Reviewed by: Jeff Borland (Professor of Economics at the University of Melbourne)
With the stroke of a pen, Australia’s migration landscape has shifted dramatically.
On the 11th of December 2023, the Albanese government unveiled its “Migration Strategy – Immigration and Citizenship” (Dept Home Affairs, 2023). Core to the strategy are measures to shrink total migration and better target available places at high skill workers. According to the Prime Minister, the policy “is a response to the fact that the system is broken” (Reuters, 2023), intended to rein in inflation and exploding house prices while dealing with labour shortages.
What the Policy means for Migration to Australia
Figure 1: Overseas Migrant Arrivals by Visa Groupings 2021
Source: ABS, 2021
Figure 2: Australia Net Migration Forecast Post-Implementation
Source: ABC News, 2024.
Table #1: New Australian Visa Pathways under Migration Strategy
Source: Prepared using information form Jobs and Skills Australia and Visa Envoy
Economic Analysis of Migration Strategy
The COVID-19 pandemic created high-levels of unemployment (peak 7.5% July 2020) and a troubled economy with major economic disruptions. Forced economic shutdown and border closures worsened existing skill shortages across aged care and disability support work.
While 94% of Australians who lost their jobs or were stood down to zero hours were back in work by March of 2021 (Parliament of Australia, 2021), the loss of 500,000 temporary visa holders resulted in significant on-going skill shortages within Australia. Especially prolific shortages at the time included in hospitality, chefs, managers, aged carers, and agricultural workers.
Filling the much-needed gaps in occupations with immediate shortages and boosting the economy, skilled migrants were seen as having an “an important role in filling gaps in the Australian workforce” (Parliament of Australia, 2021). Aided by the re-opening of borders and economic conditions, an intentional effort to fill these skill shortages was made in mid-2021 by the Australian Government. This intentional effort included policy efforts to reduce processing times of “urgent skill” visas and reduce quarantine times for these workers once their visa was approved.
This was reflected in the subsequent rise in temporary visa holders to well above pre-COVID levels, nearly double that of previous years.
Figure #3: Overseas Migrant Arrivals post-COVID Labour Market
Source: Parliament of Australia, Skilled Migration Post-COVID.
The regrowth in migration has been important in fostering recovery in the Australian labour market. The fall in numbers and rates of unemployment (having fallen below 4% from May 2022 – Dec 2023) and underemployment (has fallen by 2% (Mar 2024 ABS) from pre covid levels) are indications that the labour market has tightened rapidly. An imbalance of labour supply and demand has contributed to increasing wage pressures in the economy in an environment where inflation was also increasing at a much higher rate due to several compounding factors. (Australian Parliament, COVID Labour Market Report).
Migration helped the economy come back from the tumble in GDP growth as well as restore sectors of the labour market. But levels of immigration pushed beyond what was needed to restore economic activity to its pre-COVID level. The government therefore became concerned about projected levels of net migration of 440,000 next year and 305,000 in the following year (Migration review, Department of Prime Minister and Cabinet, 2023).
With projections well above the sustainable pre-COVID trend of between 200,000 – 300,000 net migration each year, the current system is seen to have added to the current cost of living problems and inflation in Australia. How much impact migration has actually had on overall inflation can be questioned, despite definite fears among economists. HSBC Chief Economist stated “model-based estimates suggest that a positive shock to migration is net inflationary in the short run” (AFR, 2023). Lower total migration may these ease inflationary pressures in the short run.
The composition of our migration intake is pivotal in current analysis of migration and the labour market. Concerns surrounding skill shortages have been a focus of migration policy, trying to attract new prospective or highly skilled labour from overseas. Skilled migration programs have been a key strategy that has been used by governments to address labour shortages as well as helping boost waning productivity growth. Lowered skill shortages result in a more productive labour force and increase economic growth (KPMG, 2023).
However, 36% of occupation nationwide having labour shortages in 2023 (Jobs and skills Australia, 2023). The biggest shortage of willing-to-work qualified personnel occurred in occupations that had longer training times (requiring a bachelor’s degree, Certificate IV or apprenticeship) and occupations that suffered from lack of retention and high average job mobility (Jobs and skills Australia).
The required skills were not being attracted via migration post-covid due to uncertainty with visa processing time, undefined pathways to permanent residency and employer payment requirements for visa sponsorship.
Due to these systemic skilled visa issues, skilled migration levels haven’t been able to keep up with requirements for a productive economy, making up only 3.66% (102,565 people) of overall temporary visas (excluding overseas visitors) as migration continues to be dominated by international students.
