THE ECONOMICIMPACT OFMIGRATION
THE ECONOMICIMPACT OFMIGRATION
CONTENTSEXECUTIVE SUMMARY 02THE MODEL 04AUSTRALIA’S MIGRATION PROGRAM 04RESULTS 10POPULATION 10PARTICIPATION AND EMPLOYMENT 12PRODUCTIVITY AND GROWTH 14DISTRIBUTION 20LOOKING TO THE FUTURE 24APPENDIX ONE 26SUMMARY OF MODEL RESULTS 26APPENDIX TWO 28THE INDEPENDENT MACRO MODEL 28REFERENCES 40
Migration has mixed effects on labour productivity.On the one hand, productivity receives a boost,as high levels of education are associated bothwith high personal productivity and a contributionto general productivity through researchand development. On the other hand, there is aloss in productivity from applying a larger labourforce to a fixed stock of natural resources, includingmineral resources and land.However, the gain in employment easily outweighsthe loss in productivity, so by 2050, migration leadsto a 5.9 per cent gain in GDP per capita. This gainin GDP per capita flows through to an even largergain in living standards.This gain in living standards drives a further benefitto the budget bottom–line as government revenuesincrease with the gains to employment, while anyrise in government expenditures is limited to theeffect of the population increase.Migration in fact provides savings across thepopulation in expenditures on education,transfer payments and governmentnetwork infrastructure. Migrants who initiallyenter Australia on a student visa pay the full costsof their education, providing a saving to thegovernment budget compared to the subsidisedplaces offered to Australian–born residents.Further, the elderly are under–represented in themigrant intake, so migrants generate only a limitedincrease in government payments. Finally, becauseof fixed costs, per capita expenditures ongovernment network infrastructure fall as migrantsboost the population.Overall, the gain in GDP per capita combines withthe net fiscal benefit of migration to lead to a risein household consumption. Comparing this withthe population gain, migrants offer a premiumboost to the economy compared to Australianborn residents. Importantly, this premium isshared with Australian residents. As the budgetbottom line improves, personal income taxrates can be lower and this in turn supportshigher household consumption. This researchdemonstrates that by 2050, real after–tax wageswould be significantly higher.The findings in this report are based onindependent economic modeling completedin 2014–15 by Independent Economics.Two migration scenarios projected out to 2050have been simulated using the IndependentMacro–econometric Model (Macro Model). The firstscenario assumes our current migration frameworkcontinues, the second assumes zero migration fromnow to 2050.The Macro Model captures the standard linkagesbetween migration and the economy, such asthe boost to the labour force. In addition,it goes beyond previous studies in this area toallow for economies of scale in infrastructure,diseconomies of scale from fixed natural resourcesand semi–endogenous growth from education andresearch and development.The following report is broken into threechapters: explaining the model; the results;and our conclusions. The results chapter includessections dealing with population, participation,productivity and distribution.This report demonstrates the critical role thatmigration will continue to play in Australia’seconomic future and wellbeing. This highlights theneed to ensure policy remains dynamic and is ableto respond to changing global circumstances.BY 2050,MIGRATION WILLBE CONTRIBUTING$1,625 BILLION TOAUSTRALIA’S GDP.03THE ECONOMIC IMPACT OF MIGRATION
TABLE A SUMMARISES THE KEY TYPES OF VISA (STREAMS) THAT ARE INCLUDED UNDEREACH PROGRAM05MIGRATION PROGRAMMESkilledFamilyTEMPORARY ENTRYStudentTemporary work(sub–class 457)VisitorWorking Holiday andother temporaryHUMANITARIANHumanitarianGrants permanent residency to those individuals with skills that are indemand in Australia.Grants permanent residency to relatives of an Australian citizen,permanent resident or eligible New Zealand citizen.For individuals completing a university qualification, vocationaleducation and training qualification or other qualification at anAustralian education institution.Allows businesses, who cannot find an Australian citizen to complete theskilled work, to sponsor a migrant worker. The visa is eligible for up tofour years.Allows individuals to travel to Australia for business or holiday purposesfor a short period of time, up to one year.The working holiday visa is designed for young people from certaineligible countries to holiday and work in Australia. Eligible for one yearwith possibility of an additional year.Grants permanent residency to individuals who are subject topersecution or discrimination in their home country.THE ECONOMIC IMPACT OF MIGRATION• Diseconomies of scale from fixed factorsFactors such as land, water and mineralresources are fixed. A larger population,through migration, means each resourceis spread more thinly, creating costs forthe economy — potentially leading to lowerliving standards.• Terms of trade As the size of the Australianeconomy increases relative to the size of theworld economy, a fall is expected in Australia’sterms of trade, leading to a reduced real incomefor the population.• Endogenous growth Factors such as humancapital accumulation and productivity growthrelated to research and development (R&D)can affect the long–term growth rate ofthe economy. Both of these factors are impactedby migrants, who lift the educational attainmentof the Australian population.Modeling the economic impactof migrationPrevious modeling of the economic impact ofAustralia’s migration policies occurred in 2006,when the Productivity Commission produced areport into the economic benefits of populationand migration, and Independent Economics (thentrading as Econtech Pty Ltd) subsequently providedmodeling to the (then) Department of Immigrationand Citizenship in the same year.These studies were based on Australia’smigration program and policies in 2004–05.However, there have been significant developmentssince then: Australia’s Net Overseas Migration(NOM) rose from around 143,000 migrants in2004–05 to around 239,000 migrants in 2011–12.
06THE ECONOMIC IMPACT OF MIGRATIONFurthermore, during these years Australia’s skilledmigration expanded and increased its focus —both on skilled migration and temporary visas asa pathway to permanent migration. For example,net migration under 457 visas rose from 7 per centof NOM in 2004–05 to 15 per cent by 2011–12.Net Overseas MigrationEach of the visa streams within Australia’smigration policy framework contributes to thetotal of Australia’s Net Overseas Migration (NOM).Broadly speaking, NOM is the number of newlyarrived migrants minus the number of newlydeparted migrants. More specifically, NOM iscalculated as the difference between the numberof persons entering Australia who stay in Australiafor more than 12 months within a 16–month periodand the number of persons leaving Australia whoremains overseas for 12 months or more over a16 month period.To estimate the economic impact of migration,the two migration scenarios were simulatedto the year 2050 using the IndependentMacro–econometric Model (Macro Model).The Macro Model builds on the 2006Econtech analysis, capturing the standard linkagesbetween migration and the economy, such asthe boost to the labour force from migration.In addition, it goes beyond previous studiesin this area to allow for economies of scale ininfrastructure, diseconomies of scale from fixednatural resources and semi–endogenous growthfrom education and research and development toalso be considered.This report provides a more up–to–dateanalysis of the economic impact of migration,incorporating the changes to Australia’s migrationprogram since the last analysis, almost adecade ago.To estimate the economic impact of migration toAustralia, a baseline scenario was developed thatprojected Australia’s NOM out to 2050 based oncurrent policy and migration trends. 1 This baselinescenario was then compared with an alternativehypothetical scenario, where there was nomigration from here on. 2 This allowed a comparisonof the economic outcomes arising from the twoscenarios, demonstrating the overall economicimpact of migration to Australia.1Current Department of Immigration and Border Protection (DIBP) forecasts extend to 2017–18 (256,900); these forecasts were broadlyadopted in this report and then extended to 2050–51. In extending the DIBP (2014) projection beyond 2017–18, the annual level of NOMwas held constant at 250,000 migrants until 2029–30 and thereafter grown so that its contribution to population growth was kept constant at0.85 percentage points (based on NOM’s average contribution to population growth between 1999–2000 and 2013–14).2It is highly unlikely that a scenario of zero migration will occur in the near future; however, utilising this scenario provides a basis to captureand analyse the economic impact of migration to Australia.
