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Restricting population growth is good for local workers

Summary:
In the aftermath of the 1991 recession, which was the worst economic downturn in Australia since the Great Depression of the 1930s, I wrote a series of articles that we published in academic journals. In part, they were theoretical pieces that conjectured about the impact of rapid population growth on the labour market, which at the time was characterised by persistently high unemployment and rising underemployment (the recession had replaced full-time with part-time work). My conjecture was that high rates of immigration at a time of slow employment growth would lock unemployed workers into long-term unemployment. Of course, I could not test that proposition because the government maintained the relatively high immigration levels and other factors might have been responsible for the

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In the aftermath of the 1991 recession, which was the worst economic downturn in Australia since the Great Depression of the 1930s, I wrote a series of articles that we published in academic journals. In part, they were theoretical pieces that conjectured about the impact of rapid population growth on the labour market, which at the time was characterised by persistently high unemployment and rising underemployment (the recession had replaced full-time with part-time work). My conjecture was that high rates of immigration at a time of slow employment growth would lock unemployed workers into long-term unemployment. Of course, I could not test that proposition because the government maintained the relatively high immigration levels and other factors might have been responsible for the rising long-term unemployment. Last week’s Australian Labour Force data showed that unemployment and the unemployment rate has fallen rather quickly in recent months as the economy recovers slowly from the pandemic recession. Historical comparisons show the unemployment response this time has been much larger than in the previous recessions. The other key point is that the working age population has grown at historically low rates as a result of the border closures. It seems that my conjectures in the early 1990s were correct, despite getting flack at the time from mainstream economists who were pushing the line that immigration is always good for the labour market.

Some history …

In 1993, I had an article – The impact of immigration in the trades’ labour market – published in the journal – People and Place (Vol 1(2), pp. 23-24).

In the aftermath of the 1991, the federal government was under pressure to reduce the high immigration levels to ease the supply of workers and allow the pools of unemployment to dissipate as the economy struggled to recover.

Mainstream economists argued that high rates of immigration were essential for easing skill shortages and improving productivity growth.

The claimed that (quoting from that 1993 article):

1. Immigrants were “more mobile and more willing to accept stigma-laden jobs” but the evidence refuted that claim.

2. “By bringing in skills which are in short supply, migrants increase growth and stimulate competitiveness” – yet, at the time there was no evidence of skills shortages in the skilled labour market.

Which led me to write that:

… importing trades-qualified labour worsens the prospects of the long-term unemployed. The contention is two-fold. First, importing trades-qualified labour is damaging to the local labour force who are presently unemployed, and is likely to permanently increase the level of long-term unemployment. Second, importing trades-qualified labour is unnecessary, both in the short-term, due to the parlous state of the trades’ labour market, and, in the longer-term. This is because a combination of a national training strategy and workplace reform is a more efficient way of dealing with skill shortages than immigration.

I referred to another paper I had presented at the time to the ‘Second National Immigration Conference’ entitled ‘Skilled immigration and long term unemployment’.

Further, the pro-immigration lobby never really considered the problem of long-term unemployment, which became very visible during the 1991 recession.

Drawing on my doctoral research (on buffer stock dynamics), I wrote that “with expansion, unemployed workers will be offered employment, with on-the-job training opportunities attached. In addition, entry positions will be available for young, inexperienced persons leaving formal training.”

So it was critical to allow these dynamics to work effectively in an environment of relatively slow employment growth.

Recession always interrupts that sort of process.

Workers who lose their jobs typically also lose skills as new technology replaces old in the recovery.

School-leavers who cannot gain entry into the labour market ultimately become disadvantaged when the economy resumes growth.

I wrote:

If a recession overlaps graduations, the most recently trained persons will be preferred to the pool of unemployed remaining from previous years.

Skilled migration also exacerbates this situation.

I wrote:

If firms use migrant labour instead of training the local unemployed workers, then the long-term pool of unemployed remains above the levels that might normally follow the upgrading process.

