The fallacy of immigration inflation

The Reserve Bank of New Zealand wishes to reduce immigration to ease inflationary pressures.   But blaming immigrants forinflation when we have a tight labour market makes as much sense as thankingthe horde of New Zealanders moving to Australia for reducing inflationarypressure.   Although migrants increase demand for goods, they also bring withthem a number of types of capital (physical, intellectual, and financial) thatcan increase the economy’s capacity and thereby ease inflationary pressure.

Beyond inflation, the government has othersocial and political goals from immigration.   These goals are primarily metthrough the family reunification and refugee immigration programmes.   Althoughthese groups may impose some economic burden in the short run, the governmentis willing to accept this in order to achieve its social and political goals.  

The target group associated with thegovernment’s strictly economic goals is the skilled labour group.   Over thepast year, 13,440 skilled labour applications were approved to enter thecountry, making up 48% of total primary residential migrant applications.   Asany change in government policy to accommodate inflation through immigrationwould occur by changing the size of this migrant group, it is appropriate tofocus on the inflationary effect of these migrants.

  1. By increasing the number of consumers, demand for goods rises, thereby putting upward pressure on prices.
  2. Increasing the number of workers in a labour-short economy will increase the supply of goods and services, thereby putting downward pressure on prices.

Both these arguments make sense.   However,this raises the question, is current government policy conducive to an increaseor decrease in inflation through immigration?

The housing market offers a prime exampleof immigration stoking inflation by creating additional demand for products.   Therate of growth in immigration has undoubtedly contributed to the rate of growthin house prices, as a sudden unexpected leap in immigration in 2003/203 led toan increase in demand for houses.

On the other side, an increase inimmigration can drive down inflation by increasing the supply of labour,especially sectors of the economy constrained by skill shortages.   New Zealand has been in a state of constant labour shortage for a number of years.   Themost recent Department of Labour survey on labour shortages found that all nineof the major occupation groups were suffering from a shortage of labour.  

A shortage of labour drives up wages forthose required skills.   To compensate for the increased cost of labour,employers need to put up the price of the goods and services they produce.   Byallowing skilled migrants into the country to fill skill gaps, we alleviate theupward pressure on prices.

Furthermore, working migrants increase the setof resources that a country has.   A larger supply of resources allows a countryto produce more goods and services, which will have a downward effect oninflation.   In a situation where there is a severe shortage of labour the extraproduction created from a new worker is substantial, implying that thedisinflationary impact of a skilled migrant can be significant.

How can we weigh up the counteracting influencesthat immigration has on the rate of inflation?  

A common argument is that immigration takestime to increase the supply of goods, implying that inflation is driven up inthe short-run, but eases back in the medium-term.   But statistics onimmigration application approvals suggest that skilled migrants move quicklyinto work.     Over the last year nearly one third of applications that have beenapproved under the Skilled Migrant Category had job offers before they enteredthe country.   Furthermore, many of the remaining two-thirds of approvedapplications were for applicants that were qualified in occupations in whichthere is an "absolute shortage" of that skill domestically, implying that theyshould be able to find work relatively quickly.

As new skilled migrants are able to quicklymove into work, their inflationary impact depends on how much they additionalproduct they produce compared to how much they consume.   If the majority of newmigrants are moving straight into work in areas of the economy that are short oflabour, migration will significantly improve national production and drive downinflationary pressures.   Given the long-term nature of the labour shortages in New Zealand, the migration of skilled labour is more likely to decrease inflationarypressure rather than increase it.  

Ultimately the Reserve Bank’s focus shouldbe on the root causes of our inflationary woes: inflated domestic demand, poorproductivity growth, and a wasteful government sector.

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