Politicians don't control migrant numbers, and usually don't want to

Suddenly, everyone’s talking about high migration and the way it’s disrupting the economy. Why is the government letting in so many people, and why hasn’t it turned off the tap?

Short answer: because, the way we run immigration, it has little control over the tap.

But, at times like this, that’s not something either side of politics wants to admit. The truth is, they could exercise more control over immigration, but neither side has particularly wanted to.

Usually, the pressure on them to keep immigration high greatly exceeds the pressure to keep it low. The upward pressure comes from business, which finds it easier to increase profits when it has a continuously growing market.

For many years, business’s main interest was in getting more factory fodder. More people to buy the products of our highly protected manufacturing industry and give it a little of the economies of scale it lacked.

This was why it had to be protected from imports from overseas manufacturers with much bigger domestic markets. As well, our manufacturers needed a steady supply of less-skilled workers to staff their production lines.

In more recent decades, the emphasis has switched from factory fodder to preferring those immigrants with the skills we particularly need to fill shortages as they arise. This, I fear, has allowed our employers to take less interest in ensuring they were always training up enough locals to meet their industry’s future needs.

Another change has been from focusing on permanent migration to encouraging people to come here for a while on temporary visas: workers with skills coming to see what it’s like, students coming to gain further education and young people coming on working holidays, aka backpackers.

We’ve become quite dependent on this huge inflow and outflow of temporary migrants, which far exceeds people coming on permanent visas. Businesses often want their temporary skilled workers to stay on.

The sale of education to overseas students has become one of our biggest exports, one on which our universities have become heavily dependent. Our hospitality industries rely on the casual employment of overseas students and backpackers. And farmers and country towns rely on backpackers for fruit picking and other unskilled work.

On top of all that, federal governments have become reliant on high migration to make our GDP growth figures look better. They often boast about how well our growth compares with the other rich countries, without ever mentioning that most of this is explained by our faster population growth.

And right now, of course, the economy’s growth is so weak we’d be in recession if not for the recent immigration surge.

All these are the reasons successive federal governments want to maintain strong immigration, despite the public’s longstanding reservations. Former prime minister John Howard did a great line in diverting the punters’ attention to resentment of some uninvited arrivals by boat, while he ushered in visa-wielding immigrants arriving by the plane load.

It’s only when high immigration becomes an issue before elections, as now, that the pollies make noises about slowing the inflow. It’s true that, since we reopened our borders following the lockdowns, our “net overseas migration”, people arriving minus people departing, but not counting those on brief visits, leapt to 528,000 in 2022-23, more than double what it was in 2018-19. And it may exceed another 400,000 in the financial year just ending.

This surge does seem to have contributed to the present acute shortage of rental accommodation and the big jump in rents, but Opposition Leader Peter Dutton is drawing a long bow in blaming the recent surge for the unaffordability of buying a home, which has been worsening for decades.

The telltale sign that Dutton is fudging is his plan to make more homes available by cutting the government’s permanent migration program from 185,000 a year to 140,000.

The government does control the size of this program, and often moves it up or down a bit, but the size of the program makes little difference to what matters most for the economy: annual net overseas migration.

The trick is that about 65 per cent of the permanent visas go to people who are already here on temporary visas. Changing their visa status makes no difference to net overseas migration.

At times like this, the pollies would like you to think they have the power to move immigration up or down according to the economy’s needs at the time.

But they don’t. For the most part, the level of net migration is, as economists would say, “demand determined”. And, as the demographers will tell you, net migration tends to go up and down with the state of our economy.

When the economy’s booming, migrants are keen to come to Australia, and our employers are keen to have them, particularly if they have skills. What’s more, locals and former immigrants are more likely to want to stay here than go overseas.

It’s a different story when our economy’s weak. Employers are less keen to bring in people and migrants are less keen to come.

Now, our present circumstances don’t fit that long-established cyclical pattern. But that’s mainly because the economy’s been returning to normal after the end of the pandemic. This is particularly true of the people most disrupted by the pandemic, and who’ve done most to account for our recent downs and ups in net migration: overseas students.

Most students went back home during the lockdowns, but now many of them, and many newbies, are coming back in. We’ve had a lot more students than expected because, to encourage their return, the Morrison government removed the limit on how much paid work they could do. It took the Albanese government too long to wake up and end the concession.

If you find it hard to believe the government has little control over the number of immigrants it lets in, note this. To be given a temporary visa, you have to fit one of the many categories the government wants: skilled, student, backpacker and so on. But there are no limits on the number of applicants accepted in each category.

Until now. Because it’s the students who’ve contributed most to the recent surge, the government is planning to impose caps on how many it will admit. The opposition is promising something similar.

Remember this, however. The economy is weak – and it is forecast to remain so for a year or two – so it’s reasonable to expect that, even without the caps on overseas students, net migration will fall back soon enough.

