7.3  Policy implications for migrant productivity

As set out in the growth accounting framework, labour productivity is a result of capital per worker and multifactor productivity. There is little direct evidence in New Zealand on the productivity of migrants relative to the native population; however, there was evidence of underemployment of skilled migrants, who are operating at a salary lower than their native counterpart, suggesting a productivity differential. While disentangling the effects that migrant workers have for productivity can be a black box question, the analysis above has policy implications relating to the skills of migrants, including technology spill-over questions and investment.

7.3.1  Increasing skills of migrants

The objectives of the SMC are to grant residence to people who demonstrate that they have skills to fill identified needs and opportunities in New Zealand; are able to transfer those skills to New Zealand and link with local needs and opportunities; are able to demonstrate an ability to contribute to New Zealand both economically and socially; and are able to demonstrate an ability to successfully settle in New Zealand. In meeting these objectives the SMC aims to maximise and accelerate the contribution of immigration to New Zealand's capacity building, sustainable growth and innovation, global connectedness, and thriving and inclusive communities through focusing on a range of source regions to achieve a balanced programme and linking global talent with local opportunities.

The Borjas immigration surplus model suggests that the greatest gains from immigration may arise when the arrival of immigrants reduces local labour costs. This will tend to occur in those segments of the labour market in which wages are sensitive to labour supply. The weight of empirical evidence suggests that the wages of skilled workers are significantly more responsive to a shift in supply than the wages of unskilled workers. This is partly because most governments regulate wages at the low end (eg. through minimum wage laws) but not at the high end; and skilled labour and capital tend to be complements, whereas unskilled labour and capital tend to be substitutes.

It is also reasonable to assume that skilled immigrants generate larger positive externalities than unskilled immigrants (for example they disseminate more knowledge, pay more tax, and consume more); and the evidence (Nana et al 2003) indicates that government expenditure on income support and welfare is lower for skilled immigrants than for unskilled immigrants.

These points suggest that increasing the skill composition of the immigrant flow can potentially generate economic gains for a country. However, the gains may be associated with a redistribution of income from native workers within the affected labour market to owners of capital (shareholders, investors). The policy question is whether the efficiency gains outweigh any social costs arising from this redistribution (which raises a prior question of whether there are any significant social costs, or whether there are simply winners and losers).

There is a potential trade-off between distributional impacts and efficiency gains from immigration: the literature suggests that countries are unlikely to achieve real gains from immigration (in terms of an increase in national income) without some negative impact on the local workforce. It follows that immigration policies that are driven by a concern to minimise negative impacts on the local workforce are unlikely to be consistent with maximising the net benefits to a country from immigration.

In some respects New Zealand immigration policies are focused on minimising the impacts of immigration on native workers.[20] This approach may be costly to New Zealand, in terms of lost opportunity for economic gain. Protecting the local workforce may be a high priority for government, but it is important to understand the nature and level of the trade-offs involved, in order to make informed decisions.

World demand for skilled migrants

Migrant preferences affect migration decisions. The effect that this will have on demand for residence in New Zealand is dependent on whether migrant groups have homogenous or heterogeneous preferences. If viewed as homogenous then it must be accepted that countries compete with each other for skilled migrants. One study showed increases in the number of skilled migrants arriving in the United States from a particular sending country are related to a reduction in the numbers of skilled individuals from that country applying for an Australian visa (Cobb-Clark and Connolly 1996). In this light New Zealand immigration policy developments must always take account of the relative attractiveness of countries such as Canada, Australia and the United States. Competition for skilled migrants is likely to increase in the future as the pressures of populating ageing start to be felt across developed countries and the demand for skilled labour increases.

It is unlikely that migrants are distinctly heterogeneous or homogenous in their migration decisions. Understanding the motivation of migrants is difficult. But the shift to a greater number of onshore residence applications suggests that if migrant preferences are homogenous New Zealand needs to have very competitive policies for work and other temporary permits, not just residence permits. In practice the development of New Zealand immigration policy usually provides country comparisons between proposed changes to policy and the comparative policy in other similar countries. This should continue.

At present, the United States remains the favoured destination for many highly skilled foreign workers, but its continued competitiveness in attracting the best and brightest will require substantial changes in immigration policies and administrative mechanisms. An increasing proportion of highly skilled enter through temporary categories with little prospect of permanent residence within a reasonable period. The numbers involved are very significant and the pressures that drive them are likely to continue over the near future (Martin and Lowell 2004). Another aspect to this is that the United States has increased visa restrictions in the wake of 9/11 and the increased security has made it more difficult for some foreign workers to enter.

7.3.2  Emigration

This paper discussed the role of emigration in the migration system. What does this mean for policy in New Zealand? Again, it is dependent on which effects would dominate behaviour. If labour does not respond to international wage differentials, then New Zealand can safely invest in human capital without concern that educated New Zealanders will flee the country. What is the effect of high wage inequality on skilled workers’ decisions to emigrate? This may to some extent offset the incentives to leave for higher average wages in other countries, whereas low-wage labour faces greater constraints to emigration (due to lack of resources and/or information). If the wage inequality offset does not significantly affect decisions then New Zealand can be viewed as a component of an integrated global labour market. This argument has implications for work on skills training and education for New Zealanders.

