Drop in living standards as foreign workers don’t find their way to the best jobs

Immigration is a vital ingredient to a more prosperous society. But Australia is losing its knack.

Australia has a productivity problem and we’ve been using immigration to cover it up. Most of our population growth since 2000 has come from overseas. A bigger Australia brings many benefits but the boon to living standards gets depleted when productivity is left to stagnate.

Why don’t we fix other things first? Many growth-enhancing structural reforms hinge on mastering the lost art of federal-state collaboration. But migration policy is the sole responsibility of the federal government, making it a clear lever to pull.

The economic fallout from the recent international border closures highlights just how much immigration matters.

And international research shows migrants bring new skills and innovative ways of working, breaking the shackles on firm growth. Their skills complement locals, making both groups more productive, allowing everyone to take on more specialised roles that suit their unique skills.

Immigration is thus a vital ingredient to a more prosperous society.

But Australia is losing its knack.

Productivity growth has slowed due to the declining capacity of the Australian economy to reallocate scarce workers from low productivity to high productivity firms.

And our complex migration system may have contributed, according to fresh evidence which suggests that the productivity benefits of migration have fallen over time.

E61 Institute analysis – which links migrant visas to de-identified tax data on the firms at which they work – identifies three key channels.

First, migrants are increasingly working in lower productivity industries like hospitality, with the (pre-pandemic) boom in international students central.

Second, within industries migrants are working in less productive firms than local workers.

In 2011, 40 per cent of migrants were working in “lower productivity firms” – those in the bottom 40 per cent of the productivity distribution – 6 percentage points higher than the non-migrant share.

But by 2020, the migrant share in lower productivity firms had risen by 4 percentage points.

Rather than adding much needed grease, the (pre-pandemic) migration boom threw grit into the wheels of the creative destruction machine that channels workers towards more productive firms.

Third, visa type matters.

In 2020, 48 per cent of students and 65 per cent of working holiday makers worked in lower productivity firms, up from 45 per cent and 58 per cent in 2011 respectively.

These visa types are not directly targeted to economic outcomes.

And migrants entering through these untargeted streams have both kept “zombie firms” alive and coincided with a decline in the productivity of the firms which they join.

Fortunately, migrants on “targeted” visas – such as the temporary and permanent skilled programs – are more likely to work in high productivity firms than all other workers.

In 2011, 32 per cent of migrants on “targeted” visas worked in those leading firms that occupy the top 20 per cent of productivity distribution within industries.

Clearly, this part of our migration system is productivity-enhancing, as it works to relieve skill bottlenecks that constrain the growth of leading firms.

But by 2020, the productivity dividend had declined, with the share of migrants on “targeted” visas working in leading firms falling to 27 per cent.

Overall, our migration system is too complex.

We currently advertise more than 70 different visas. But more than 100 visas are in play once we count the visa types of incumbent migrants that do not provide a port for new entry.

Firms using the visa system lament the increase in red tape.

The system has been left to run essentially on autopilot for decades. And with the status quo crimping the productivity benefits of migration, something needs to change.

All of this justifies Home Affairs Minister Clare O’Neil’s reformist zeal in the immigration space.

Obviously, boosting productivity is not the only goal of our migration program.

Permanent migration reunites families. The working holiday maker program allows young people to get a taste of Australia. International students constitute one of our largest exports.

But we need to make it easier for the economic-focused parts of the migration program to attract the best migrants and channel them into our most dynamic firms.

In an uber-competitive global labour market, the challenge for migration policy is no longer just to get bums on seats, but to get the right bums on the right seats.

Productive allocation counts as much as population and participation.

The return of evidence-based policy processes – such as the Parkinson Migration System Review – is a portent for meaningful structural reform.

After the Review, there’s no looking back.

Dan Andrews is research director and Aaron Wong is research economist at the e61 Institute