Abstract
This Selected Issues paper analyzes the effect of international migration on unemployment in New Zealand. The empirical results in this paper suggest that net migration inflows give rise to a fall in the unemployment rate. The paper estimates a system of equations including the unemployment rate, real wage, net migration rate, and labor force participation rate, taking into account the interdependence of the variables. It also examines the impact of exchange rate volatility on export firms’ decisions to hedge foreign exchange exposure.
I. How does International Migration Affect Unemployment in New Zealand?1
A. Introduction
1. International migration flows to and from New Zealand are large and volatile. During the past twenty years, permanent and long-term migrants arriving and leaving New Zealand averaged about 1¾ percent of the total population or 3½ percent of the labor force in both directions.2 Net migration flows to New Zealand are also volatile compared with other traditional immigration countries. For instance, while Australia has been steadily receiving migrants in the past twenty years, net migration flows to New Zealand have oscillated from being significantly positive to being significantly negative (Figure I.1). As a result of the high variability of the net migration flows, the population growth in New Zealand has also been more volatile than most other OECD countries (Figure I.2).
Net long-term migration of Australia and New Zealand
(in percent of total population)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A001
Source: CEIC data and Fund staff calculations.Net long-term migration of Australia and New Zealand
(in percent of total population)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A001
Source: CEIC data and Fund staff calculations.Net long-term migration of Australia and New Zealand
(in percent of total population)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A001
Source: CEIC data and Fund staff calculations.
Volatility of population growth in selected OECD countries 1/
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A001
1/ Measured as the standard deviation of annual percentage changes in the population during 1989-2003.Source: US Census Bureau: International Data Base.Volatility of population growth in selected OECD countries 1/
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A001
1/ Measured as the standard deviation of annual percentage changes in the population during 1989-2003.Source: US Census Bureau: International Data Base.Volatility of population growth in selected OECD countries 1/
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A001
1/ Measured as the standard deviation of annual percentage changes in the population during 1989-2003.Source: US Census Bureau: International Data Base.2. Migration has had an important influence on New Zealand’s economy. Migration affects both demand and supply. On the demand side, the swings in migration flows contributed to business cycle developments in the economy during the 1990s.3 Figure I.3 illustrates how real exchange rate changes (measured as the differences between non-tradable goods inflation and tradable goods inflation) tend to follow the movements of net immigration flows. The positive relationship of the two series suggests that immigrants are associated with an increase in domestic demand. The housing sector is one prominent demand component affected by immigration, with immigrants helping to fuel the housing boom since the mid-1990s (Figure I.4). Opinions about the impacts of migration on the supply side are more complex. While some suggest that immigrants may “invade” local jobs, others view immigrants more positively as a welcome offset to the “brain drain” resulting from New Zealanders’ emigration and a driver of the country’s long-term growth and job prospects (New Zealand Department of Labor, 2004).
Migration and Real Exchange Rate
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A001
1/ Advanced three quarters and measured as the difference of the inflation between non-tradable and tradable.Source: CEIC data and staff calculations.Migration and Real Exchange Rate
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A001
1/ Advanced three quarters and measured as the difference of the inflation between non-tradable and tradable.Source: CEIC data and staff calculations.Migration and Real Exchange Rate
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A001
1/ Advanced three quarters and measured as the difference of the inflation between non-tradable and tradable.Source: CEIC data and staff calculations.
House price and migration
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A001
Source: Reserve Bank of New Zealand.House price and migration
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A001
Source: Reserve Bank of New Zealand.House price and migration
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A001
Source: Reserve Bank of New Zealand.3. The empirical results in this chapter suggest that net migration inflows give rise to a fall in the unemployment rate. Net migration from Australia is also found to induce a stronger reduction in the unemployment rate than that from other countries, suggesting that migrants to and from Australia may have a better match in their skill set with local workers than those from other countries. A higher share of skilled migrants in the net inflows—measured by their declared occupations—does not seem to have an additional impact on the unemployment rate, suggesting skilled migrants have not in general been more successful in their job search than unskilled migrants.
