The visible hand in economics

Is outward migration a problem?

Posted on: September 24, 2008

Over at Kiwiblog, David Farrar comments on outward migration from New Zealand. He concludes by stating:

Inwards migration of new New Zealanders (which is a great thing) helps keep the overall population stable, but that does not mean there isn’t a serious problem with the numbers leaving.

A similar theme was mentioned a few weeks ago in an extremely interesting newspaper article by David Grimmond, which concluded:

Ultimately outward migration flows are a barometer of perceptions of government management. The steady growth in departures suggests a growing disillusion with the current government. It potentially also suggests a lack of confidence that the alternative will make much difference.

However, I don’t feel that this view of outward migration gives us the full picture of what is good and bad – lets discuss (Note: The Standard discusses the issue here):

Why do people migrate

As the department of labour points out there are a myriad of exciting reasons why people migrate, such as the weather. Now although this discussion by DOL has been roundly criticised (even by myself), it is appropriate to look at it this way if we are going to focus on the level of departures as both authors have (as opposed to growth rates – which should be a function of “changes” to the situation between the two countries, and as the Standard points out it should also be a function of population growth).

Saying that “the gross PLT loss of citizens over the last five years is equal to losing Hamilton & Palmerston North”, as Mr Farrar did say, does not actually tell us anything about whether this was a positive or negative factor overall, for the welfare of the people involved (our migrants and people in New Zealand).

Welfare

When discussing welfare policy we have to figure out what group we are trying to “maximise lifetime happiness for”. People migrate overseas because it makes them happier in some way. As a result, simply saying that it is bad ignores their lifetime happiness but does it not matter?

Furthermore, if people move overseas how does this actually impact on New Zealand? Our GDP will be lower, but what about GDP per capita, what about incomes, what about happiness – it really doesn’t tell us anything about the outcomes for people still in New Zealand.

It is conceivable that someone moving overseas may be good for them, and for the people remaining in New Zealand (by increasing the amount of capital per person) – if this is what is occurring (which is possible) then what would the issue be?

So large outflows don’t have a welfare cost?

This is not completely what I am saying – but if I had no information I would make this my default position.

Ultimately, if outflows from New Zealand are the result of bad policy then there may be scope for government to intervene and help itself. However, if this is the case we have to state what the government is doing wrong – rather than just assuming that rising migration is the result of policy failure.

Fundamentally, people leaving New Zealand does not have to be seen as a cost to New Zealand – it is merely the movement of a bunch of individuals that are doing what is in there own best interest, the country division is a smokescreen that hides this.

But wages in NZ are too low!

Ok, so we have a “shortage of labour” and our wages are “too low” – what is this relative to again. In equilibrium our wages will change to adjust for any shortage of labour – could it be that people are bleating about a problem that doesn’t really exist.

As well as a open goods market we are now part of a open labour market, as a result firms have to be willing to pay market wages in order to keep labour – or else deal with having less labour than they would like.

However, this also means that there is greater potential for policy failure. If tax rates are higher, or regulatory conditions are stricter, then they would be overseas, it is going to be much more difficult for firms to compete, as they will be unable to hold onto their skilled labour resource.

The implicit belief of many authors, including David Farrar and Dave Grimmond is that the government has created a situation which leaves firms in a more difficult situation than they would otherwise be. The migration inflow in this case is a symptom of the true cost associated with the net outflow of New Zealand citizens which is a weaker NZ economy through a disadvantage in the labour market.

Although there may be some truth to this – I don’t think it is accurately represented by looking at departure numbers outside of the context of other situations (strong Aus and UK economies are HEFTY drivers of departures from NZ!).

Conclusion

Should we be concerned about people moving overseas – no. We should only be worried if we think that the lift in departures is the result of policy related factors – not if we think a policy can “fix the problem”.

My distinction may seem a bit arbitrary so let me explain.

A policy related factor is one where government action pushes people to leave that would have stayed in some optimally defined environment. An example of this is allowing taxes to rise for fiscal drag – in this case the tax burden increases past the level it was structurally set for, which in turn drives up migration. Here rising departures is a symptom of poor policy decision making. Furthermore, a tax policy that ignore the “cost” in the labour market associated with higher taxes, namely the outflow of more people, will come up with a tax level that is too high to be optimal – in this case policy may need to be re-thought out.

