Migrant outflows to Australia, wages, and productivity: What is going on?
Posted February 5, 2008on:
A rising outflow of New Zealander’s to Australia is causing concern amongst a bunch of people. People move away for a number of reasons, as the Department of Labour nicely points out. However, as economists we like to think at the margin. We are not interested in the general reasons that people are leaving New Zealand, in so much as we are interested in the ‘marginal’ factors that are driving people overseas. The non-policy factors mentioned by DOL are constant, the weather will stay warmer, the country will remain as close, and the culture will remain similar. However, the policy factors (e.g wages, taxes) can be changed, and as a result will have an impact on the ‘change’ in migration levels (beyond some sort of trend).
The Standard provides one piece of the puzzle we require in order to control migrant outflows – we need higher wages. However, the solutions they provide may not necessarily be the correct ones. A important marginal factor in the decision on whether to stay and work in NZ, or do so in Australia is the difference in ‘real disposable income’. Ignoring non-wage income for now leaves us with ‘real disposable salary’. Increasing nominal wages may not lead to an increase in real disposable salary if all it does is increase inflation. If we pay everyone more $$$ but don’t increase the number of goods avaliable to buy, then the price of goods will increase and peoples true living standard will not change.
There are two ways people are talking about increasing real disposable salary:
- Tax cuts that increase the demand for labour more than they increase the supply of labour, or that cause a smaller reduction in the real wage than the quantity of the tax cut, or transfer funds into more productive sectors,
- An increase in labour productivity.
Fundamentally, both these solutions require policy that increases the amount of product produced by labour. Now this begs the question, how do we increase labour productivity relative to Australia.
By cutting taxes we stimulate the economy, although if we are running a balanced budget there must be reduction in government spending, if people value government spending sufficiently this may lead to more people moving overseas! For simplicity lets assume that the stimulus is canceled out by a reduction in government spending.
First let us thing about an individual firm. If some of the incidence of tax falls on the firm then this will increase their cash flows, allowing them to invest more. As an increase in capital increases the marginal product of labour, this will increase wages. However, lower taxes make labour relatively cheaper than capital, increasing the incentive for firms to hire labour instead of capital. As the marginal product of labour falls as the quantity of labour rises, and as capital expenditure has eased, this will put downward pressure on wages. As a result, we care ultimately care about which of these effects dominates, when deciding whether tax cuts will actually increase real wages.
However, one thing we do know about tax cuts is that it decreases the cost of production for the firm – implying that production must increase. As a result, the question we have to ask is whether this surplus is passed on to employees or whether it accrues to the owners of capital – this is an empirical question.
Other arguments have been made stating that we should increase taxes on labour or improve the power of unions in order to increase the relative price of labour, thereby leading to an increase in capital and an increase in the marginal product of labour. There are a few important things to note about this point of view:
- It will lead to a reduction in production in the short-run, as it increases firms costs,
- It may not lead to an increase in capital, as labour increases the marginal product of capital,
- This point of view requires a cut in employment, and so supports people losing their jobs (something I did not expect the left wing blogs to be supporting).
As this policy will reduce national output, its impact on peoples real wage will depend on how it redistributes production between the owners of capital and workers. If increased union power was sufficient enough relative to the change in output, then it may in fact increase the real wage of employees (this would involve a significant of amount of employer power in the labour market currently).
Further discussion has focused on ‘strategic complementarity’ between firms (eg if one firm increases its capital input, it may lead to other firms increasing their capital input). In this case we need to define the spillovers (R&D spillovers?) and figure out how important they are to the problem. The existence of ‘multiple equilibria’ in the economy depends on these spillovers or strategic interactions – so if you hear anyone say that higher taxes may move us too a new, pareto superior equilibrium, ask them what the source of the strategic complementarity is, if they can’t answer you they are talking trash 😉
Ultimately, the impact of government policy on productivity and thereby on migration is an inherently empirical matter, as theory can point use either way. As data on New Zealand labour productivity is relatively recent, subject to constant revisions, and filled with structural breaks, any killer blow to the ideas coming from the left or right of the spectrum is unlikely to appear.
Anyone that can improve my logic, or explain to me where I might be mixed up is welcome to do so in the comments 😉