A comparison of the model features is shown below:TABLE B. MODEL COMPARISON07MODEL ATTRIBUTE 2006 COMMISSION 2006 ECONTECHLabour skillsand migrationLabour forceparticipationand migrationLink from higher exportsto lower terms–of–tradeLink from populationgrowth to investmentLink from financialwealth of migrants toliving standardsNatural resourcesdiseconomies of scaleInfrastructureeconomies of scaleSemi–endogenousgrowtha) Link from educationspending to productivitySemi–endogenousgrowthb) Link from R&Dto productivityPopulation andgovernment spending(social security,health, education)?2014 INDEPENDENTECONOMICSTHE ECONOMIC IMPACT OF MIGRATIONThe expanded attributes allow the modeling to better capture both the positive and negative impactsof migration.
08THE ECONOMIC IMPACT OF MIGRATIONThe IndependentMacro–econometric ModelThis report’s analysis of the effects of themacroeconomic shocks on the key economicparameters is undertaken using the IndependentMacro–econometric model. This Macro Model iswell suited for analysing the economic effects of themacroeconomic shocks for the following reasons.• It is able to consistently analyse the economicimpacts of macroeconomic shocks in the short,medium and long term. Consistent modellingthrough time is particularly important foranalysing economics shocks such as a gain inthe terms of trade, where there are different,important effects in both the short–term andlong–term.• It features fully–integrated industry modelling,which models the inter–linkages between sixdifferent industries (including mining) andthe broader economy within one model.This allows for a fuller analysis of the effectsof macroeconomic shocks, such as changesto world mining prices. The six industries areAgriculture, Mining, Manufacturing, GovernmentServices, Other Services and Housing Services.• The Macro Model has a fully–integrateddemographic model. This allows the MacroModel to robustly estimate the economic effectsof population ageing, including its effects on theparticipation rate.• The model incorporates a sophisticatedproduction structure that allows for theimportance of fixed factors such as landand natural resources in industries such asAgriculture, Mining and housing services(Ownership of Dwellings). This enables themodel to provide more realistic estimatesof the response of these industries tomacroeconomic shocks, such as changes inlabour productivity.Other features of the model that are useful for theanalysis include:• forecasts on a quarter–by–quarter basis to along–term horizon;• strong data consistency for moreaccurate forecasting;• solid theoretical foundations for more robustpolicy analysis;• an understanding of how the ReserveBank pursues its inflation target in settingmonetary policy, taking into accountdevelopments in inflation, unemployment andthe bond market;• modelling of consumer and investmentbehaviour that allows for the GFC;• a new approach to modelling householdconsumption that uses a target for assetholdings based on labour income;• a detailed representation of the interactionsbetween building and construction activity ineach industry and the broader economy;• an allowance for structural change in thelabour market;• sophisticated modelling of financial markets inwhich market agents are forward looking andinstantaneously respond to new information.This is a more realistic approach to modellingfinancial markets and helps the model providecredible short–term forecasts;• an industry satellite model that disaggregatesselected forecasts for the six broad industries inthe macro model to 37 more detailed industries;and,• a states satellite model that disaggregatesselected national forecasts from the macromodel to the state level.For a detailed explanation of the IndependentMacro Model, please see Appendix Two.
MIGRATIONWILL ENSUREAUSTRALIAREMAINSA HIGHLYSKILLEDNATION.
RESULTS2Using the model to simulate the economic impactof migration to 2050, we were able to examinethe likely effect of migration on key economicindicators with a degree of precision. These resultshave been broken down so as to isolate the effectof migration on population, labour participationand productivity. A further section has beenincluded to outline the distributional effectsof migration, most notably on wages.These results paint a comprehensive picture of theinterdependence between Australia’s migrationframework and our economic fortunes.POPULATIONThe Australian population is projected to be38 million in 2050, rising to 40.1 million by 2055.Migration is one of two major demographicfactors that affect the rate that Australia’spopulation grows. The other is how the existingpopulation increases. This is a combination of thefertility rate and life expectancy, or more simplybirths minus deaths.While migration trends can move very quickly inboth scale and direction, fertility and mortality areboth slow to adjust. For example while the fertilityrate increased at the turn of the millennium, it didso progressively over a number of years. This makeschanges in births minus deaths more predictablethan the migration trend.Using the two scenario modelling in thisresearch it can be shown that with no migration,our population would stagnate at 24 millionby 2050. However, with migration, we canproject that Australia’s population in 2050 will be38 million. That is to say, migration adds 14 million— or 37 per cent — to the total population overthe next 35 years. This is based on an averageNOM of 250,000 per year until 2029–30. Afterthis initial period, an assumption is made that netmigration will be equal to 0.85 percentage points. 3This population projection contrasts starkly withprevious long–term government projections.For example, previous intergenerational reportsoffered significantly lower population projections.3The assumption of 0.85 percentage points is based on NOM’s average contribution to population growth between 1999–2000 and2013–14. This period accounts for the more recent changes to Australia’s migration framework.
There are two primary reasons for this variance.Firstly, in the past, estimates of Australia’sprojected population have failed to allow forthe growth of the migration program. In effectmigration has been held at a constant figure as thepopulation increases, reducing the net impact ofmigration over time.Secondly, previous projections have relied onlong–term historical trends to project future growth,rather than incorporating the effect of significantstructural changes in the migration framework.For example, the third Intergenerational Reportpublished in 2010 projected a population basedon an average net migration rate of 0.6 per cent ofthe population, or 180,000 net migrants per year.This was based on the long–term average from theearly 1970s to the late 2000s. By the time the thirdIntergenerational Report was published in 2010,NOM was already 180,000, allowing for no growthin migration.Similarly, historical long–term trends miss capturingthe true effect of more recent changes in themigration framework, most notably the growth intemporary migration. Indeed, the ABS populationprojection series offers a possible range for NOMfrom a conservative 200,000 to an upper limitof 280,000. Current Department of Immigration andBorder Protection forecasts of NOM, which accountfor more recent policy parameters have netmigration rising to 257,000 by 2017–18.11THE ECONOMIC IMPACT OF MIGRATIONTHE AUSTRALIANPOPULATION ISPROJECTED TOBE 38 MILLIONIN 2050.
12This chart shows the population projections used in this report compared to current ABS projections and thethird Intergenerational Report.THE ECONOMIC IMPACT OF MIGRATIONPROJECTED NET OVERSEAS MIGRATION (PERSONS PER YEAR)35000030000025000020000015000010000050000MCA (2015)ABS Series B projection (2014)IGR3 Projection (2010)2004-052008-092012-132016-172020-212024-252028-292032-332036-372040-412044-452048-49Source: MCA; ABS; TreasuryThe rate of NOM is important. A lower rate ofNOM will project a lower population, but becausemigrants are generally younger than the existingAustralian population, a lower rate of NOM alsomeans an older population. A lower rate of NOMwill therefore adversely impact on the dependencyratio of workers to non–workers.Conversely, a higher rate of net migration willproject a higher population. This will play asignificant role in reducing the economic negativesassociated with Australia’s ageing society.Human capital and demography are the two mainfactors that drive change in the labour market andthe economy. Australia’s skilled migration policyframework focuses on these two key factors,with migrants coming to Australia being onaverage both younger and more skilled than theaverage person in the labour force. These factorsdemonstrate the importance that policy–makersshould place on migration.As reflected in the previous IGR projections —which failed to take into account how Australia’smigration framework fundamentally altered with theprioritisation of skilled migration and the expansionof temporary migration — there is currently a poorunderstanding of how migration trends ebb andflow, as well as the impact of policy change on theNOM rate.PARTICIPATIONANDEMPLOYMENTThe characteristics of migrants differ from theAustralian born population. As such, the impactof the migration program on the labour marketis transformative, increasing the rate of participationand employment.