However, migration itself is not something we should attempt to “fix” with policy. Just because people are leaving does not mean we have to turn around and change our tax or benefit system to prevent it. Ultimately, as long as our policies remain focuses on what we think is optimal for society, the outflow of people is simply part of that process – focusing on migration itself is akin to trying to target the means to an end, instead of the end itself (which is social welfare).

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15 Responses to "Is outward migration a problem?"

I wish we had better data on out-migrants. If we could get their names and last census address on the exit card, could link migration up to all kinds of interesting stuff.

A while back I dug around for data on migrants but there didn’t seem to be enough to do anything particularly interesting with. I wanted to test whether the same covariates that predict voting against Labour also predict leaving: we could then see whether Cullen was revealing a bit too much when he encouraged the one young guy to leave the country. Andrei Shleifer argues in The Curley Effect that Mayor Curley of Boston deliberately set extortionary tax policy to drive out richer Protestant voters to ensure his continued re-election by his Catholic base; one could view aspects of Labour policy here in similar vein. I’d put only 20% chance that the story would hold up if the data were sufficient for testing, but it would be worth testing. If the data were there. And the data doesn’t really look to being up to the task. Sigh.

The data is never there, and if it is no-one lets us touch it :(

Your description of higher taxes being used to increase the governments underlying tax base reminds me of Goonix’s piece on working for families:

http://tvhe.wordpress.com/2008/02/13/working-for-families-or-nazi-medals-2/

Glaeser and Shleifer, The Curley Effect. Very nice article.

The important question you don’t address is who exactly is migrating? If it the out-migrants are all unskilled labourers, that’s one thing. If it’s skilled knowledge workers, doctors, teachers and the like that’s an entirely different matter.

My fear, is that government taxes and other policies are either deliberately (or accidentally) having a Curley-like Effect, driving out the skilled workforce and degrading the overall quality (hmm, probably not the politically correct term) of our workforce.

Just about every skilled sector in New Zealand faces shortages. You only have to look at the recruitment campaigns run by Australian, British and American employers targeting these groups to realise the threat is very real.

“The important question you don’t address is who exactly is migrating? If it the out-migrants are all unskilled labourers, that’s one thing. If it’s skilled knowledge workers, doctors, teachers and the like that’s an entirely different matter.”

Really – doesn’t this presume that there are positive externalities from skilled labour that are not taken into account during the market interaction between the purchaser and seller of labour? If these positive externalities exist – then sure we could have a “skill shortage”. However, if they are absent we do not.

I am not a fan of the idea of “skill shortages”. If we have a shortage then the price (wage) should go up – if it isn’t going up then I feel that the idea of a shortage of that type of labour is overblown. The Department of Labour loves the skill shortage idea – hell I know plenty of people making money writing reports on it – that doesn’t mean that the idea correct.

“Just about every skilled sector in New Zealand faces shortages. You only have to look at the recruitment campaigns run by Australian, British and American employers targeting these groups to realise the threat is very real.”

This is part of a free market for labour – skilled labour can move around. If New Zealand firms won’t pay higher wages to retain skilled labour then the skilled labour will leave. If the firm is unwilling to pay a higher wage it must also be in its best interest – overall, the industry shouldn’t be there in the first place.

Why do we treat the market for labour so differently from the market for other inputs? Why do people accept the idea of a long-run “labour shortage” when we wouldn’t accept the idea of a “steel shortage” or a “jam shortage”?

“My fear, is that government taxes and other policies are either deliberately (or accidentally) having a Curley-like Effect, driving out the skilled workforce and degrading the overall quality (hmm, probably not the politically correct term) of our workforce.”

The policy failure here would stem directly from making firms too inefficient. If we believe that the government has taxes and compliance costs too high then we will see an outflow of skilled labour – as businesses are unable to pay satisfactory wages. In this case the outflow of labour is a symptom of the problem – it is not the cause.

We dont know precisely why people are leaving, which leaves us all free to assume it is the same reason why we would think of leaving.

So National supporters will think it is because of Labour policies, and Labour supporters will think it is because of Nationals “failed policies of the past”. Socialists will think it is because the government doesnt spend enough, and libertarians will think it is because government takes too much.

But the fact remains that more people are leaving than can not be explained by population growth. We can assume that moving country is a big decision, so would have big reasons. The big reasons will be involving the big things in peoples lives, and people arent different enough that there are a huge number of big things in their life.

In modern society the biologically big things are sorted; food, shelter, mating. So they are likely to be the main reasons. So what is next?

We could start a list with family. Which is more likely, someone wants to leave to get away from family or someone wants to leave to join other family?

