Look at the evidence: Cutting immigration would be a mistake for Australia

More migrants are coming to Australia right now, on a net, per capita basis, than to any other major advanced country. While this reflects a catch-up after our pandemic border closure, in recent decades our migrant intake has consistently outpaced almost everywhere else.

With our birth rate well below replacement, migration is the only thing standing between us and a shrinking population. Recognising the importance of population growth, our robust migration program has received bipartisan support for decades.

More migrants are coming to Australia right now, on a net, per-capita basis, than to any other major advanced country.Credit: Dionne Gain

But the threads holding together this delicate political equilibrium are starting to fray.

Our record migration intake is claimed by some to put pressure on our already-buoyant inflation rate. Some fear migrants provide unfair competition in the labour market. It’s even been claimed that migration undermines per-capita economic growth.

Well, we’re here to report that fearmongering about our migration intake is, variously, straight-up wrong, premised on faulty logic, or at best based on decidedly mixed evidence.

The most common error we see is the “lump of labour” fallacy.

One often hears complaints that migrants will boost either supply or demand without recognition of the fact they invariably boost both. Recently, the complaint has been that migrants add to inflation (boost demand). Previously, the complaint was that migrants would steal jobs from local workers (boost supply).

Illustration by Simon LetchCredit:

Under the “lump of labour” fallacy, migration critics misconceive the amount of work in the economy as fixed—a lump of labour. In reality, migrants both contribute to the amount of work performed and create the need for more work to be done. By expanding both demand and supply, their immediate effect is not at all clear.

It’s become fashionable to talk about “per capita” recessions; to de-emphasise aggregate GDP and point out that what really matters is the economic activity we generate per person.

Some have gone so far as to suggest that while migration can increase aggregate GDP, it also increases the population so has at best a neutral effect on GDP per capita. For what it’s worth, based on the available evidence, the IMF and OECD say exactly the opposite.

The IMF states that “immigration significantly increases GDP per capita in advanced economies, that both high and lower-skilled migrants can raise labour productivity, and that an increase in the migrant share benefits the average income per capita of both the bottom 90 per cent and the top 10 per cent of earners…”

The confusion arises from two critical points missed by immigration critics.

First, our migration intake is not a carbon copy of the Australian population. We have the most skill-biased migration program in the world, and migrants are younger, more fertile, higher-tax-paying, and lower welfare-receiving than the population.

By being more productive than the average Australian, the average migrant makes Australia more productive. One sure way to reverse our dramatic productivity slowdown is to welcome more migrants, who inevitably will give us more than they take from us.

Second, even if our migrant intake were a carbon copy of the Australian population, economies of scale mean the whole will be greater than the sum of the parts. This is why even greater low-skilled migration would be a good thing.

A population twice the size does not need twice the resources to sustain itself. This is obvious for non-rivalrous consumption like defence, information, and other public goods. Economists refer to these as agglomeration economies, and they take myriad forms.

A larger national population allows for a sharper division of labour – with greater specialisation raising productivity. The production function for ideas is such that two people can come up with more than double the ideas of one, three more than triple, and so on. Smart people make the people they interact with smarter.

A bigger population allows firms to spread their fixed costs over a larger customer base, lowering average costs and raising competition. Some have lamented a lack of competition in Australia, but much of this comes down to our small population. The US has 19 major airlines (versus Australia’s 3.5) because the US has 13 times the population.

A rich body of evidence confirms the link between immigration and productivity, including via innovation and investment.

Harvard economist Richard Freeman famously referred to migration-facilitated knowledge transfers as “one ring to rule them all”. And it is not just the size, but the diversity of birthplace that matters for long-term prosperity. We could go on.

Suffice it to say that migration-fuelled population growth raises GDP per capita, and with it our standard of living. And let’s not forget the benefits to the migrants themselves. Yes, they’re people too!

Is it without cost? Of course not. But rather than pointing to these costs to justify yanking the handbrake, perhaps we should instead advocate for better policies to mitigate the negatives. The burgeoning YIMBY movement has shown masterfully how this can be done.

The renewables transition, with the effectively infinite supplies of electricity and water it can unlock, is a testament to our ability to overcome short-sighted Malthusian thinking—something a more valuable stock of human capital nourished by immigration will only assist.

As immortalised in the musical sensation, Hamilton: “Immigrants, we get the job done!”

Steven Hamilton is assistant professor of economics at The George Washington University and visiting fellow at the ANU Tax and Transfer Policy Institute.