Indeed, as modelling in this research demonstrates,by 2050, migration will have increased therate of labour participation by 15.7 per cent,or approximately 0.4 per cent per year. To putthis in perspective, the expected bump to labourparticipation over the next 35 years from migrationis nearly equal to the gains made over the past35 years of women’s participation in the workforce.This modelling further demonstrates that by 2050,there will be a gain in employment thoughmigration of 45 per cent, easily outstripping thepopulation gain of 37 per cent. In simple terms,this means that migration plays a role injob creation. The gap between employment andpopulation represents a raw premium in terms ofthe economic benefit of migration.In addition, new migrants hold a higher levelof qualification than the average person in thelabour force. The skill profile of migrants is critical inmanaging our workforce capacity and in addressinggaps in our labour market. In part, the additionaljobs premium that migrants yield is a reflectionof the increased capacity for investment thatcomes from a stable, diverse and more highlyskilled workforce.Migrants, on average, are more highly educatedthan existing residents. This is particularly thecase for migrants who initially enter Australia ona student visa. The Chart below compares thepercentage boost to total population with thepercentage boost to population with a universityeducation. By 2050, the boost to the populationwith a university education of 60.4 per cent easilyoutstrips the boost to the total population of37.0 per cent.13THE ECONOMIC IMPACT OF MIGRATIONMIGRATION DIFFERENCE; POPULATION, UNIVERSITY EDUCATED POPULATION0.70.60.50.4Total population0.3University-educatedpopulation0.20.102014 Q32016 Q42019 Q12021 Q22023 Q32025 Q42028 Q12030 Q22032 Q32034 Q42037 Q12039 Q22041 Q32043 Q42046 Q12048 Q22050 Q3
14THE ECONOMIC IMPACT OF MIGRATIONMoreover, the increasing rate of labour participationdriven by migration has strong economic benefits.The most important is the role migrants play inmitigating the effects of an ageing population.Structural demographic changes will havesignificant long–term impacts on the tax burden,revenue projections and the workforce capacity ofthe Australian economy. While migration cannotsolve Australia’s demographic problems, it canassist on the margins by extending an adjustmentperiod to alleviate the worst effects of an ageinglabour force.This is because migration does not just addadditional population; it adds younger workerswho have high participation rates. Thus italleviates the workforce capacity issues,shifting the ratio of working age to non–workingage people. Further, because migrants aremore highly educated on average, they can beexpected to participate more in research anddevelopment, adding to economic growth with itsdisbursed benefits.A further participation bonus arises from migrantshaving higher rates of participation than theAustralian born population, with these higherparticipation rates giving rise to increased labourincomes and a corresponding boost to tax revenue.The boost to tax revenue is, however, offset againstmigrants being relatively young and having lowernet wealth than existing residents.Migrants may contribute more to the governmentin taxes than they draw in government services.They generally receive less governmententitlements, particularly if they arrive ontemporary visas. Often the costs of their educationhave already been met in their source country or,if they arrive on a student visa, they pay the fullcosts of their education as they are not eligible fora government–funded place. Further, relatively fewentrants are old enough to be immediately eligiblefor the age pension.The major visa categories that are generatingmigration to Australia, such as internationalstudents and temporary and permanentskilled visas, are exemplary in terms of theircharacteristic profiles. International studentsare proportionally younger and receive theireducation at Australia’s higher education providers.Under more recent changes to the migrationframework, a new streamlined ‘post–study work’visa now allows international students to enter thelabour market full time for up to four years at thecompletion of their studies. While skilled migrantstend to be slightly older than international studentsthey have very high participation rates in the labourmarket. Moreover, their previous work experience inother countries enables them to transfer knowledgeand skills to our domestic workforce.Previous research on migration and labourparticipation supports this economic modelling.Cully (2011) found migrants contributed1.9 percentage points of growth to the aggregateparticipation rate from 2000 to 2010. New migrantsarriving in this decade were younger than previousmigrants (via policy change) and the migrants whowere already in Australia increased their propensityto work. Without these effects, the labourparticipation rate would have been less positive inthe first decade of the 21st century.PRODUCTIVITYAND GROWTHMigration has mixed effects on labour productivitybut its overall effect on growth is conclusiveand compelling. Using the model to simulatethe economic impact of the migration programto 2050, we can project the economy will be40 per cent larger as a result of migration.Expressed in dollar terms, migration will becontributing $1.6 trillion to the Australian economy.Taken together, these two figures underscorejust how significant migration is to Australia’sfuture prosperity.The effect of migration on productivity is complex.On the one hand, productivity receives a boostbecause migrants are concentrated in theprime working age group and are relativelyhighly educated. Moreover, they are more likelyto participate in the workforce and have higherlevels of personal productivity. In the modelling,we also take account of the contribution migrantsmake to general productivity through researchand development.
On the other hand, a higher population meansapplying a larger labour force to a fixed stock ofnatural resources. Further, a larger economy maylead to a lower terms–of–trade as less favourableexport prices need to be accepted to achieve alarger share of world markets.On the whole, using the model to simulate theeconomic impact of the migration programto 2050, productivity decreases by 7.9 per cent.This occurs as capital in the economy adjusts to alarger labour market. The process of adjustmentoccurs slowly at first with growth accelerating asthe projection extends towards 2050. As will bediscussed later in this section, the effect is notuniform across industries: sectors of the economythat engage our national resources are more likelyto be affected.However, comparing the GDP gain of 40.7 per centwith the population gain of 37.0 per cent,it follows that migrants offer a premium of10.1 per cent in their GDP per capita comparedto existing residents. This means it only takesroughly 9 migrants to produce the same amount ofeconomic activity as 10 existing residents.Overall the gain in the employment rate under themigration scenario to 2050 easily outweighs theloss in productivity. As a result, by 2050 migrationleads to a 5.9 per cent gain in GDP per capita,or approximately $6,151 per capita at2012–13 prices.This per capita GDP premium is important inthat it clarifies that migration does not just makethe economy bigger by adding more people.Migrants make a per capita contribution thatexceeds existing residents. Not only do they addmore population, they assist in fuelling growth.In addition to GDP per capita, householdconsumption per capita arising frommigration increases by 12.2 per cent ($6,977).Household consumption is closely linked to livingstandards and this increase suggests substantialeconomic gains for the existing population isgenerated by migration.It is also important to note that these GDP gainsdo not appear immediately. Rather, these gainsoccur as capital adjusts to a higher population.This “lags” the gains, as can be seen below:15THE ECONOMIC IMPACT OF MIGRATIONPER CAPITA GROWTH OVER TIME14%12%10%Consumption per capita8%GDP per capita6%4%2%0%-2%20142016201820212023202520272030203220342036203920412043204520482050-4%
16THE ECONOMIC IMPACT OF MIGRATIONLarge structural changes over the past two decadesin Australia’s migration policy have placed us inan advantageous position. Our efforts to prioritiseskills as a primary driver of selection means we arenow well positioned to reap the benefits over thecoming decades.PERMANENT RESIDENCY VISAS: ONSHORE AND SKILLEDPROGRAMME YEAR TOTAL % ONSHORE % SKILLED1996–97 73587 22.5% 47.1%1997–98 66840 22.9% 51.5%1998–99 67821 22.2% 51.5%1999–00 70237 24.8% 50.3%2000–01 80597 28.1% 55.5%2001–02 93054 33.9% 57.5%2002–03 108072 29.0% 61.1%2003–04 114362 32.1% 62.3%2004–05 120064 33.0% 64.9%2005–06 142933 30.3% 68.1%2006–07 148200 33.6% 66.1%2007–08 158630 34.3% 68.4%2008–09 171318 37.0% 67.0%2009–10 168623 37.7% 64.0%2010–11 168685 48.1% 67.4%2011–12 184998 42.9% 68.0%2012–13 190000 49.9% 67.9%2013–14 190000 50.4% 67.7%Source: DIBP 2014By looking to the long–term acceleration ofeconomic benefit, this analysis demonstratesthe caution that governments, both politiciansand bureaucrats, should apply in consideringshort–term reactive decisions on migration policy.The economic imperative of migration is strong,yet requires a commitment to extract the fulllong–term potential.GDP premium per visaEach visa stream is designed for aparticular purpose and thus has differenteligibility requirements, so different visa subclassescreate different economic impacts. To capturethese differences, the modeling has isolated eachmajor migration stream to measure the GDPper capita contribution.
