Former RBA governor says immigration putting ‘downward’ pressure on wages

Former Reserve Bank governor Bernie Fraser has buttressed Philip Lowe’s view that high levels of immigration have contributed to low wages growth, saying the nation needs to train local workers to fill skills shortages rather than rely on migrants.

But Prime Minister Scott Morrison has not signalled that reducing international arrivals when the borders re-open is part of the post-pandemic economic recovery plan. “In relation to the debate about migration and wages ... we’re in quite an extraordinary situation at the moment,” Mr Morrison said on Friday afternoon. “[Closed borders] obviously put some restrictions on the labour market. But at the same time, jobs picked up very quickly.”

Former Reserve Bank governor Bernie Fraser.Credit: Josh Robenstone

The effects of high levels of immigration on wages were raised by the central bank boss this week, with Dr Lowe saying that while the hundreds of thousands of new migrants into the country each year helped boost the economy they also diluted wages. His views have fuelled debate among the economics community with many pointing to the benefits of welcoming migrants into Australia as they tend to be younger and highly skilled.

Mr Fraser said that in terms of supply and demand there should be upward pressure on wages when there is a labour shortage.

“Immigration is a contributing downward source of pressure [on wages] over the past decade with large numbers of people coming in,” he said. “We have had, until the virus hit, a surplus of labour. There were a lot of people under-employed and it’s very hard to contemplate wage increases in that situation.”

He acknowledged there were substantial structural factors also affecting wages, including declining trade unionisation and increasing casualisation of the workforce.

While he said he had always been a supporter of migration he was concerned the nature of immigration has changed in recent decades from largely single men who worked and had low demands on services like schools towards families with higher demands on local infrastructure.

“I’m not sure it’s such an advantage as [it was in] the earlier times. I’m not all that upset about not having a lot of immigrants coming in at this time,” he said.

Mr Fraser said more needed to be done to train local workers to fill the gaps that tend to be in roles such as IT. “We should have more skills being developed here. It doesn’t take Einstein to work out this is an area [of demand].”

However, Committee for Economic Development of Australia senior economist Gabriela D’Souza has hit back at claims high migration hurts wages growth, saying it isn’t borne out in the academic literature both abroad and in Australia.

“It might be peoples’ impression but that’s why we have an evidence base,” Ms D’Souza said. “Our migration has skewed towards skilled workers.”

While she wasn’t concerned about the future of immigration, with the government needing the national overseas migration figures to increase for productivity gains, she raised fears that a false narrative could be ingrained in the public making the resumption of migration more difficult. She said recent analysis shows permanent skilled migrants are a net federal budget benefit providing annual revenue of $9.7 billion.

Australian National University Professor Warwick McKibbin has also criticised the RBA’s view, describing it as “unhelpful”. “Real wage growth is drive by productivity,” he said, adding skilled migrants help improve economy-wide productivity.

Stephen Koukoulas, former economic adviser to prime minister Julia Gillard, said there should be a “serious rethink on immigration levels when we re-open the borders” to assist local wages growth.

Former Australian Competition and Consumer Commission Allan Fels, who co-chaired the federal government’s Migrant Workers Taskforce, said he was “on the fence” about the effect of immigration on wages. On the one hand, immigrants substitute for domestic workers which can reduce the number of available jobs and wages. But on the other new arrivals can be beneficial by driving additional spending in terms of both their own expenditure and government spending on infrastructure, he said.

“It’s hard to identify a priori which effect dominates,” Dr Fels said.

He said the nature of immigration itself was also important to determine in terms of skills gaps being filled. “Quite a lot of the effect of migration is neutral,” he said. “I’m not on one side or the other.”

He said there are strong signs the labour market is improving and this will eventually lead to improving wages but policy settings need to remain expansionary. “The austerity policies of 10 years ago would be inappropriate in the current labour market.”