation, as well as by labour productivity. Income differential is measured in the literature by comparing the incomes of different migrant cohorts with the income of natives. Evidence is usually presented in terms of the number of years that it takes for immigrant incomes to converge with those of the native population. This section focuses on the New Zealand literature, including evidence of differences in the income differential for second-generation migrants.

While the evidence shows that participation and employment rates for immigrants appear to converge with rates for New Zealand born residents within 5-15 years, for most groups the convergence of income seems to take approximately twice as long.

An earlier study (Poot 1993) looked at the median annual incomes of immigrants using 1986 census data. The effects of age, occupation, country of-origin and years since migration were controlled for. Pacific Islanders had a large income disadvantage upon arrival and a relatively steep ‘years since migration-income profile’. Their income did not reach parity with New Zealand born workers until 35 or 40 years in New Zealand. UK born immigrants did not face an initial entry disadvantage, typically outperforming New Zealand born workers from the start. Australians had similar outcomes to New Zealand born workers.

The Winkelmann study (Winkelmann and Winkelmann 1998) showed that on average, new skilled migrants (those who had been in New Zealand less than five years) in the labour force had an income 20 percent below that of New Zealand born residents with similar characteristics and qualifications. An NZIER report (2003) notes the differential noted in the Winkelmann study may in fact be more marked today because that study focussed on migrants who were in employment, and since the report was published migration flows from non-Anglophone countries have increased. In addition to this, recent immigrant cohorts have been younger, more likely to be involved in full-time education and less likely to be actively participating in the labour force. On the other hand recent immigration cohorts have been more skilled as high demand has ensured a high pass mark and this may to some extent offset their tendency to not actively participate in the labour force so much as in the past.[12] It is difficult to ascertain which factor would have the greatest effect on income, but is reasonable to assume that the incomes of new skilled migrants are unlikely to have improved from the 20 percent discrepancy discovered in the Winklemann study. This indicates that, at least in the initial stages after entry, and probably also after this stage, migrants have lower levels of labour productivity than natives.

This lower productivity and slow convergence can be explained, at least in the short term, because migrants must adjust to a new country and its culture, workplace routines, language, and other factors. This adjustment period will vary depending on the nature of the migrants (such as their country of origin) but it is sensible to expect that it would partly explain the findings of lower productivity and slow convergence.

5.2  Under-employment

NZIER (2003) research investigated the economic cost of under-employed skilled migrants finding that the major cost component came from reduced production as a result of migrants not fully utilising their skills. In this situation there are unrealised gains from immigration. While migrants are participating, their sub-optimal participation is not the best use of inputs available.

Winkelmann and Winkelmann (1998) show that immigrants had distinctively higher education levels than New Zealand born persons. Immigrants were about 30 percent more likely to have a post-school qualification than New Zealand born persons in any of the census years and that recent immigrants were between 40-50 percent more likely to have those qualifications. Migrants had a higher proportion of university qualifications and a lower proportion of vocational qualifications, a distinction that is likely to have been perpetuated under the mechanics of the pass mark system during the late 1990s.

This greater level of education can lead to an increase in the overall levels of knowledge, skills and experience. Most immigrants to New Zealand are highly skilled, well qualified people. This increases the overall knowledge level in the economy and the stock and quality of the skills base (considering of course the skill level of the emigrating population). In this respect, work on the “brain drain” which became a fear in the early 2000s indicated that in fact the flows of migrants at that time would be more appropriately called a “brain exchange” rather than a “brain drain” (Bushnell and Choy 2001). This is discussed further below.

In New Zealand, the current policy settings focus on facilitating the entry of skilled migrants. Sixty percent of the total Immigration Programme is allocated to the skilled category. In addition, the Minister has the ability to reallocate any unused places in the other streams to the skilled category. During the early 2000s the high demand for migration to New Zealand meant that the pass mark under the General Skills Category (GSC) had to be increased quite significantly to manage the number of residence permits that could be offered. In practice this means that between 1999-2003 a GSC applicant would be unlikely to be accepted unless they had a tertiary qualification. The policy argument for focusing on skilled migration has been that skilled migrants will make a greater contribution to economic activity than migrants in other categories would, or than less skilled migrants. The discussion above confirms that skilled migrants have better participation and employment rates than migrants who are not selected for their skills, but it also indicates that there are still barriers to skilled migrants reaching employment at their greatest level of social return. This policy may be revisited in light of current labour market conditions in New Zealand and high demand for unskilled labour.