GDP PREMIUM BY MIGRATION STREAM (PER CENT PER MIGRANT)17THE ECONOMIC IMPACT OF MIGRATION-50% -40% -30% -20% -10% 0% 10% 20% 30% 40%All streamsWorking HolidayVisitorOther skill visaSkilled independentStudents457HumanitarianOther points testedFamilyAs the chart demonstrates, there is a wide variancein economic contribution between variousvisa categories. Permanent skilled, temporaryskilled and student visa holders all show a large,positive effect. The younger average age and thehigher human capital common across thesestreams drives their economic contribution.Other points–tested visas, other skilled visasand working holiday makers all make smaller,but positive, contributions.Migrants who initially enter Australia on a studentvisa provide the largest economic benefit. This isbecause they are young and well educated.457 visa holders also provide a significanteconomic benefit, which is largely driven bytheir high labour force participation rates andskill level. Skilled independent stream migrantsalso add significantly, reflecting their relative age,language and technical skills. Indeed, 63 per centof the intake in this stream is in the prime workingage group of 25 to 44.Some other migrant streams, such as those whoenter on a Humanitarian visa, and migrants whoinitially enter on a family visa have a negativeeconomic impact. This is to be expected becausethey have not been chosen on the basis of theireconomic characteristics. These streams meetbroader social obligations, supporting socialcohesion and Australia’s role as a global citizen,and are not intended to yield any neteconomic gain.A stream by stream analysis of visa typesdemonstrates how policy decisions made nowhave long–term impacts. Policy decisions onstudent visas, for example, will shape the trend ofstudent migration in the short– and medium–termyet will have a much longer–term economic impact.
18THE ECONOMIC IMPACT OF MIGRATIONEffects of migration on per capitaGDP by expenditureWhile the migration program boosts total GDPper capita by 5.9 per cent through to 2050,the boost varies significantly between componentsof GDP.EFFECTS OF MIGRATION ON PER CAPITA GDP BY EXPENDITURE0.70.60.5Economic growth is more rapid with the migrationpolicies than without the migration policies.With migration, a larger share of GDP is allocatedto investment to support more rapid growth incapital stocks. Thus, in per capita terms, there arelarge gains in residential, business and publicenterprise investment.Household Consumption0.40.30.20.10-0.1-0.2Government Final DemandResidential InvestmentBusiness InvestmentPublic Enterprise InvestmentExportsImportsGDP-0.3While migration leads to an expansion in exportsthat weighs on the terms–of–trade, the negativeimpact of this real income loss on consumptionis outweighed by the modest nature of the risein demand for government services arising frommigration. More rapid growth in GDP also meansthat foreign liabilities can grow more rapidly,without rising relative to GDP. This allows a lowertrade balance, so imports strengthen relativeto exports. The lower trade balance is also partlyfinanced by the transfers of wealth that migrantsbring with them to Australia.
EFFECTS OF MIGRATION ON PER CAPITA GDP BY INDUSTRY(PER CENT DEVIATION IN 2050)0.20.150.10.050-0.05-0.1-0.15-0.2-0.25AgricultureMiningManufacturingGovernment ServicesOther ServicesHousing ServicesGDP19THE ECONOMIC IMPACT OF MIGRATION-0.3-0.35Effects of migration on per capitaGDP by industryThis modeling demonstrates how migration hasvaried economic impacts across industries.While mining GDP is boosted by migration,in percentage terms this boost falls well short ofthe boost to population. This is because mining isdependent on a fixed natural resource. Thus miningGDP is substantially lower on a per capita basis.Both the manufacturing industry and theother services industry achieve large gainsfrom migration, as these industries do not face thesame natural constraints as mining and agriculture.They both benefit from their exposure to the stronggain in household consumption per capita, and themore plentiful supply of high–skilled workers.Manufacturing also benefits from the very stronggain in investment demand per capita.On a per capita basis, the boost to the Governmentservices industry is modest. This reflects thefalls in general government final demandper capita. The boost to Agriculture on aper capita basis is also modest. This is becauseAgriculture is dependent on the supply ofagricultural land, limiting its ability to expand witha higher population.
20THE ECONOMIC IMPACT OF MIGRATIONDISTRIBUTIONWhile it is critical to understand the influence ofmigration on the economy as a whole, it is equallyimportant to understand the flow of benefitsfrom migration, and in particular the impact ofmigration on existing residents. While many ofthe economic gains from migration will go tomigrants themselves, in the form of employmentand income from that employment, the effectsof migration flow through every aspect ofthe economy. There are also significant gains forexisting residents, both in terms of wages andliving standards, through the net fiscal benefit theyprovide to the Government budget.The distributional effect of migration gains is drivenby a benefit to the budget bottom–line. As notedabove, the main benefit of migration for existingresidents arises as new migrants add 40.7 per centto GDP but only 37.0 per cent to population.While government revenues increase with the gainsto employment and GDP, any rise in governmentexpenditures is limited to the effect of thepopulation increase. As explored earlier, migrantscoming to Australia on a student visa pay the fullcosts of higher education, providing a saving to thegovernment budget compared to the subsidisedplaces offered to Australian–born residents.Skilled migrants have already had the costs oftheir education met by their country of origin.Limitations on eligibility for Government servicesapply to many migration streams. The agedemographics of the migrant intake mean that theelderly are under–represented in terms of demandfor government transfer payments. These factorsreduce the fiscal impact of the increasein population.Moreover, because of fixed costs, per capitaexpenditures on government networkinfrastructure fall as migrants boost the population.Consequently, the demand for government services(as measured by general government final demand)rises by only 35.7 per cent, well below the gain inGDP of 40.7 per cent. Put simply, when migrationboosts the population, demand for somegovernment services rise, but by a lower proportionthan the population increase.As the budget bottom line improves under themigration scenario, personal income tax rates cantheoretically be lower and this in turn supportshigher household consumption. This does notmean that personal income tax rates are cut underthe migration program. Rather, it means thatvery large increases in personal income tax ratesthat would have been necessary under the zeromigration scenario are largely avoided. With nomigration, a rapidly ageing population drains theGovernment budget, forcing large increases intax rates.Modelling in this research demonstratesan overall gain in real after–tax wages of9.7 per cent. Furthermore, these gains have adistributional affect, proportionately benefiting lowskilled and medium skilled workers. The effect ofmigration on wages to 2050 is:• a 3.5 per cent decrease for high skilled workers• an 11.0 per cent increase for mid skilled workers• a 21.9 per cent increase for low skilled workersThese benefits for existing residents vary becauseof the differential effects of migration in differentareas of the labour market. Migration enlargesthe economy, boosting demand for workers ofall skill levels. However, because the migrationprogram is slanted towards high–skill workers andaway from low–skill workers, it initially createsan excess supply of high skill–workers and anexcess demand for low–skill workers. This inducessignificant adjustments in relative wages tore–balance labour markets.This modelling simulation accords with otherexisting evidence. A 2013 OECD study showed thenet contribution of migrants to various countries netfiscal position.