There is a lack of definitive literature on whether greater investment in skills by government leads to higher emigration and/or less immigration of skilled workers, thereby offsetting the effects of these policies on New Zealand’s aggregate economic performance. Evidence in this area would be essential for understanding the impact of investments in human capital on growth. If human capital flows overseas to the country offering the highest wages then how would this affect government’s incentives to increase the number of people undertaking tertiary training?

Perhaps this debate illustrates the need for greater links between work on education and immigration policy. At the very least it suggests that investments in education should be considered with a long-term lens which considers how to encourage educated New Zealanders to stay in New Zealand, or at least to return to New Zealand. The student loans policy announced in 2005 allowing students who remain in New Zealand to be free from interest payments is an example of this. The aim must be for the government to invest in skills that assist economic growth in New Zealand and it is appropriate to consider how these skills can be retained. As discussed above in relation to global connectedness, the government should also consider how to ensure New Zealand remains an attractive return option for those people who do leave the country at some point.

7.3.3  Skill and labour shortages

The New Zealand government is currently undertaking work on the interface of various responses to labour market shortages. The use of immigration policy is one possible response to periods of skill and labour market shortages. There is no agreed definition of skill and labour shortages. However in broad terms government has used the term ‘skill’ to refer to occupations requiring significant specialist, managerial or technical expertise while ‘labour’ has been used to denote low or unskilled occupations that can be learnt in a relatively short period of time.

Could immigration make a greater contribution to economic growth if it could be exploited to alleviate skill shortages and encourage expansion within businesses that have said they are currently constrained by skill/labour shortages? Since 1999 New Zealand has been facing a tightening labour market. The official unemployment rate has fallen from 6.3 percent in December 1999 to 3.6 percent in the December 2005 Household Labour Force Survey. Skills and labour shortages are high and are forming a major constraint on business expansion. There can be a number of underlying reasons why these shortages exist and the use of immigration policy to alleviate the shortages would not address all of these reasons.

Skill shortages constrict economic growth by constraining business production (or expansion). They can also push up wages for certain types of skills leading to wage inflation in excess of productivity growth. Since 1999, the New Zealand labour market has been tightening – unemployment has decreased from 6.3 percent end-1999 to 3.6 percent at the end of 2005, while employment has increased by 10 percent over the same period. Employers have reported considerable and sustained difficulties in recruiting suitable staff, with 45 percent of firms reporting difficulty in finding skilled staff and 25 percent finding it difficult to recruit unskilled staff (NZIER 2004, March).

A 2001/2002 work permit review concluded that it was not appropriate to use immigration temporary work policy to enable employers to meet shortages for low or unskilled labour caused by recruitment difficulties. Working holiday schemes were seen as a potential source of labour for addressing temporary or seasonal shortages. The risk of businesses being constrained by the unavailability of labour prepared to work at the going wage rates was noted, but immigration was not considered to be an appropriate policy response.[21]

An important question is establishing why the shortages exist. Immigration is a possible short-term intervention for shortages caused by skill gaps while training and education initiatives are underway to resolve the shortages. If shortages are absolute and ongoing then immigration could be viewed as a possible longer-term intervention. Skill shortages can be met by bringing in labour from overseas. However, if shortages are the result of poor pay or conditions or inadequate training, bringing in overseas workers could adversely impact on employment opportunities for the host country and may reduce the incentives for both businesses and individuals to invest in education and training.

Should New Zealand be more flexible in facilitating lower-skilled workers where it is in New Zealand’s longer-term economic interests and where risks can be effectively managed? Particular areas experiencing labour shortages are the construction industry and the horticulture industry. Use of the occupation shortages list is a possible way forward but the concern must be the period of time for which these permits are granted. Using immigration to respond to short-term problems makes quick and efficient processing by NZIS imperative.

In the latter part of this decade there will be a brief increase in the available workforce as the ‘baby blip’ cohorts of the early 1990s work their way into the working age population. Possible consequences include increases in emigration if members of the New Zealand workforce cannot find jobs in the domestic labour market. At this time Australia, Europe and North America will all be competing for skilled labour. Irregular patterns of growth will cause differential pressures on the labour market and services (Bedford, Ho and Lidgard 2000). Immigration policy can be seen by governments as an attractive mechanism to alleviate various labour market challenges, but these responses can in turn be destabilising.

7.3.4  Technology Spillovers

A possible approach is to pursue further the gains to native firm productivity that can be had from technology spillovers. In addition to the literature identified in the productivity section above, there is anecdotal evidence from firms involved in the Auckland Chamber of Commerce Skilled Migrant Employment scheme that firms are receiving great benefits from employing migrant workers. The scheme is funded by NZIS and administered by the Auckland Chamber of Commerce and aims to link skilled migrants with employers (or assist skilled migrants into jobs).

There are limited policy levers available to the Government to encourage these spillovers. The greatest advantage may be in ensuring that action is taken to reduce barriers to employment, including educating the host community employers of the benefits of bringing migrant workers, with their varied experiences, into the workplace. There are possible benefits from encouraging foreign firms to locate in New Zealand as their skills and knowledge are likely to spill over to native firms and workers.