4. A slowdown in net migration inflows is expected to contribute to a rise in the unemployment rate in the next few years. Model simulation indicates that the projected reduction in the net migration inflows would lead to a rise in the unemployment rate by close to half a percentage point over the next two years.
B. Migration and Unemployment—Economic Links and Empirical Model
5. The interest in the impact of migration on the unemployment rate is two fold. First, an estimate of the impact of migration on the labor market of New Zealand can be used to assess whether and to what extent an anticipated decrease in the net inflow of migrants will lead to an increase or decrease in the unemployment rate. Second, it may aid the understanding of the extent to which migration could affect the gap between unemployment and its natural rate, and thus result in inflationary pressures (along the “Phillips Curve”).4
6. The effect of migration on unemployment is ambiguous from a theoretical perspective. On the one hand, immigrants may reduce unemployment through complementing existing jobs and stimulating job creation, or if the demand of the immigrants for goods and services generate more jobs than they themselves occupy. Moreover, to the extent that some immigrants come as investors, they also generate investment demand. On the other hand, immigrants may increase unemployment if they compete and substitute for existing workers, or find it hard to get suitable jobs
7. The empirical literature considering the impact of migration on the job market has produced mixed results. Most work has used a cross-sectional approach to measure the impact of immigration across different regions in a country, with particular attention paid to the effect of the immigrants on the labor market outcomes of native-born workers. The results have typically pointed to a small effect on the wage and employment of native-born workers.5 Work on New Zealand has largely focused on the labor market performance of immigrants. In particular, Winkelmann and Winkelmann (1998) concluded that the labor market performance of immigrants is related to their educational qualifications, years in New Zealand, and regions of origin. Among the work using time-series data is a study on Australia by Pope and Withers (1993), who examined the impact of migrants over a long sample and found that more immigrants did not lead to higher unemployment. In the case of France, Gross (1999) found that immigrants tended to increase unemployment slightly in the short-run, although there was a reduction in the unemployment rate in the long run.
8. This chapter estimates a system of equations including the unemployment rate, real wage, net migration rate, and labor force participation rate, taking into account the inter-dependence of the variables. The model is similar to that of Pope and Wither (1993) and Gross (1999). The net migration rate is defined as the ratio of net permanent and long-term migration inflows to the total labor force. The impact of migration on unemployment is a combination of demand side factors (increased aggregate demand from the consumption and investment of the migrants, and consequently demand for labor) and supply side factors (impact on the labor supply and the real wage). Migrants themselves may be driven by domestic economic conditions, such as the unemployment rate and the real wage (pull factors), and affected by exogenous events such as the labor market conditions or perceived security situation in other countries (push factors). Annex I lays out the empirical model that enables an exploration of the interaction and joint behavior of migration and labor-market indicators. Annex II discusses definitions of the variables and sources of the data
9. The potential impact of the composition of the migrants are further considered, with particular attention on their country origins/destinations and their skill levels.
Differences in the impacts of the net migration inflows from Australia and those from non-Australian countries are examined. New Zealand has a common labor market and very close economic ties with Australia. Not surprisingly, Australia is the single most important migration partner with New Zealand. As migration to and from Australia does not face immigration restrictions, as is the case with migration to and from other countries, it is plausible that trans-Tasman migrants have different characteristics compared to those who migrate to and from other countries. As seen in Figure I.5, the past two decades were associated with net outflows of migrants to Australia and net inflows of migrants from other countries. While migration to and from other countries may be influenced by immigration policies, migration to and from Australia is mainly driven by New Zealanders’ choice about where to live.
On skill composition, the assessment focuses on whether a greater share of skilled migrants in the net inflows has any additional impact on the unemployment rate. Are skilled migrants more beneficial to the job market than unskilled migrants? This might be expected if one or more of the following about skilled immigrants holds true: i) they are more successful finding jobs than unskilled immigrants; ii) they help alleviate skill shortages in the country, thereby enhancing the scope of business expansion and possibly increasing employment; or iii) they generate a higher demand impact than unskilled immigrants, having accumulated greater savings out of higher earnings in the past. A skill composition index of the migrants is constructed based on their declared occupations. A rise in the index corresponds to a larger increase of skilled migrants relative to unskilled migrants in the net inflows (Figure I.6). Annex III discusses the skill index and the empirical analysis.