DIFFERENCES IN THE NET DIRECT FISCAL CONTRIBUTION OF IMMIGRANT AND NATIVE–BORN HOUSEHOLDS AND THE ROLE OF DIFFERENTCHARACTERISTICS, 2007–2009400020000-2000-4000-6000-8000GermanySwedenBelgiumDenmarkPolandNetherlandsFinlandAustriaIcelandSlovakiaEstoniaCzech RepublicFranceSloveniaOECD averageNorwayUnited StatesAustraliaUnited KingdomGreecePortugalItalyIrelandSwitzerlandHungarySpainLuxembourgSOURCE: OECD, 2013THE ECONOMIC IMPACT OF MIGRATION21
22THE ECONOMIC IMPACT OF MIGRATIONThe OECD average contribution by migrants toa net fiscal position is –€2022. By comparison,Australia is –€32. This means there is virtually nodifference between what migrants contributeand draw from government compared toAustralian–born residents for the period 2007–09.Further, if this net fiscal position is brokendown into government contribution (tax paid)and benefits (welfare provided), an interestingpattern emerges. Migrants contribute less thanAustralian–born residents in terms of governmentreceipts (–€1811 compared to the OECD averageof –€3295) but migrants also use less governmentsupport than Australian–born residents on average(–€381, compared to the OECD average of –€247).Migration Council modelling shows that this netfiscal position is likely to rise strongly over time.However the OECD study focused on the existingpopulation. New migrants to Australia overthe next 35 years have different characteristicsfrom those who are already living in Australia.For the most part, this is a reflection of thefocus in the current migration framework onskills and education. This will transform the netfiscal contribution of migrants into a strongpositive impact.As migrants have different characteristics to theexisting labour force, their impact on acrossthe labour market varies. The post–tax wageincreases for both mid– and low–skilled workersare substantive. In part this is a consequence ofa skilled migration framework. High skilled newmigrants will compete with other high skilledworkers in the labour market. Conversely newmigrants act as complements to existing workers inmid– and low–skilled occupations. The cumulativeeffect of a 0.6 per cent per year wage impactfor low–skilled workers in particular is a largeand significant gain. The distributional effect ofmigration in benefiting low skilled residents is oftenoverlooked as part of the discourse of Australia’smigration framework.This modelling finding is also supported by aNational Bureau of Economic Research paper byPeri, Docquier and Ozden (2010), showing a similartrend in terms of the impact on wages. They showthe average impact of immigration on wagesbetween 1990–2000 in Australia was +1.7 per centor 0.17 per cent per year. When split intolow–skilled and high–skilled groups, migration hasvery different effects. The impact on high skilledwages for the period was –1.1 per cent while forlow–skilled wages the result was +4.5 per cent,or 0.45 per cent per year which is a similar result tothe modelling simulation.Unlike wages, there is little impact on theunemployment rate by migration. In part, thisis because the wage adjustments to each skilllevel ensure that any impact on unemployment islargely mitigated. In line with historical experience,projected unemployment rates are higher for lowskilled workers.While there are some long–term adjustmentsoccurring over the projected period, the end resultis basically neutral.This research refutes the commonly heldconception that migration reduces the capacity ofAustralians to find work. In reality, migration playsa role in addressing inequality and in generatingopportunities for lower income workers.Overall, the distributional impact of migration onexisting Australian residents is a highly positive.An improved employment to population ratiodrives higher consumption while migrants draw lesson government service provision and contribute anet fiscal benefit via taxes paid.
UNEMPLOYMENT RATES BY SKILL LEVEL, WITH AND WITHOUT MIGRATION1423121086420High skilledwith migrationHigh skilledno migrationMid skilledwith migrationMid skilledno migrationLow skilledwith migrationLow skilledno migration2012 Q12014 Q32017 Q12019 Q32022 Q12024 Q32027 Q12029 Q3THE ECONOMIC IMPACT OF MIGRATION2032 Q12034 Q32037 Q12039 Q32042 Q12044 Q32047 Q12049 Q3
LOOKINGTO THEFUTURE3This report offers the first window into the trueimpact of migration on our economy. Through adetailed analysis of the effect on each of oureconomic indicators a story unfolds — migration isone of our greatest economic assets. It will be theunsung hero of our future prosperity.By 2050, migration will contribute 40 per centto GDP in a multi-trillion dollar economy, with aper capita GDP benefit of 5.9 per cent.The past two decades have seen an overarchingshift in the policy framework that governs ourmigration program. The program has beenre–shaped to focus on attracting highskilled entrants who will help to address ourageing profile. Further, there has been ashift towards temporary migration, includinginternational students and 457 workers. A complextwo–step process now works to select migrants whowill fit best with our labour market and who will fillour skills shortages.The reforms that sit behind this shift to a skilledframework have driven a transformation in theprofile and characteristics of new entrants. This hasplaced Australia in an advantageous situation.We are now perfectly positioned to reap thebenefits over the next 35 years.In this sense the results of this research shouldnot come as a surprise. A migration frameworkbuilt on a foundation of skills that seeks toimprove economic outcomes should yieldeconomic benefits.However, we should also recognise that we haveachieved such success within a balanced program.The strength of our skilled framework has enabledthe accommodation of family and humanitarianmigration while still maintaining significantoverall gains. This is a testament to Australia’sposition as a leader in managing migration policy.No other developed society can lay claim to thesuccess that Australia has had with mass migration.In an increasingly uncertain global environment,policy must continue to innovate and pushboundaries. New ways to attract migrants must betested and refined. Fostering entrepreneurship,generating regional linkages and creating moreeffective skills transfer opportunities can all beassisted by migration. With the rise of a middleclass in China and the increase of competitionfor skills, Australia cannot take for granted thesuccesses of the past. Competition is only goingto increase.
IN ANINCREASINGLYUNCERTAINGLOBALENVIRONMENT,POLICY MUSTCONTINUETO INNOVATEAND PUSHBOUNDARIES.
APPENDIXONESUMMARY OFMODEL RESULTSTHESE RESULTS PAINTA COMPREHENSIVEPICTURE OF THEINTERDEPENDENCEBETWEEN AUSTRALIA’SMIGRATIONFRAMEWORK ANDOUR ECONOMICFORTUNES.
