Wednesday, September 27, 2006

Inadequate assessment of gains from skilled migration

At the Australian Conference of Economists today I was asked to comment on papers by John Salerian of the Productivity Commission that draws on an immigration model constructed by Monash University’s Centre for Policy Studies. The latter was also presented by Graeme Cuxson and James Giesecke from Monash. I didn’t like the model that was presented for reasons I have set out in an earlier post where I also provided a comprehensive framework for assessing the gains from a skills-oriented program. But now, having heard a detailed exposition of their model, my criticisms are much stronger than they were before.

Cuxson and Giescke in today’s presentation met one of the criticisms I made by providing estimates of the gains to original residents alone of a sustained expansion in the skilled migration program - immigration economics provides explicit guidelines to how this is dedtermined though it is quite non-specific about the effects on per capita incomes of residents plus migrants together.

But the Monash computation revealled a deeper malaise in their work - the difficulty was that they computed these gains to residents, in fact, to be negative relative to trend! Not just small but negative!

This amounts to the following: Proposition. A group of residents are given enhanced trading opportunities with a group of skilled migrants who impose no recognizable external costs on them and yet, while the migrants are better-off, the Australian residents are worse-off.

This is not sensible. How can people who are given an improved opportunity to trade (not an obligation to trade) be worse-off long-term? The result they attribute to terms of trade effects and to foreign investment flows which immiserise (why?) the local Australian economy. The result however is inconsistent with basic 'gains-from-trade' theory.

The result has the foolish policy implication that, from the perspective of residents, we should end our skilled migration program now.

Let’s hope this paper gets revised before Australian immigration policy designers see it and before it does damage by diminishing the valuable emphasis Australia now places on skilled migration . The analysis needs to be redone. The first thing the Monash model builders need to take on board is the forty years of literature on the welfare economics of immigration and basic trade theory. You can’t just plunge in with a very detailed macroeconomic model without paying attention to the basic mechanisms by which gains from migration accrue. Otherwise the detail obscures rather than improves things. If you are analysing a policy issue in a particular area you need to account for basic theory in that area.

From my perspective its got to be back to the drawing board for the boys from Monash. The implications of their model do not make sense and are inconsistent with the basic economics of migration. On the other hand I do understand now why they get such extraordinarily low estimates of the gains from skilled migration.

I’ll write a longer piece setting out the specific problems of the COPS-PC model if I can get time.

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