Does migration affect inflation?

Both the theory and the evidence say "don't overthink it".

Photo by Jordi Rubies on Unsplash

I have, belatedly, had a thorough read of the NZIER report on migration and inflation, which was commissioned by the Reserve Bank and was published back in March. Overall I think it’s a good piece - it gives a sense of the breadth of research on migration that’s been done here and overseas, without claiming to be comprehensive. I won’t attempt to cover all of the report’s findings here, though there are a few interesting bits that I’ll pick out along the way. Instead, I’d like to add some of my own observations, and to reflect on the difficulties of saying anything meaningful on this topic at all.

The setup

The path to this report was a fairly tortuous one. As the border was being reopened in 2022, inward migration wasn’t really on the Reserve Bank’s radar, other than some brief comments that it would help to ease labour shortages - that is, something that would reduce inflation pressures. By early 2023, net migration had more than recovered and was surging to new highs, and the RBNZ began to talk about its impact on demand (particularly for housing) as well as on the supply of labour.

The August 2023 Monetary Policy Statement really ramped up the migration discussion, including a whole chapter making the case that migrants may be less inflationary than thought:

Previous research has shown that net immigration tends to put upward pressure on inflation. Changes in the ages, countries of origin and occupations of recent immigrants suggest that the current upswing could have a different inflationary impact from past immigration flows. It is possible that the net inflationary impact of migration is less than it was because of the tight labour market.

Three months later, though, the RBNZ was putting all of its chips on “migrants are inflationary” again (for reasons that I didn’t find all that convincing at the time). Then finally, in a speech in January, they quietly revealed that they had commissioned the NZIER to give them advice on how to think about the matter.

That brings me to the one negative thing I have to say about the report: I don’t think it actually met the brief. The introduction states:

As well as reviewing the literature, we have been asked to include NZIER’s conclusions of the existing literature for the work of the Monetary Policy Committee in understanding the inflationary impact of current and anticipated migration patterns in New Zealand and to make recommendations for further analysis.

But there is very little in the report that is actionable for the policy committee. It would be fair to say that the literature on the effects of migration can be summed up as “it depends on the circumstances” - but the committee is looking for advice on how it matters in our circumstances. There are some ideas for further research that could be done with micro-data, but (1) this would take some time, and we already seem to be moving into the next phase of the migration cycle, and (2) other countries have failed to find anything decisive from this sort of data and it’s not obvious why New Zealand will be the one to crack the case.

The challenges of migration research

As a starting point, a basic demand-supply framework would suggest that the impact of migration on the economy is neutral. New migrants create an additional demand for housing, food, clothing, education, and other goods and services. But they also add to the supply of workers, which in turn helps to meet that increased demand. At an economy-wide level, those effects are likely to balance each other out, leaving us with a larger economy but no meaningful differences otherwise.

That may not hold, though, if the migrants are different in some way from the existing population. Of course, it’s easy to identify some differences even without resorting to stereotyping - migration is self-selecting, so you won’t end up with the same mix as the general population. Migrants skew much younger (the vast majority are under the age of 45), they tend to come from countries with lower average incomes (people move to opportunity), and they’re more likely to have general skills that are transferable across countries.

As a result, migrants may have noticeable effects on certain segments of the economy. At one end of the scale is something like aged care - many migrants come to work in this area, but their age profile means that they don’t add to the demand for those services. In this case, migrant workers may indeed keep wage rates lower than otherwise. At the other end of the scale, the classic example is housing - every migrant needs a roof over their head from day one, putting pressure on the housing stock. Some of them do go to work in construction, but it takes time to build new houses (and the supply of labour typically isn’t the main barrier to getting more houses built).

But these are examples of relative price effects. Can migrants actually make a difference to the rate of increase in the general level of prices? Theory can’t give us an answer; instead we have to look to experiences in other times and other countries, and make some guesses as to how applicable they are to our own circumstances.

In the real world

That’s far from an easy task though, because there may be many other factors affecting the economy at the same time as a change in migration: monetary and fiscal policies, trade or financial shocks, or changes in legislation. What’s more, we need to be careful with the direction of causation - migration flows are often in response to changes in economic conditions, perhaps more so than a cause of them.