TABLE A SUMMARISES THE KEY TYPES OF VISA (STREAMS) THAT ARE INCLUDED UNDER EACH PROGRAMFAMILYSKILLEDINDEPENDENTOTHERPOINTSTESTEDOTHERSKILL VISA HUMANITARIAN VISITOR 457WORKINGHOLIDAYSTUDENTSALLSTREAMSPopulation 4.4% 1.7% 2.7% 0.5% 1.4% 3.2% 3.0% 2.4% 17.7% 37.0%Employment 3.8% 2.3% 3.5% 0.5% 1.2% 3.5% 4.0% 2.9% 23.4% 45.1%GDP 2.8% 2.1% 2.9% 0.5% 0.9% 2.9% 3.7% 2.4% 22.6% 40.7%Consumption 2.2% 2.3% 3.2% 1.3% 0.6% 3.1% 4.3% 2.5% 25.3% 44.7%GDP per capita – per cent –1.7% 0.3% 0.2% 0.0% –0.6% –0.4% 0.7% 0.0% 7.4% 5.9%$ per year(at 2012–13 prices)–$1,790 $360 $188 $31 –$618 –$423 $763 $12 $7,629 $6,151% premium per migrant –37% 21% 7% 7% –37% –9% 22% 2% 28% 10%Consumption per capita –per cent$ per year(at 2012–13 prices)–2.4% 0.6% 0.5% 0.9% –0.9% –0.1% 1.5% 0.2% 12.0% 12.2%–$1,361 $324 $266 $505 –$519 –$79 $836 $110 $6,896 $6,977% premium per migrant –51% 34% 17% 170% –58% –2% 42% 7% 43% 21%Income tax rate (% pointdifference)Real after tax wage –average0.6% –0.8% –1.0% –0.2% 0.2% –0.7% –2.0% –0.9% –15.8% –20.6%–2.1% 0.2% –0.2% 0.2% –0.8% –0.5% 0.9% 0.0% 11.9% 9.7%high–skilled –1.2% –1.0% –0.6% 0.1% –0.3% –0.6% –0.7% –0.1% 1.0% –3.5%mid–skilled –2.0% 0.7% –0.5% 0.3% –0.8% –0.5% 1.0% 0.0% 12.7% 11.0%low–skilled –3.5% 1.2% 1.0% 0.3% –1.3% –0.3% 2.8% 0.1% 21.7% 21.9%THE ECONOMIC IMPACT OF MIGRATION27
APPENDIXTWOTHEINDEPENDENTMACRO MODELThis section explains, in turn, the methodologyused by Independent Economics to estimate theeffects of migration on the Australian economy.Independent Economics has used a suite of linkedeconomy–wide models to develop the estimates.This suite of models includes a demographic modeland a macro–econometric model. This sectionprovides more detail on the macro–econometricmodel and the extensions to the model which werespecifically developed for this project. Section A.1describes the original model and section A.2describes the extensions.A.1 Economy–wide modellingmethodologyThe Independent Macro–econometric model(Macro Model) is Independent Economics’forecasting and policy model. It uses economicprinciples and evidence from the historicaldata to capture the broad workings of theAustralian economy. This makes it a powerful toolto enhance the robustness of economic forecastingwhether the time horizon is short (to 2015) or long(to 2050).Notably, the approach taken is rigorous in itsapplication of economic theory; this means thatit also delivers powerful insights into fiscal andmonetary policies. For example, the six–sectorMacro Model converges to a balanced growth path.In addition, a separate demographic model is usedto provide population inputs and to determinelong–term trends in the participation rate.In the Macro Model, households, firms,the government and foreign agents interact infactor, product and financial markets. The role ofeach agent is discussed, in turn, below. This isfollowed by a discussion of the model’s marketclearing mechanisms.A.1.1 Economic AgentsHouseoldsHouseholds supply labour, own capital andgovernment bonds, purchase goods and servicesfrom businesses and pay taxes to government.The household’s inter–temporal budget constraintis imposed by assuming that households have asavings target. This savings target is defined as thelocally–owned stock of produced capital expressedas a multiple of labour income and its value isestimated from historical data.
Since there is a target for the stock of capital thathouseholds hold, changes in the government’sdebt position do not affect the household’s stock ofreal assets in the long run. Consumption graduallyadjusts so that this savings target is gradually met.Consumption is positively affected by incomefrom labour, produced capital, natural resourcesand bonds and transfers. Conversely, consumptionis negatively affected by unanticipated inflation.Once the aggregate level of consumption isdetermined it is allocated across the six industriesidentified in the model (Agriculture, Mining,Manufacturing, Government services andHousing services). Households choose theirallocation to maximise a Constant Elasticity ofSubstitution (CES) utility function.Labour supply is determined by the age, genderand education structure of the population,underlying trends in the participation rate and anencouraged worker effect.BusinessesA representative business in each industryproduces goods and services using labour,natural resources, structures, other types of capitaland intermediate inputs. The six industries featuredin the Independent Macro–econometric model arebased on the latest Australian and New ZealandStandard Industrial Classification (ANZSIC 2006).The mapping between the model’s industriesand ANZSIC 2006 industries is shown in thetable below.29THE ECONOMIC IMPACT OF MIGRATIONMACRO MODEL INDUSTRY ANZSIC2006 INDUSTRIES ANZSIC2006 CODESAgriculture (A) Agriculture, forestry & fishing AMining (B) Mining BManufacturing (C) Manufacturing CGovernment services (G)Other Service Industries (S)Public administration & safetyEducation & trainingHealth care & social assistanceElectricity, gas, water & waste servicesConstructionWholesale tradeRetail tradeAccommodation and food servicesTransport, postal and warehousingInformation media & telecommunicationsFinancial & insurance servicesRental, hiring & real estate servicesProfessional, scientific & technical servicesAdministrative and support servicesArts and recreation servicesOther servicesOPQDEFGHIJKLMNRSHousing services (T) Ownership of Dwellings –
30THE PRODUCTION TECHNOLOGY FOR A TYPICAL INDUSTRY IN THE INDEPENDENTMACRO–ECONOMETRIC MODEL IS SHOWN IN THE FIGURE BELOW.THE ECONOMIC IMPACT OF MIGRATIONINDUSTRY AINDUSTRY SSTRUCTURESLABOUR0.7VARIABLEFACTORS0.9LABOUR &EQUIPMENTEQUIPMENT& MACHINERYFIXEDFACTORS00.5INTERMEDIATEINPUTSVALUEADDED0LOCALPRODUCTIONIMPORTS2TOTALSUPPLY2.5DOMESTICDEMANDEXPORTSINDUSTRYINTERMEDIATEINPUTSHOUSEHOLDCONSUMPTIONMACHINERY &EQUIPMENTGFCFGENERALGOVERNMENTCONSUMPTIONDWELLINGSTRUCTURESGFCFNON-DWELLINGSTRUCTURESGFCFGENERALGOVERNMENTGFCF
A representative business in each industrycombines labour and non–structures capital(including machinery and equipment) into a labourand equipment bundle using a Constant Elasticityof Substitution (CES) technology with an elasticityof substitution of 0.9. Similarly, structures andthe labour and equipment bundle are combinedusing CES technology to produce a variablefactors bundle. Notably, this variable factors bundleis then combined with fixed factors to producevalue added. The explicit modelling of fixed factorsin production is a key feature of the IndependentMacro–econometric model and is important inallowing for the role of land supply in the housingservices sector and the role of mineral resourcessupply in the mining sector.Local production is derived by combiningvalue added and intermediate inputs in fixedproportions, a standard assumption in these typesof models. A CES function is also used by firmsto produce total supply from local productionand imports. A high elasticity of substitution (2)is assumed between local production and imports.Finally, domestic businesses decide whether tosell on the domestic or export market based on aConstant Elasticity of Transformation technology,with an elasticity of transformation of 2.5.In the short term, the quantity of output producedis determined by demand. Businesses are alsoconstrained by the amount of capital they own.Thus, businesses choose the profit maximising levelof labour, imports and exports based on a givenlevel of domestic demand, capital, fixed factors,wages, and trade prices.Over time, domestic prices adjust to equalmarginal cost. In addition, the capital stockgradually adjusts so that the marginal productof capital is equal to its user cost. A Tobin’sQ formulation is used to model capital stockadjustment. Importantly, the