I then provided some data analysis to support these conjectures and while the evidence was strong, I could obviously not conduct a counter-factual experiment because migration levels were high and on-going.

I mainly showed that there was an excess supply of skilled trades’ workers already available to the labour market, which was a contribution to the debate at the time.

In 1996, I published a related article – Why high levels of net migration present problems for unemployment and external debt stabilisation (published in People and Place, (Vol 4(1), pp. 40-46).

This was the result of further research I had been doing – which was one of several strands of research I was pursuing at the time.

I was trying to provide an evidence base to counter the relentless lobbying of the Business Council of Australia for increased rates of migration as a means of putting downward pressure on wages in the Australian labour market.

Their argument centred on the continued existence of skill shortages, which wer undermining economic growth.

At the time. unemployment remained very high and underemployment had become a major problem.

I argued in that article that “two key economic policy objectives of the Federal government are not compatible with the current immigration policies being pursued”.

First, the Federal government was trying to reduce the unemployment rate.

Second, they were worried about the growing external deficit.

I noted that the Long running debate about whether “Immigration promotes the deterioration in the unemployment rate” was largely unresolved.

It came down to whether increases in the labour supply outstripped the labour demand affects promoted by the increased spending that new entrants provided.

They had been no definitive study on that question.

The 1996 paper stated that:

Whether migrants add enough to aggregate demand to ensure the labour force growth they promote is absorbed is moot.

The point that the subsequent empirical work presented in the paper showed was that the likely labour force growth would be too strong, under current immigration policy, and feasible productivity growth assumptions, for the projected GDP growth rates to reduce unemployment.

In other words, long-term unemployment would rise because of the immigration impacts on labour force growth.

Now we can see the impact of reduced immigration

With the external border closures since March 2020 we now have a situation where immigration rates are at all time lows.

On June 17, 2021, the Australian Bureau of Statistics released their updated population estimates – National, state and territory population, December 2020.

In their media release – Population growth slowed due to falls in overseas migration – the ABS stated that:

2020 was a year of unusually low population growth in Australia, due to the effects of COVID-19 on overseas migration. During 2020, Australia’s population grew by 0.5 per cent (136,300 people) to 25.7 million, compared with a growth of 1.5 per cent in 2019 …

Natural increase accounted for 97.6 per cent of annual population growth, while net overseas migration accounted for the remaining 2.4 per cent. This is a shift from the long run trend of net overseas migration driving the majority of Australia’s population growth.

With COVID-19 international travel restrictions still in place, net overseas migration was down 98.7 per cent compared with the previous year, driven by a decrease in overseas migration arrivals (59.9 per cent).

The following graph is from the ABS site:

Restricting population growth is good for local workers

I also showed in last week’s labour force data commentary – Australian labour market – stronger as working age population flattens out (June 17, 2021) – that Australia’s working age population (Over 15 year olds) had flattened as a result of the external border closures (see graph below).

I indicated that this flattening out has forced employers to work harder to get workers and is one of the reasons unemployment is falling quite quickly, given the circumstances.

Restricting population growth is good for local workers

The changing unemployment responsiveness to immigration

Now we can see more definitively the impact of the slowing population growth has on the ability of the labour market to absorb unemployed workers back into productive employment following a recession.

I went back to the three major cyclical downturns since the modern labour force data series began (February 1978) for Australia.

I then found the employment troughs in those recessions and examined the period of recovery afterwards for 20 months in each instance.

Those periods were:

1. April 1983 to December 1984.

2. July 1991 to March 1993.

3. July 2009 to March 2011.

4. December 2020 to May 2021 – the current period of recovery is shorter obviously.

The following graph shows the relationship between monthly employment growth (horizontal axis) and the change in unemployment (vertical axis) for each of these periods, denoted separately by different coloured and shaped markers.

The thick line is a simple linear trend and the simple linear regression is displayed next to each line.