Next up might be security. Do people leave because they dont feel safe in NZ? Do they leave because they dont feel secure?

Next, lifestyle. Are people leaving because NZ has a shitty lifestyle? Doesnt sound right to me, but could be a factor for people that want the big city lifestyle.

Next, income. Are they leaving because they can get more or less overseas?

Although we dont know exactly why someone would leave, I think we can guess fairly well.

I agree with your reasoning Kimble. However, that still doesn’t answer the question about whether people leaving is actually a bad thing.

If people are leaving because the global labour market is stronger and there are gains from trade to be made then this is fine – isn’t it? Does a person going overseas to benefit themselves actually hurt us – what is the externality?

“Does a person going overseas to benefit themselves actually hurt us – what is the externality?”

Well, there are the arguments of people taking their social investment with them when they go. But I dont want to get into that argument.

A mass of people leaving somewhere may not be a bad thing, but it can be a symptom. Having a mass of people running out of a public restroom is not a bad thing, but it does indicate to anybody watching that perhaps they should hold on until they get home.

I think the mass of people leaving NZ is an indication that expectations of NZ’s future are not good; that the standard of living in NZ is expected to be worse than somewhere else very close by.

Is there good reason for people to have these expectations? If they are correct, is there a good reason why our relative standard of living is going to fall? If there is, then people leaving is rational and there are no policy implications. If there isnt, then there are.

I should also say that when people like DPF say that the outward migration is a problem, I am more likely to read it as being a symptom rather than a negative thing in and of itself.

“A mass of people leaving somewhere may not be a bad thing, but it can be a symptom.”

Very true, very true.

“I think the mass of people leaving NZ is an indication that expectations of NZ’s future are not good; that the standard of living in NZ is expected to be worse than somewhere else very close by.”

In this case the question is – is policy causing this relative decline, or is it simply a result of fundamental factors. If it is the result of fundamental factors we have to ask, can policy actually help?

I don’t think we can conclusively take rising migration outflows as evidence of policy failure – which is the impression I glenned from both Kiwiblog and the Infometrics article.

OK, you dismal scientists will have to accept this next idea is from someone who is trained as physicist and has a number-centric view of the universe:

A possible clue to understanding why people leave New Zealand might be to check the correlation between our outward migration numbers against other measurements; consumer confidence, housing affordability and so on, to see if there’s an obvious pattern. This only takes care of the ‘push’ factor, there may also be a ‘pull’, but I guess it would be a useful starting point.

Matt writes

“This is part of a free market for labour – skilled labour can move around. If New Zealand firms won’t pay higher wages to retain skilled labour then the skilled labour will leave. If the firm is unwilling to pay a higher wage it must also be in its best interest – overall, the industry shouldn’t be there in the first place.”

Yes. That’s the theory. The practice is that NZ employers won’t pay the international market rate yet still bitch and moan about not being able to the hire people they need. So is this just hot air or is something else going on here?

“A possible clue to understanding why people leave New Zealand might be to check the correlation between our outward migration numbers against other measurements; consumer confidence, housing affordability and so on, to see if there’s an obvious pattern. This only takes care of the ‘push’ factor, there may also be a ‘pull’, but I guess it would be a useful starting point.”

Indeed, I am actually doing migration forecasts at my work as we speak, and I’m check over some additional indicators (such as terms of trade) in order to get an idea of their significance in explaining recent movements.

“So is this just hot air or is something else going on here?”

I suspect it is hot air. Hot air is a great way to try and get money off the government – which is effectively the same as taking resources off everyone else in the economy :P

I suspect that the property council are worried about the level of migration as it will adversely affect house prices, and as we can reasonably assume they back National this could be behind nationals move to free up immigration requirements for business migrants, (and that in the light of there having been a 25% increase in the nations population between 1990 and 2004).
Why do people think citizens shouldn’t leave when (for instance) we have a globalised property market?

“National this could be behind nationals move to free up immigration requirements for business migrants”

I don’t actually have a problem with freeing up migration – the main constraints have to be infrastructural and social (given peoples propensity to form groups etc). I think we actually do a damned good job with immigration in NZ

“Why do people think citizens shouldn’t leave when (for instance) we have a globalised property market?”

I agree – why a free market for capital and goods but not for labour? I guess we have the same criticisms people hold for goods and labour – and also the fact that a big inflow of migrants could lead to people arguing with each other, or infrastructural issues. However, overall I think free labour markets is a way the world needs to head.

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