adjustment speed ofdomestic prices and the capital stock is estimatedfrom quarterly historical data. This means thatover time, the short–term constraints on firms areremoved and firms simply maximise profits subjectto the production technology.GovernmentGovernments collect taxes from households andbusinesses, purchase goods and services on behalfof households, invest in the economy, providetransfers to households, borrow from households,and set monetary policy.The Independent Macro–econometricmodel recognises the key taxes collectedby government and models their impacton behaviour. For example, the model forecastsrevenue collections from the corporate incometax and recognises that corporate income taxaffects the cost of capital and thus impactsinvestmentdecisions. Other taxes recognised inthe Independent Macro–econometric model arelabour income tax, production taxes by industry,and product taxes by end user.Similar to households, the government’sinter–temporal budget constraint is met byspecifying a target deficit relative to nominal GDP.Labour income tax is the swing fiscal policyinstrument and gradually adjusts to ensure that thedeficit target is met in the long term.Monetary policy in the IndependentMacro–econometric model mimics how theReserve Bank of Australia (RBA) pursues itsinflation–targeting policy. Specifically, a Taylorrule is used to determine how the short–terminterest rate reacts to deviations of inflation andthe unemployment from their targets. The inflationtarget is set to 2.5 per cent, the mid–point of theRBA’s target band, while the target unemploymentrate is the NAIRU, which is estimated fromhistorical data. The responsiveness of theshort–term interest rates to deviations of theinflation rate and unemployment rate from theirrespective targets is estimated using historical datafrom the mid–1990s, since this is when the RBA’sinflation targeting regime began in earnest.Foreign sectorThe foreign sector provides funds, demandsexports and supplies imports. As a smallcountry, Australia is assumed to be a price takerfor imports. However, it is assumed that Australiahas some market power in export markets. That is,an increase in the volume of exports supplied byAustralia leads to a small reduction in export prices.31THE ECONOMIC IMPACT OF MIGRATION
32THE ECONOMIC IMPACT OF MIGRATIONSince households and the government meet theirbudget constraints in the long term, this means thatexternal balance is also achieved in the long termand growth in net foreign liabilities is sustainable.A.1.2 Market clearingThere are three key types of markets in theIndependent Macro–econometric model,the labour market, the goods markets andasset markets. For each, prices adjust to clearthe market.Wages are ‘sticky’ and gradually adjust to clearthe labour market. An inflation–expectationsaugmented Phillips curve is used to modelwage adjustment. In the long–run, wage growth isdriven by consumer price inflation and growth inlabour efficiency and the unemployment rate settlesto the NAIRU.As noted previously, in the short–term demanddrives activity so that demand shocks causebusiness cycles. Over time, prices gradually adjustto clear the goods market. This means that, in thelong term, activity is driven by supply–side factorssuch as the level of population, participation,productivity and the fixed factor.In asset markets, the rate of return on capitalis determined exogenously since Australia isa small, open economy. For financial assets,the rate of return on long–term bonds isbased on the expectations theory of theterm structure. Uncovered interest rate parity isused in determining the nominal exchange rate.The underlying assumption is that long–termdomestic securities, short–term domesticsecurities and short–term foreign securities areperfectly substitutable.A.2 Extensions to theMacro ModelExtending the Macro Model to incorporatesemi–endogenous growth involves two separateelements of development work. The first is toexplicitly model the link between governmenteducation funding and the education attainmentof the population. The links between greatereducation attainment and more favourable labourmarket outcomes are also incorporated intothe model. The second is to extend the firm’sproduction technology to capture the effects ofR&D investment on productivity growth.In addition, the model is extended to captureeconomies of scale from government investmentin public infrastructure. Currently the productiontechnology in the model exhibits diseconomiesof scale due to the presence of fixed factors ineach industry. Introducing economies of scalewould allow the model to provide more robustestimates of the effects of policies, such asmigration policies, which change the size of theAustralian economy.The extensions to the model are discussed inthe following subsections. The diagram belowsummarises the structure of the extendedMacro Model.A.1.3 Empirical aspectsBehavioural equations in the IndependentMacro–econometric model are estimatedeconometrically from quarterly data starting,in most cases, from the early 1980s.The general–to–specific approach to incorporatingdynamic adjustment is used, so that dynamics arefully captured. Diagnostic tests are performedon each estimated equation to check for modeladequacy and statistical fit. This high level of dataconsistency means that the model is not onlysuitable for policy analysis, but also for forecasting.
PRODUCTION TECHNOLOGY IN THE EXTENDED MACRO MODEL33HIGH-SKILLEDHIGH-SKILLEDR&DMEDIUM-SKILLED1.5LABOURLOW-SKILLEDTHE ECONOMIC IMPACT OF MIGRATIONINTERMEDIATEGOODSEQUIPMENT& MACHINERY0.9STRUCTURESLABOUR &EQUIPMENT0.7GOVERNMENTINFRASTRUCTUREVARIABLEFACTORSFIXEDFACTORS0.5VALUEADDED
34THE ECONOMIC IMPACT OF MIGRATIONA.2.1 Human Capital AccumulationAn education attainment module is used toestimate the effects on changes in governmentfunding on the education attainment of thepopulation by gender by age. Ten age groups andthree education attainment levels are separatelyidentified in the module.These education attainment groups are basedon an aggregation of the Australian Bureau ofStatistics (ABS) Australian Standard Classification ofEducation. The aggregation used in the module isshown in the table below.TABLE A.1.1: EDUCATION ATTAINMENTS SPECIFIED IN THE MODULEABS EDUCATION ATTAINMENTMODULE EDUCATION ATTAINMENTPOSTGRADUATE DEGREEGRADUATE DIPLOMA/GRADUATE CERTIFICATEHigher EducationBACHELOR DEGREEADVANCED DIPLOMA/DIPLOMACERTIFICATE III/IVVocational Education and TrainingCERTIFICATE I/IICERTIFICATE N.F.DSchoolWITHOUT NON–SCHOOL QUALIFICATIONSeveral assumptions have been made to simplifythe analysis of human capital accumulation.The main assumption is that there is excessdemand for education, so that an increase ineducation funding by government always results ina boost to the number of students.Higher education attainment leads to morefavourable labour market outcomes sincemore educated individuals have: higherparticipation rates, lower unemployment rates,have greater productivity and work higher hourson average (e.g. more likely to be employedfull time). The first three effects are allowed for inthe extended Macro Model through the additionof heterogeneous labour. A boost to the numberof university educated individuals lead to anincrease in the number of high–skilled labour.Inthe Macro Model high skilled labour have higherparticipation rates, a lower sustainable rate ofunemployment and are more productive thantheir counterparts.The standard version of the Macro Model has asingle type of labour, while the extended MacroModel features three types of labour, high–skilled,medium–skilled and low–skilled labour. The labourtypes are based on an aggregation of the ABSoccupation classification (ANZSCO), as shown inthe table to the right.
