Targeting skilled immigrants

I finally got around to looking at the Productivity Commission’s Position Paper Economic Impacts of Migration and Population Growth. The emphasis here is on analyzing the effects of a recent policy trends requiring skills in the migrant intake – about 70% of the intake was skilled in 2005/06 compared to 29% 10 years ago.

Given that annual immigration is a small fraction of the workforce and that migrants are not that different from native-born Australians one would not expect big effects from additional migration and this is what the report finds. Using an ‘economic model’ (not at all well spelt out) the report finds that maintaining a 50% higher skilled migration intake over 20 years – this would make total population 2.7% bigger than it would otherwise be – leads to workforce participation rising by 1%, average hours worked rising by 1.3% and per capita incomes rising 0.6% or by $335. Overall unemployment initially increases but ultimately falls a little.

There is very little theory in this report, a fact that I find regrettable. The main effect identified is the increase in labour force participation with effects of capital dilution which reduces capital productivity and negative effects on the terms of trade that stem from the fact that the country imports more offsetting the favorable workforce participation effects. The theory used is primitive and there is no microeconomic analysis of the effects of having more skilled workers.

Let me sketch what I think is a more sensible qualitative analysis of the case for pursuing a skilled migration program.

Having skilled migrants come to Australia implies a ‘brain gain’ - human capital acquired in other countries becomes available in Australia – it’s a brain drain from them. Indeed from a global viewpoint this is an ethical argument against skilled migration – Australia captures human capital without paying the full investment cost. Ignoring this important issue – as the report does – the arrival of skilled migrants would not represent a source of net advantage to resident Australians if the arrivals were paid their marginal products and thereby captured all the gains created. But they don’t – skills can be copied and ‘leak’ into the community – a brilliant scientist or a creative artist gets paid less than his or her marginal worth with some value being transferred to residents. This transfer is increased by the progressive tax system which also transfers wealth to others.

Other advantages of having skilled migrants include complementarities with unskilled workers increasing demands for the latter. Having more imported specialist doctors increases the demand for less skilled occupations such as receptionists and those in the service sector generally. Thus having more skilled migrants reduces pressures on the public purse directly because those with skills are less likely to be unemployed and, indirectly, by increasing the demand for those with lower skills who are, in fact, exposed to higher unemployment risks.

Generally I think favoring skilled rather than unskilled migrants has both favorable efficiency and equity implications. Having more skills provides an appropriate response to market signals which suggest higher returns to those with skills and increases overall productivity. But, in addition, effects on the public purse and on the job opportunities for those less skilled, suggest that having a strong skilled immigration component outperforms having migrants with lower skills.

Indeed while trade liberalization with low wage countries harms the unskilled in Australia by adversely impacting on their wages and working conditions, attracting skilled migrants can help this same group.

By the way, the claimed capital dilution effects of having migrants here and the effects of increased immigrants on our terms of trade seem erroneous to me. Capital stocks are not ‘diluted’ when immigrants come here because we don’t live in a communist state. You don’t acquire capital assets by walking through the Australian door – you have to acquire them by saving or bring them with you. Having extra skilled migrants here increases the productivity of capital at the margin in Australia which, in a world of mobile capital, will encourage a healthy current account deficit reflecting the implied capital inflows. And having migrants here who demand more of our non-internationally traded goods mean expanded markets for Australian producers of these goods which imply a welfare gain analogous to trade liberalization. If immigrants buy cars and other consumer durables from overseas by spending their income that is in no sense a cost to resident Australians if these same migrants more than proportionately increase our capacity to export.

Nor is the focus in the report on income per head a reasonable way of assessing the economic impact of immigration since this is defined inclusive of newcomers - it can fall with immigration though every group can be better-off as has been argued countless times over the past 20 years. The relevant target variable is the effect on incomes of non-immigrants. If this increases then everyone will be better-off (assuming voluntary immigration) even if overall income per head falls.

The Productivity Commission report does not really talk much about environmental impacts from un-priced congestion and pollution. The costs of these externalities are a problem with or without immigration but are worsened by it. The answer of course is to internalize these externalities using pricing or other policies thereby addressing these issues. It probably does not make a lot of difference between selecting skilled rather than unskilled immigrants to address such issues but, to the extent that equity arguments are used to thwart efficient pricing – you cannot congestion price roads because poor workers will be disadvantaged – there is a slight preference for selecting those with skills.

Finally, although these conclusions are couched in terms of economic benefits there are social and other benefits from gaining those with skills. Skilled intelligent people contribute to our society in many ways other than economic and the opportunity to interact with them is an unpaid-for benefit of emphasizing the case for skilled migration.

Update 1: A good discussion of skill oriented immigration policies in Canada and France is at Demography Matters.

Update 2: Thanks to Tania Price for this valuable link to a review of two online publications looking at the brain drain. The Betts and Healy reference from Andrew Norton is discussed on this blog here. On this blog also I discussed a recent paper asserting that many Indian students in Australia were studying here to gain residency not because they have an interest in IT or accounting but to gain entry. Measures were announced this morning by Senator Vanstone to prevent or limit this (see also here). The report supporting these changes has been written by B. Birrell, L. Hawthorne and S. Richardson but I have been unable to find it. A critique of the Productivity Commission Report published at the DIMA website is here.

This is an early draft of a longer piece I will write. Comments very welcome.