Net migration from Australia and other countries
(in percent of labor force)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A001
Source: CEIC data and Fund staff calculation.Net migration from Australia and other countries
(in percent of labor force)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A001
Source: CEIC data and Fund staff calculation.Net migration from Australia and other countries
(in percent of labor force)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A001
Source: CEIC data and Fund staff calculation.
Skill index of migrants 1/
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A001
1/ Defined as the difference between skilled and unskilled workers in the net inflows of migrants (in percent of labor force).Source: CEIC data and Fund staff calculation.Skill index of migrants 1/
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A001
1/ Defined as the difference between skilled and unskilled workers in the net inflows of migrants (in percent of labor force).Source: CEIC data and Fund staff calculation.Skill index of migrants 1/
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A001
1/ Defined as the difference between skilled and unskilled workers in the net inflows of migrants (in percent of labor force).Source: CEIC data and Fund staff calculation.C. Empirical Results
10. The econometric results show that a positive shock to the net immigration rate reduces the unemployment rate and raises labor force participation in New Zealand. Annex I provides the details of the results. The increase in the labor force participation rate suggests that the demand impact of the immigrants helps to raise the labor force participation rate by enhancing job prospects. The reduction in the unemployment rate indicates that immigrants, by generating greater demand and limiting wage growth, create more jobs than they themselves occupy.
11. Moreover, while the impacts of migrants to and from Australia and migrants to and from other countries are similar in signs, the impact of the former is much stronger. Assuming that migrants from different geographic location have a similar demand impact, the stronger response of the labor market variables to migration with Australia suggests that immigrants from non-Australian countries are less successful in finding jobs than those who migrate to and from Australia.6
12. A higher share of skilled workers in net migration inflows is not found to have an additional impact on the unemployment rate. Despite the shortages of skilled labor often cited by employers, skilled migrants do not appear to have greater success finding jobs than their unskilled counterparts. This might be explained by the observation that many skilled immigrants may have been inhibited in their job search by factors such as their language skills, or by direct or indirect discriminations by employers.7 However, an important caveat applies to the occupation based skill index, as a significant proportion of migrants do not register their occupations (Annex III).
D. Conclusion
13. Econometric results suggest that the fluctuating migration flows to New Zealand indeed “amplify” the cyclical position of the economy, highlighting the need for careful demand management by policy makers to take into account the projected trend of international migration. In this regard, the recent change in the immigration policy is helpful as it may facilitate smoother inflows and “dampen” the fluctuations.8 The results also show that migration inflows have a positive impact on the job market overall, as it helps to raise the labor force participation rate and reduce unemployment. However, despite the high share of skilled workers in the net inflows, foreigners (other than those from Australia) tend to have more difficulties finding jobs than New Zealanders, underlining the importance of the efforts currently underway to enhance the job market integration of immigrants.9
14. The slowdown in the net migration inflows projected for the coming years is expected to contribute to a rise in the unemployment rate and subsiding inflationary pressure. The Reserve Bank of New Zealand projects that annual net migration inflows will slow by about 50 percent during the year to the September quarter 2005 (Reserve Bank of New Zealand (2004)). The model estimated here suggests that a 50 percent reduction in net migration could lead to an ⅛ percentage point rise in the unemployment rate in the first year and nearly a ½ percentage point rise over two years.
References
Bryant, John, and David Law, 2004, “New Zealand’s Diaspora and Overseas-born Population,” New Zealand Treasury Working Paper.
Friedberg, Rachel and Jennifer Hunt, 1995, “The Impact of Immigrants on Host Country Wages, Employment, and Growth,” Journal of Economic Perspective, Vol. 9, No. 2.
Glass, Hayden, and Wai Kin Choy, 2001, “Brain Drain or Brain Exchange,” New Zealand Treasury Working Paper.