But an election is coming. Voters are unhappy about high migration and the high cost of housing, and both sides want to be seen doing something about it. How much the winner actually bothers to do after the election, may be a different matter.

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Years of neglect won't make it easy to get wages up

In Tuesday night’s budget, it will be important to note its assumptions about when our international borders will be back to functioning normally. Not because they’re sure to be right, but because our borders will have a big impact on Scott Morrison’s new strategy of getting unemployment down to get wages – and thus living standards – up.

As the Commonwealth Bank’s Gareth Aird has reminded us, fancy calculations about how low unemployment has to fall before labour shortages force employers to bid up wages, rest on the (usually reasonable) assumption that our borders will be working the way they always have.

If our borders are temporarily closed to immigration and overseas students, however, the point where skill shortages emerge may arrive a lot earlier than the fancy calculations suggest. What’s more, it’s become clearer that the day where our border conditions return to normal may be a lot further into the future than we’d first hoped.

It will be interesting to search the budget papers for signs that these complications don’t come as news to the economic managers, but have been built into the new strategy’s design.

The point is that over the decades of what we used optimistically to call “micro-economic reform”, our employers have become used to the idea that finding enough skilled labour – or even unskilled people willing to do the crappy, badly paid jobs that most Australians aren’t, fruit-picking for instance – isn’t something you have to worry much about.

Whenever you look like running out of the workers you need, you just bring someone in on a temporary visa. If they turn out okay, you help them move to a permanent visa. Our immigration program used to be about recruiting factory fodder for the manufacturers, now it’s about people on many classes of temporary visas allowing employers instant access to skilled workers trained by someone else at some other country’s taxpayers’ expense.

The trouble with this is that it’s come at the expense of our technical education system and our young people. Our business people no longer need to worry about whether they’ll have enough skilled workers a few years down the track, so no longer put enough money and effort into training apprentices, trainees and other technical workers.

I see it as further evidence for my theory that part of the reason both productivity improvement and wages have been weak for some years is our businesses’ preference for improving their profits by cutting costs – particularly wage costs – rather than improving their efficiency.

One implication of this emphasis on employers buying skilled (or cheap) labour off the shelf, so to speak, is that the longer the economy recovers behind closed borders, and the more the government tries to use labour shortages to get some decent wage growth, the more pressure employers and their lobby groups will put on the government to open the temporary-visa floodgates.

The more the government gives in to its business mates – who are used to getting their way – the more it will sabotage its strategy for getting wages, consumer spending and the voters’ standard of living going up not sideways.

But Dr Mike Keating, a former top econocrat, argues there’s a different weakness in the new strategy: it continues the economic managers’ earlier error of analysing the wages problem in purely cyclical terms.

For seven years they told us not to worry about weak wage growth because the recovery from the global financial crisis was just taking longer than usual. Wrong. Now they’re saying the problem is too much slack in the labour market, so we must stimulate harder to reduce the rate of labour underutilisation (unemployment plus under-employment) and, once we have, healthy wage growth will return as sure as demand and supply go together.

This thinking fails to acknowledge the likelihood that the problem is more structural than cyclical. It’s not just weak demand that’s the problem, it’s a change in the structure of the labour force, particularly as skill-biased technological change has increased employers’ demand for high-skilled labour and dramatically reduced demand for semi-skilled labour, while not having as much effect on demand for services-performing less-skilled labour.

Even so, the notion that much unemployment is the result of “structural mismatch” rather than weak demand is hardly new. That is, many of the unemployed lack the particular skills employers are looking for. So it’s wrong to assume that unemployment falls in lock-step with rising demand.

We’ve been marvelling at the recent rapid increase in job vacancies, which has reduced the number of unemployed per vacancy to 2.75, well below its decade average of 3.9. Many have taken this as indicating the strength of the recovery and a sign that unemployment will continue its rapid fall.

But Keating, a labour economist, says it indicates “a substantial and increasing degree of structural mismatch in the labour market”. (It could also be a sign that our employers’ dependence on importing the skilled labour they need is already making itself felt.)

“If this mismatch continues through the economic recovery, the wage increase in some jobs will most likely exceed the increase in other jobs. Consequently, pursuit of the target rate of unemployment may well result in an increase in wage inequality, which in turn may not produce the increase in demand that economic recovery requires,” Keating says.

I think the econocrats need to remember that, in the old days, the tendency for wage rises caused by skill shortages in some occupations – or some parts of the country – to spread to all other workers was caused by the operation of the old centralised wage-fixing system. The move to enterprise bargaining was intended to stop that happening. And it has.

These days, the labour market’s only equalising tendency comes from the existence of the more amorphous “wage norms” (“other bosses are giving pay rises of X per cent, so I’ll do the same”).

Keating says the best way to remove structural impediments in the labour market is to ensure the necessary development of education and training so that people have the particular skills needed to meet the requirements for the jobs that are available.

But that, of course, is just what we haven’t been doing.

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