The number next to the x measures the responsiveness of the change in unemployment to the employment growth.

A larger number means the responsiveness is higher.

In each case, the slopes of the lines are negative as one would expect. Rising employment growth reduces unemployment.

But the respective slopes (measured by the number next to the x in each equation) show that the 1982 and 1991 responsiveness was very low.

It took a long time to reduce the unemployment rates (and they never came back down to the full employment levels).

The GFC downturn was different because the fiscal stimulus really prevented Australia from enduring a recession. There was a slowdown and unemployment did rise (as has never returned to the pre-GFC level).

But the responsiveness increased during this ‘recovery’.

However, the current recovery is very different – the slope of the blue line (and number on the x variable) is several times larger than the 1982 and 1991 recessions.

The major explanatory factor is the record low growth in the working age population as a result of the border closures.

Restricting population growth is good for local workers

The next graph shows the same data except that I replaced the change in unemployment with the change in the unemployment rate.

A similar tale, although with the added complexity of cyclical participation adjustments (which I won’t go into today).

Restricting population growth is good for local workers

The Black Death

I was reminded yesterday that the Black Death also had positive impacts on (some) workers.

The Encyclopedia Brittanica analysis of the – Effects and significance – of the Black Death tells us that:

A more lasting and serious consequence was the drastic reduction of the amount of land under cultivation, due to the deaths of so many labourers. This proved to be the ruin of many landowners. The shortage of labour compelled them to substitute wages or money rents in place of labour services in an effort to keep their tenants. There was also a general rise in wages for artisans and peasants. These changes brought a new fluidity to the hitherto rigid stratification of society.

In the EH.net article – The Economic Impact of the Black Death – notes that it was the “Black Death’s socioeconomic impact stemmed, however, from sudden mortality on a staggering scale”.

The major impact was on the agricultural sector where 90 per cent of the labour worked.

We read:

Before the plague, rising population had kept wages low and rents and prices high, an economic reality advantageous to the lord in dealing with the peasant and inclining many a peasant to cleave to demeaning yet secure dependent tenure …

… the Black Death swung the balance in the peasant’s favor … the rural worker indeed demanded and received higher payments in cash (nominal wages) in the plague’s aftermath …

A pool of labor services greatly reduced by the Black Death enabled the servile peasant to bargain for less onerous responsibilities and better conditions …

Ultimately, the plague ended serfdom in Western Europe and the manorial system, which had already been struggling, was destroyed.

A whole range of other beneficial consequences occurred.

The research by Jane Humphries and Jacob Weisdorf – Unreal Wages? Real Income and Economic Growth in England, 1260–1850 – (published in the Economic Journal, Vol 129, Issue 623, October 2019, pp. 2867-2887) demonstrates, that males fared better than women during the plague in terms of wages growth and jobs.

Conclusion

The hope is that the tighter labour supply conditions will drive unemployment down much lower given that it is unlikely the external border will open until at least mid-2020.

The border closure will endure because of the disastrous vaccination strategy of the federal government and it is highly unlikely that the Australian population will be fully vaccinated before the first quarter 2022.

The other hope is that the tighter labour supply conditions will drive up wages as occurred during the Black Death.

Reflecting back on work I did in the 1990s on these sorts of issues, which was subjected to widespread criticism from the mainstream economists, in one way, it is good finally to be able to see that the my conjectures had substance.

But, what I have written today should not be taken as an anti-immigration stance. Far from it.

The problem is that governments have not been prepared to use their fiscal capacity to ensure everyone has a job and so the labour supply has outstripped labour demand.

That is enough for today!

(c) Copyright 2021 William Mitchell. All Rights Reserved.

Bill Mitchell
Bill Mitchell is a Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, NSW, Australia. He is also a professional musician and plays guitar with the Melbourne Reggae-Dub band – Pressure Drop. The band was popular around the live music scene in Melbourne in the late 1970s and early 1980s. The band reformed in late 2010.

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