With these factors to consider, the government’s new omnibus migration strategy seems to have recognised some of these issues and looks to solve this skills shortage. It does this by solving the systemic logistical issues with skilled visas related to faster processing time, clarity in pathway and easier access if correct requirements are filled. Through these new pathways, Australia hopes to attract required skilled workers across hospitality, engineering, care and agricultural workers (Department of prime Minister and Cabinet, 2023) to support skills and labour market in Australia.
Given this solution of the migration policy to solve the issue of skill shortages coming out of covid, what can we expect from the Australian labour market moving forward?
Short Run Economic Implications (1 – 5 Year Horizon)
The impact of migration permeates the economy via increases in employment, labour participation, population growth, and productivity growth (Migration Council Australia, 2015).
Benefit: Increased immediate productivity with skilled labour which meets shortages
The largest benefit of reinventing visa pathways to encourage skilled workers to Australia is to allow for a more immediately productive short-run labour force and hence stimulate economic growth. Reduced skilled shortages allows production to be no longer constrained by non-optimal qualified staffing levels, allowing immediate productivity as skilled labour demand meets skilled labour supply across more industries (Morris et al, 2020).
This is likely to occur across industries in Australia such as civil engineering, agricultural production, aged care, disability care and hospitality which have been particularly plagued with skilled shortages in recent years. For example, a lack qualified civil engineers in recent years has hindered infrastructure growth. An estimated additional 41,000 civil, geotechnical, structural and materials engineers, to meet the demands of infrastructure projects planned and in progress to 2025 (Engineers Australia, 2023). Similarly, the aged care sector along with others have faced labour shortages which could be solved by new migration strategy.
Figure 4: Aged Care Workforce Shortage
Source: Community Colleges Australia, 2022
By “filling in the gaps” of the labour force, migrants also boost the labour productivity of Australian‑born workers by allowing allocation of skilled Australian workers to roles relevant to their skills. There has been evidence found for this, suggesting skilled migration to Australia results in Australians obtaining higher-paid jobs on average (Crown et al, 2020).
The benefits of a more productive economy are well-documented, inclusive of higher real wages, higher output per person, more profitable businesses and lower prices. It is also possible that immediate productivity benefits will have long-run multipliers in terms of infrastructure supply.
Benefit: Housing affordability may improve with less total migration and student visas
Australia, along with other parts of the world such as Europe, has faced exploding housing prices over the past 20 years, well above wages. ‘The Australian Housing Crisis’ is an imbalance between supply and demand, where new demand for housing as a result of population growth and migration has outstripped the number of new housings being built. Catalysts on top of this supply imbalance include falling interest rates, meaning higher credit availability and stimulated demand, and tax breaks introduced back in the 1980s (Forbes, 2023).
Figure #5: Historical Australian Hosing Prices and Wages
Source: The Australia Institute of Centre for Future Work, 2022
The sharp increase in total migration to Australia post-COVID following 2020 propagated these skyrocketing housing prices further, especially in major cities around Australia such Melbourne and Sydney. The large proportion of student visas being granted placing high pressures on rent especially in suburban areas after lows due to COVID restrictions and migrants returning home across COVID.
Figure #6: Year-ended Rent Inflation across Australia*
Source: RBA, 2023
The new migration strategy lowering total migration is likely to relieve demand pressures for housing especially in capital cities across Australia, at least slowing the rate at which housing prices are growing. This is likely to be beneficial to younger consumer groups in Australia who will face a lower ratio of rent payment to wages freeing up disposable income for expenditure and investment. It will also benefit first-home buyers who will gain from higher financial accessibility to their first home. Specifically, it is possible that we see lowered rents in capital city housing and apartments as this generally where international students move to when studying in Australia (Victoria University, 2020).
Problem: Lowered economic growth and less jobs with lower total migration
Migrants increase the supply of labour resulting in increased competition for jobs. However, migrants also spend higher proportions of their income and save the least, resulting in an increase in consumer spending with more migrants.
Figure #7: Weekly Expenditure differences between migrants and Australian-born
Source: Grattan Institute Analysis of ABS Expenditure Survey 2016
This higher expenditure has been linked to greater relative need for new goods and services such as housing items, electrical appliances, clothing and other material items when establishing lives in Australia (Australian Parliament Submission Number 111 on Migration Policy). On net, more migrants create jobs in the short run as there is an increased required of workers over an economy to meet increased aggregate spending demand. With less total migration under the new strategy, relative expenditure of the population will fall resulting in lower economic growth and less jobs.
Long Run Economic Implications (10 – 50 Year Horizon)
Looking at a longer time-horizon, there is increased uncertainty about economic outcomes. In the long run, it is likely that the strategy will cause structural changes to Australia’s economy.