Gross, Dominique, 1999, “Three Million Foreigners, Three Million Unemployed? Immigration and the French Labor Market,” IMF Working Paper 99/124 (Washington: International Monetary Fund).
New Zealand Department of Labor, 1998, “The integration of Highly Skilled Migrants into the Labor Market: Implications for New Zealand Business.”
New Zealand Department of Labor, 2004, “Globalisation of Labor Flows and Its Impacts on New Zealand.”
New Zealand Department of Labor, 2005, “Immigration Policy and Trends - July 2003 to December 2004,” unpublished manuscript.
OECD, 2002, Trends in International Migration (Paris: OECD).
OECD, 2004, Economic Survey: New Zealand (Paris: OECD).
Pope, David, and Glenn Withers, 1993, “Do Migrants Rob Jobs? Lessons of Australian History, 1861-1991,” Journal of Economic History, Vol. 53, No. 4.
Reserve Bank of New Zealand, 2000, “Monetary Policy Review: Business Cycle Developments and the Role of Monetary Policy over the 1990s.”
Reserve Bank of New Zealand, 2004, “Monetary Policy Statement, December 2004.”
Winkelmann, Liliana and Winkelmann, Rainer, 1998, “Immigrants in the New Zealand Labour Market: a Cohort Analysis using 1981, 1986 and 1996 Census Data,” New Zealand Labor Market Bulletin: 1 & 2.
ANNEX I.1: Employment and Migration—Empirical Model and Results
1. Following Gross (1999), a model is constructed to examine the interactions of the unemployment rate (UR), real wage in logarithm (LRW), labor force participation rate (LFP), and net migration rate (MIG). The net migration rate is defined as the net inflows of permanent and long-term migrants divided by the labor force. The sample period is from the first quarter of 1988 to the third quarter of 2004.
2. The dynamics of the variables are explored with the following vector auto-regression (VAR):
3. Since UR, LRW, and LFP contain unit roots, they enter the VAR as the first differences. Vector Z include all exogenous variables, including the first difference in the log of import prices (seasonally adjusted) to represent supply shocks, and the first difference of the Australian unemployment rate. Also included are seasonal dummies, and a dummy variable that takes the value of one between the third quarter of 2001 and the third quarter of 2003 and zero during other periods, to capture the migration flows related to 9-11 security concern.10
4. The VAR model is specified with four lags based on likelihood ratio test. The numbers of lags of the exogenous variables are selected based on Schwartz and Akaike information criteria. The diagnostic tests indicate that the residuals are reasonably well behaved, with only normality being rejected. Alternative lag specifications yield similar results, although residuals from VARs with smaller lags are less well behaved.
5. Figure I.7 shows the accumulated impulse response of ΔUR, ΔLRW, and ΔLFP to a one-percentage point increase in the net migration rate (with two times the standard errors on both sides). A positive innovation in the net migration rate results in a fall in the unemployment rate and the real wage, and a rise in the labor force participation rate.
Accumulated Impulse Response to 1 Percentage Point Increase in Net Migration (+/- 2 S.E.)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A001
Accumulated Impulse Response to 1 Percentage Point Increase in Net Migration (+/- 2 S.E.)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A001
Accumulated Impulse Response to 1 Percentage Point Increase in Net Migration (+/- 2 S.E.)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A001
6. To examine the possibly different impacts of migrants to and from Australia and migrants to and from non-Australian countries, the above VAR is re-estimated with a breakdown between the net migration rate from Australia and the net migration rate from other countries. The accumulated impulse response of ΔUR, ΔLRW, and ΔLFP to a one- percentage point increase in the net migration rate from all countries, that from Australia, and that from non-Australia countries are summarized in Figure I.8. The responses of the labor market indicators to the migration rate from Australia are much stronger than the responses to the migration rate from other countries, suggesting that immigrants from non-Australian countries are less well-matched in their skill set with the local labor force, and thus are less successful in finding jobs, than those who migrate to and from Australia.