TABLE 4.2: OCCUPATIONS IDENTIFIED IN THE MACRO MODELABS OCCUPATIONSMACRO MODEL LABOUR TYPE35MANAGERSPROFESSIONALSTECHNICIANS AND TRADE WORKERSCOMMUNITY AND PERSONAL SERVICE WORKERSCLERICAL AND ADMINISTRATIVE WORKERSSALES WORKERSMACHINERY OPERATORSLABOURERSAs noted earlier, a boost in the educationattainment of the population leads to a lift inthe supply of high–skilled workers. The channelsthrough which this occurs are now discussed.The projection of population by educationattainment is converted into a projection of labourforce by education attainment by modelling theparticipation rate for each education attainmentlevel using an error correction model.The labour force by education attainmentprojection is then converted to a labour force byoccupation measure using a matrix of occupationproportions for each education attainment. Thisassumes that the relationship between educationand occupations is fixed.High–skilledMedium–skilledLow–skilledOther approaches allow for some flexibility in themapping between education and occupations.However, for simplicity that approach is notpursued here.The matrix used to complete this conversion isshown below. Notably, the majority of universityqualified individuals go on to high–skilled jobs.While the majority of VET–qualified individuals goon to medium–skilled jobs, a substantial proportionalso fills low–skilled jobs.THE ECONOMIC IMPACT OF MIGRATIONTABLE 4.3: EMPLOYMENT BY EDUCATION BY OCCUPATION MATRIXHIGHER EDUCATION VOCATIONAL EDUCATION SCHOOLHigh–skilled 72.6% 24.1% 17.3%Medium–skilled 20.1% 56.2% 38.9%Low–skilled 7.3% 19.8% 43.7%TOTAL 100% 100% 100%Source: ABS Cat. No. 6227.0
36THE ECONOMIC IMPACT OF MIGRATIONOn the demand side, firms demand each of thethree types of workers and combine them into alabour bundle using CES production technology.Thus, the three types of workers are not perfectlysubstitutable for one another, even after allowingfor productivity differences between them.In the short term, demand for a particular type oflabour or occupation depends on that occupation’srelative wage and the pattern of industry demand.For example, high–skilled workers are an importantinput into the Government Services industry,making up approximately 50% of all employmentin this industry. A boost in government spendingwould increase the size of the Government Servicesindustry and hence demand for high–skilledworkers. Over time, wages adjust to clear thelabour market and the level of employment ineach occupation is driven by supply–side factorssuch as the pattern of education attainment ofthe labour force. The wage adjustment for eachtype of labour is modelled as an augmentedPhillips curve, while the adjustment from actual toequilibrium labour demand is modelled as an errorcorrection model.A.2.2 Research & DevelopmentTo introduce endogenous growth from R&Dinto the Macro Model, we broadly follow thesemi–endogenous growth approach used byVarga & Veld (2011). This involves extending themodel to include a monopolistically competitive“intermediate goods” sector and a R&D sector,which then interact with the labour and machinery& equipment “nest” of the standard Macro Model.The new sectors are discussed in this subsection.Extended labour and machineryand equipment nestThe labour and machinery & equipment nest nowbecomes an intermediate goods and machinery& equipment nest. There is a spectrum ofdifferentiated intermediate goods, which are notperfectly substitutable. The number of intermediategoods is determined by the number of patentsproduced by the R&D sector.max xj, KOiFIRMS IN THIS NEST SOLVE THE FOLLOWING PROBLEMANiP NKOi∙NKOi ∙ P x jx jdj P KOi∙KOisubject to the CES production technologyANi01i0NKOi1NKOiNKOi1N KOi = [(( xijdj) ) + (AKOi∙KOi) NKOi ]NKOiNKOi1A representative firm in this industry chooses the amount of each x jto use to maximise profit.This gives the following first order condition, which gives demand for intermediate good x j.ANi0( ∙ )11NKOiP xj = P NKOi ∙NKOi ∙( xijdj) ∙x1(1i)Where:1iNKOi1NKOiPx jis the price of the intermediate good x ji1jNKOi is the labour and machinery and equipment bundle in industry ix jis intermediate good of type jANi the number of patents in industry iNKOi is the elasticity of substitution between intermediate goods and machinery and equipmentisis the elasticity of substitution between different types of intermediate goods
However, in a symmetric equilibrium x j=x j. Hence, the first order condition can be simplified as follows andgives the demand for each x.P x = x NKOi1NKOi∙P ∙NKOi ∙ANiNKOiIf i is set to one then the intermediate goods are perfectly substitutable and we would return to the originalsetup for the machinery and equipment nest.Intermediate goods sector1NKOi∙(1i)1iNKOiA spectrum of intermediate goods firms purchasea patent from the R&D sector and then use a unitof the labour bundle to produce a unit of theintermediate good.Since these firms produce a differentiated productthat are not perfect substitutes, rents are able to beextracted when they sell the intermediate good tofirms in the machinery and equipment nest.37THE ECONOMIC IMPACT OF MIGRATIONTHAT IS, THE FIRMS SOLVE THE FOLLOWING PROBLEMsubject tomax x P x x W SRi∙l P Aix = lIntermediate goods firms are constrained by a production technology where a unit of the labour bundle isused to produce a unit of the intermediate good.The first order condition of the intermediate goods firm reduces to the familiar mark–up over marginalcost condition.P x =WSRiiFree entry into the intermediate goods industry drives profits to zero. This implies that the price of a patent isthe discounted present value of the monopolistic producers flow profit:P Ai =(1i)i∙WSRi∙xrFinally, given our aggregate labour bundle NSRi and the symmetry of the intermediate goods firms, we have:ANi0xjdj = N SRi x =NSRiANiResearch & Development sectorThis sector uses high–skilled labour to producepatents that are then used by the intermediategoods sector.
38THE ECONOMIC IMPACT OF MIGRATIONR&D FIRMS SOLVE THE FOLLOWING PROFIT MAXIMISATION PROBLEMmax x P Ai∙ANi W H∙NSRiHRsubject to the production technology below ANi = [ AitANit1NSRiHR t ]NSRiHRtWhere:* ANi is the domestic stock of knowledge and this stock varies by industry;Ai* is the international stock of knowledge and this stock varies by industry;NSRiHR is the number of high–skilled workers employed in R&D (researchers) sector of industry i; and reflect the strength of the spill over effects from international and domestic knowledge, respectively; represents total factor efficiency; and is the elasticity of production to the number of researchers.1The first order condition for the R&D firm gives the demand for high skilled labour in the R&D sector.Note that each R&D firm takes the term in square brackets as given; this follows Jones (1995) and implies thatthere is some duplication in research.W H = P [Ai* 1Ai t ANi NSRiHR ]t1Rewriting the production technology as:ANi = Ai*t ANiANi1t1NSRiHRtttaking derivatives with respect to time implies that balanced growth is given by:g Ai =g + g Ai*1NIn the short to medium term, the profit maximisingdecisions of firms determine the pace oftechnological progress. However, in the long term,the pace of growth is determined by growth in thelabour supply and growth in the stock of knowledgein the rest of the world, both of which are taken tobe exogenous.This setup is similar to that used by other largescale models to introduce endogenous growth.The Macro Model’s approach differs in thefollowing respects. Firstly, other models generallyhave a single aggregated industry and hence asingle R&D sector. In contrast, the Macro Modelhas five industries which utilise labour and each hasits own R&D sector. It is assumed that there are nospillovers across industries.Secondly, the production technology in theMacro Model uses a detailed nestedCES structure, while other models use aCobb–Douglas technology. Balanced growth ina model using the CES production technologyrequires that innovations are labour augmenting(i.e. Harrod–neutral technical progress). As notedby Klump (2007), in the long–run, only capital canbe accumulated and so the size of the labour forceconstrains the size of the economy. To prevent thelabour share of income from exploding, innovationsneed to be labour augmenting. In the Macro Modelthe intermediate goods sector uses the labourbundle to produce goods. Models which useCobb–Douglas technology can have theintermediate goods sector use capitalin production.
A.2.3 Government Investmentin infrastructureThe standard version of the Macro Model treats theeffects of a rise in general government consumptionand general government investment in broadlythe same manner. That is, general governmentinvestment does not result in an increase in thecapital stock of the economy.THE NEW PRODUCTION TECHNOLOGY IS GIVEN BYV Ai1V AiV ASRi = [(AV ARi∙[KGGR KGGR] V Ai1V Ai∙V ARi) + (AF i∙F i) ]Where:V ASRi is the value added bundle in industry i;V ARi is the variable factors bundle in industry i;Fi is the fixed factor in industry i;AV ARi is the scale factor for variable factors;AF i is the scale factor for fixed factors;KGGR is the economy–wide stock of general government infrastructure;KGGR is the threshold level of general government infrastructure; is the elasticity of value added to public infrastructure; andVAi is the elasticity of substitution between variable and fixed factors.This assumption is relaxed in the extendedmacro model. Government investment ininfrastructure such as transport and communicationsis capitalised and is incorporated into each firm’sproduction function. 4 In addition, economies ofscale in government infrastructure are allowed forby incorporating the presence of fixed costs.V AiV Ai139THE ECONOMIC IMPACT OF MIGRATIONGovernment infrastructure is introduced inthis nesting because it has similar productioncharacteristics to structures and structuresforms part of the variable factors bundle.Notably, the chosen production technology meansthat there are still constant returns to scale in theprivate factors; a relatively strong assumption.This implementation was chosen because it isone of the more straightforward methods ofincorporating the presence of fixed costs andfollows the approach used by Ratto et.al. (2008)to allow for overhead labour costs.4Other types of network infrastructure such as utilities are already capitalised within the model. They are part of the capital stock of theOther Services industry.
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THIS REPORT WAS PREPARED FORMIGRATION COUNCIL AUSTRALIA