5.3  Emigration

New Zealand is both a source and a host country. Emigration can affect average labour productivity and its impact will depend on the characteristics of emigrants. Even though many New Zealanders leave New Zealand to live and work overseas, many also decide to return (Bushnell and Choy 2001, Glass and Choy 2001). This section discusses the role of New Zealand as a source country of migrants, and the potential impact this may have on growth.

Highly skilled New Zealand workers may experience pull factors such as better-paying jobs and the attraction of larger labour markets with a greater variety of job opportunities. The phenomenon of skilled workers departing the country is often referred to as a “brain drain”. Much of the literature argues that emigration has negative effects on the source country – the “brain drain” effect. The argument is that the propensity to emigrate increases with skills, so higher skilled workers leave while less-skilled workers remain. However, the source country may also benefit from emigration.

The “brain drain” has two principal negative effects on the well-being of those who remain in the source country as discussed by Domingues Dos Santos and Postel-Vinay (2003). First, emigration reduces per capita income in the source country as the economy loses skilled workers who contribute more to GDP than do the unskilled. The economy loses income that could be taxed and redistributed. The source country also loses the returns on its public investment in the human capital of the departing workers which is enjoyed by the host country.

Secondly, the source economy suffers a decumulation of human capital, reducing productivity and economic growth. Having an on average lower-skilled labour force would reduce average labour productivity, and consequently would render physical capital less productive. Overall this can lead to lower wages and incomes. If a “brain drain” led to a relative scarcity of skilled labour this could push up wages for skilled labour resulting in greater wage inequality. Policy implications of skill shortages are discussed further at Section 7.

In addition, it may be that because of positive externalities and network effects, a critical mass of skills in certain fields is necessary to achieve higher levels of growth in certain industries. A small country with a thin supply of skilled labour will find it harder to form clusters of expertise.

So, has emigration negatively impacted upon growth in New Zealand? In the early 2000s there was fear of a “brain drain” taking the minds of New Zealand’s youngest and brightest offshore. The data, however, suggested that there was no net brain drain from New Zealand (Bushnell and Choy 2001). Theoretical reasons also exist for why it would not necessarily be expected to see a “brain drain” from New Zealand. First, it may be that wages are simply lower for all skill levels in New Zealand, as a result of low capital investment or lack of agglomeration externalities. In that case, the flow of emigrants could be expected to be evenly drawn from workers throughout the distribution, if the poor are as likely as the rich to find better opportunities overseas. This would lead us to predict steady net migration out of the country until wages are equalized across countries; on the other hand, there may be compensating differentials due to quality of life issues. It may be no exaggeration to say that migration to and from New Zealand is driven more by preferences than by skills. It is possible that those who leave New Zealand have a stronger preference for money, while those coming to New Zealand have a stronger preference for New Zealand’s way of life. This could explain why New Zealand wages are lower, but would not result in a skill bias in migration flows.

Second, as noted previously, New Zealand has experienced a strong rise in wage inequality; in other rich countries, the rise in wage inequality has been subdued or nonexistent. As predicted in the labour market models, skilled labour is expected to migrate to regions of greater inequality, while unskilled labour migrates to regions of less inequality. Thus it may be that skilled workers are migrating to New Zealand from countries with less inequality. This has been empirically tested elsewhere (Borjas 1987) but not for New Zealand.

Emigration can also have positive consequences for the source country. First, remittances from emigrants can play an important part in the income of the source country. Secondly, the “brain drain” can also increase the potential returns to skilled workers who do not emigrate and can induce individuals to up-skill, leading to an accumulation of human capital and contributing to economic growth. The source country can benefit from the spill-over effects of knowledge diffusion and imitation from the skilled emigrants who contribute to growth-inducing innovation in the host country. As discussed above, the role of the diaspora further complicates the issue of the brain drain. Finally, the source country can benefit from the human and financial capital accumulated by returning migrants during their sojourn in the host country.

5.4  Capital investment

Migrants can add to the pool of human capital, but can also bring with them physical capital. The amount of physical capital in the economy is a determinant of the level of economic growth. New Zealand’s business stream migration categories demonstrate an explicit link between capital and labour flows. There are other less direct aspects to this relationship examined by the literature.

Migrants cause factor price movements by changing the capital-labour ratio: where migrants have less capital than the average native, immigration increases the supply of labour relative to that of capital and vice versa (Kemnitz 2001). Kemnitz uses an endogenous growth model to illustrate that immigration will only benefit an average native if, and only if, the average immigrant possesses more capital than the average native, ie the capital-labour ratio is increased. This is in contrast to standard neoclassical results.

It is uncertain whether migrants have, on average, greater capital than natives in New Zealand. The only category focused on capital is the business stream. The Investor Category closed in June 2005 and a new category came into existence in July 2005. The new category requires business investors to advance $2 million to the New Zealand Government for 5 years. After two years migrants can withdraw a portion of their funds and invest in an approved business.

Lloyd (1996) suggests that globalisation literature emphasises the role of capital flows in the form of direct foreign investments and their links to the growth of international trade in commodities but neglects the international migration of people. In terms of the activities of multinational firms or enterprises, he suggests that some relationships between the international movement of goods and labour are inextricably linked to international capital movement, and that in the long run immigration may have a strong effect on the patterns of trade and direct foreign investment. He uses a Markusen specific factor model to predict the magnitude of gains and losses to factor incomes when there is a capital or labour inflow into the Australian economy (Lloyd 1996, p78).[13] Some of the literature suggests that it is usually capital which follows labour, posited on the idea that immigrant labour has the effect of raising the marginal productivity of capital and partly due to an increase in aggregate demand inducing a transfer of capital. The model used by Lloyd indicates that capital inflows may increase the incentives for labour to migrate more than the migration of labour increases the incentives for capital to flow to Australia.