Accumulated Impulse Response to 1 Percentage Point Increase In Net Migration Rate From All Countries, Australia, and Other Countries
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A001
Accumulated Impulse Response to 1 Percentage Point Increase In Net Migration Rate From All Countries, Australia, and Other Countries
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A001
Accumulated Impulse Response to 1 Percentage Point Increase In Net Migration Rate From All Countries, Australia, and Other Countries
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A001
7. The estimated model is simulated with the migration flows projected by the Reserve Bank of New Zealand (Reserve Bank of New Zealand, 2004), where the annual net migration inflows are expected to slow from 18600 in the year through September 2004 to 9500 in the year through September 2005. Assuming a one-time shock of about 50 percent reduction in the net migration ratio from its current level–roughly the percentage reduction in the RBNZ projection, model simulation suggests that unemployment rate will rise 0.13 percent in one year and about 0.4 percent over two years.
ANNEX I.2: Data definitions and sources
Unemployment rate (UR). Source: OECD
Log of real wage (LRW). Wage is the labor cost index, with data before December 1992 calculated based on the prevailing weekly wage index, deflated by the Consumer Price Index. Source: OECD.
Labor force participation rate (LBF). Source: OECD.
Net migration rate (MIG_NET). Net permanent and long-term migration inflows divided by the total labor force. Source: CEIC and OECD.
Unemployment rate in Australia (AUS_UR). Source: OECD.
Change in log of import price index (DLPIMT). Source: IFS.
ANNEX I.3: Do Skilled Immigrants Induce Greater Reduction in the Unemployment Rate?
1. The data on the skill level of the migrants is based on the occupational information collected on all arrival and departure cards.11 Based on the claims of occupations, migrants are classified into skilled and unskilled workers.12 The skill indicator is defined as the difference between the number of skilled and unskilled migrants in the net inflows, divided by the labor force. As seen in Figure I.6, the relative share of the skilled immigrants have fluctuated but steadily declined between 1993 and 2001, before rising again.
2. Does the relative share of skilled migrants have any significant impact on economy-wide unemployment rate, besides those brought about by migration itself? To answer this question, lagged skill indices are added to the VAR. Wald tests suggest that the coefficients of the lagged skill indices are not statistically significant.
Prepared by Li Cui.
As a result, New Zealand has a higher share of foreign-born population than most other countries, as well as one of the largest shares of people living overseas. See OECD (2002) and Bryant and Law (2004).
A recent OECD country survey (2004) postulated that migration flows themselves might generate some cyclical “amplification” effect as migrants create more demand than supply in the short-term. The survey, however, did not find such a link in simple correlations between broad cyclical indicators and migration flows.
See a survey by Friedberg and Hunt (1995).
Those going to Australia are probably representative of the remaining population, as suggested by Glass and Choy (2001). They argued that the common labor market with Australia has allowed the migration of a broad mix of New Zealanders who might otherwise has been screened out by selective immigration policies.
A survey by the Department of Labor of New Zealand (1998) concluded that many highly qualified and experienced migrants from Asian countries and the countries in the Former Soviet Union (FSU) were either unemployed or underemployed.
People seeking to migrate to New Zealand now make an expression of interest (EOI) rather than a direct application. The government then invites the potential immigrants to apply, giving more capacity to smooth inflows over time. However, these policies do not affect outflows of migrants, which account for a large part of the fluctuations in net migration. See OECD (2004) and New Zealand Department of Labor (2005).
Other exogenous variables considered include the real growth of Australia, trade weighted real growth of all foreign countries, and terms of trade. None of these variables was found to be significant.
One caveat about the data is the large number of “not actively engaged” or “not specified” responses. More details are in Glass and Choy (2001). Nevertheless, these are the only continuous series that could shed light on the skill composition of the migrants.
Skilled workers include legislators, administrators and managers, professionals, technicians and associate professionals; unskilled workers include other professions such as clerks, service and sale workers, agriculture and fishery workers, plant and machine operators and assemblers, trader workers, and laborers and related elementary services. Similar classification was used by Glass and Choy (2001), which further split the unskilled category into semi-skilled and low-skilled.