Benefit: Housing affordability will improve with increased construction of new dwellings
BuildSkills Australia stated 90,000 extra construction workers are needed currently to meet the goal of 1.2 million new homes in the next 5 years (ABC, 2023). Along with a local push to encourage young people to acquire trades, the government aims to reduce construction worker shortage via the migration strategy.
Defined in the Draft Core Occupational Skills List (CSOL), roles such as carpenter, building inspector, insulation installer, construction rigger, crane chaser, civil engineering estimator, bricklayer, excavator operator, welder, scaffolder, wall and floor tiler, tool maker and many more are currently facing shortages. Migrants possessing these skills fall under “essential skills pathway” and will be granted visas under the new strategy. With the acquisition of these skills and shortages reduced, construction of housing in the long-run will be able to increase addressing the current demand-supply imbalance and resulting in more affordable homes relative to wages in the long-run.
Benefit: Young workers will help address Australia’s ageing population problem
The government’s new strategy will “increase the size of the working-age population, which boosts our workforce and delays the effects of an ageing population” (Australian Government, 2023).
Figure #8: Breakdown of Long-run Australian Forecasted Population Growth
Source: Australian Government Intergenerational Report, 2023
Australia’s current ageing population is caused by low fertility rates and longer life expectancies. This further propagates downward pressures on participation rates, tapering off when an individual reaches retirement age. However, migration policies tend to offset the effects an ageing population has on participation rates.
In particular, in the setting of Australia’s permanent migration policy preference younger skilled migrants, the economic policy is expected to lower the median age of the population and add to Australia’s working age population. This is shown in Figure 8 above, as net overseas migration (NOM) increases in its projection to 2062, allowing for bolstered Australian population growth. It is important to note that while permanent migrants offset population ageing, it is not a permanent solution to population ageing, as permanent migrants also age. Furthermore, while an increase in skilled migrants does present an opportunity for a younger national workforce, the competition for skilled migrants is expected to grow in the long-run, due to an increase in ageing populations globally.
Problem: Australian higher education institutions will suffer because of less total students
Since 2004, Australia has seen increasing number of international students flow through its borders to access higher education. These full fee-paying internationals have become increasingly important in university profit and loss statements.
Figure #9: Breakdown of Revenue by source across Australian Universities
Source: Universities Australia, 2018
More revenue for top universities in Australia such as University of Melbourne and the University of Sydney has allowed for increased funding for research projects and investment into human capital resources, helping economy-wide productivity and further attract international top talent with higher rankings.
However, the strategy brings new requirements facing prospective international student visa applicants such as genuine student test, increased application scrutiny and international student caps. The strategy aims to mitigate skyrocketing international enrolments over the past 10 years and re-allocate visas towards skilled migrants. This will hurt higher education institutions in Australia’s revenue streams which currently greatly benefit financially from the substantial number of students. This will harm the growth of research as universities are forced to cut costs, hurting the growth of human capital in the country and reducing the productivity benefits it brings. It may also hurt rankings of key universities in Australia such as the University of Melbourne. Currently its rankings largely propped up by factors such as “academic reputation”, “research network” and “international students’ ratio” which could all be hurt by lowered research and international students (QS rankings, 2024). Lowered rankings result in a lowered ability to attract top international academic talent, potentially hurting labour productivity in the long run.
Problem: Lowered real GDP per person with lower total net overseas migration
The Australian government has forecast that net overseas migration (NOM) growth will fall over the next 40 years with a lowered overall migration level. According to Australia’s Intergenerational Report (2023), the growth rate of NOM is expected to fall from “1.0 percentage points in 2024-25” of Australia’s average annual population growth, to “0.6 percentage points by 2062-63” (Australian Government Intergenerational Report, 2023).
Figure #10: Productivity Commission modelled growth in real GDP per person and population 2014 to 2060 under BAU conditions
Source: Productivity Commission, 2016
In modelling carried out by the productivity commission, lowered NOM results in lower real GDP per person in the long run under certain assumptions. This attributed to the age profile of the labour force reducing at a faster rate with lower NOM, resulting in lower employment and less real output per person.
Conclusion
Overall, the Australian Government’s 2023 Migration Strategy has a range of economic outcomes. The outcomes discussed by this article can be summarised as:
Short run (1-5 years):
Long run (10-50 years):
On a final note, on the 20th of June SSI launched its findings on the underutilisation of migrants in Australia. It proposes that if our economy recognised the skills of migrants already in Australia, we would be $70 billion better off. Manager at Deloitte Economics Rachel Power suggests that if their skills were recognised, 1 in 3 would move to the higher skilled occupations such as construction, trades and education where there are shortages (Via LinkedIn, 2024). Perhaps the solution to Australia’s skill shortages is already here, and were just not looking closely enough.
References
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