For these reasons, the most convincing studies on migration have tended to focus on specific events, and have narrowed their focus to the direct impacts on the labour market. One favourite event for studies is the Mariel boatlift: in 1980, over 125,000 Cubans fled by boat to Florida, effectively adding about 7% to the working-age population in Miami in the space of a few months. Famously, economist David Card found that this surge in the supply of labour had no significant impact on wages in the area. While there has been some back and forth between economists over the years on this subject, the general view is that even where the effects on wages for some groups have been found to be statistically significant, they’re not large enough to be economically significant.

The Mariel boatlift is an example of a ‘natural experiment’. Firstly, the shock was exogenous - it was not the product of anything happening within Florida’s economy. Secondly, because the effects were so localised, economists can assess them against a ‘control group’ of neighbouring counties that otherwise had similar demographics, economics conditions, and labour laws. Obviously this isn’t as tightly controlled as a laboratory experiment, but examples like this are about as clean as we get in economics.

The Covid-19 border closures might seem like another example of a natural experiment, since the halt in migrant flows was by government order rather than the result of economic conditions. But the difficulty is that there were many other factors affecting the economy at the same time - not least the unprecedented amounts of fiscal and monetary stimulus that were being applied worldwide, in an effort to prop up demand in the face of what was expected to be a deep recession.

That response proved to be far more than necessary, resulting in overheated demand and a scramble for more workers, at the same time that access to migrant labour had been cut off. While this was regularly portrayed as a labour shortage, that’s more a reflection of who was telling the story. Individual businesses don’t perceive things like ‘aggregate demand’; what they do perceive are the positions that they can’t fill and the employees that are being poached by their competitors.

So that’s the first big difficulty in the question that the Reserve Bank posed to the NZIER: the lack of a control group that wasn’t affected by the same conditions. The second is that going from migration to the labour market to inflation adds another link to the chain, further reducing the chance of finding a connection.

The NZIER notes a few instances where people have tried to use large macroeconomic models, calibrated to historic data, to determine the link from migration to inflation. The results have been mixed: work from Chile suggested that migrants add to inflation, while work from Spain concluded that they reduce it. These contrasting results are probably down to differences in how the models are constructed, rather than any genuine differences in the migrants. It just adds to the sense that, as an opening bid, your best guess about the impact of migrants on inflation is zero.

Here for a good time, not for a long time?

Admittedly, much of the research in this area has focused on permanent migration. However, New Zealand’s inflow of migrants has increasingly shifted over time to temporary workers and students, rather than those arriving with residency. (Other develop countries have seen a similar trend.) And while many of them will come here with the hope of transferring to a longer-term visa, not all of them will be able to do so, and they may be living and working in very insecure conditions in the meantime. So one line of argument is that these kinds of migrants could have different effects to those discussed above.

Take housing for example. In most cases non-residents are banned from buying houses in New Zealand, so new migrants are unlikely to be bidding up house prices. However, they still need a roof over their head when they arrive, and every house has to be owned by someone. So the pressure on house prices comes instead from property investors as the demand for rentals rises. One counter to this is that the demand on the housing stock will be less if migrants are being squeezed in like sardines, and sadly there are many instances where this is happening.

Another idea is that temporary workers may add much less to demand than to supply, because they’re earning to send money home to their families. This has even been suggested as a reason why retail spending has been so weak over the last couple of years in spite of strong population growth. However, the numbers for this don’t stack up. According to the balance of payments data, remittances over the last year were up about $250m on the previous year. Household spending was about $230bn last year, so remittances would have made a difference of only 0.1%.

What about outward migration?

Lastly, I should address the flows in the other direction, in particular the dreaded ‘brain drain’ that has been happening to a varying degree for the last 50 years. In a 2001 paper, Treasury economists Hayden Glass and Wai Kin Choy looked at the characteristics of migrants and concluded that there was less of a ‘brain drain’ and more of a ‘brain exchange’. The New Zealanders leaving the country, rather than consisting of our best and brightest, were more a representative cross-section of the country.

That finding is probably even more true today. The northern hemisphere OE has waned in importance over the years; the vast majority of departing Kiwis now go to Australia, where the likely appeal is similar work for better pay. Unfortunately we don’t know a lot about the current outflows - we removed departure cards in 2018, so we no longer have a record of departing Kiwis’ occupations for instance. Nor do we record where they’re heading to, although data from the Australian Bureau of Statistics confirms that that’s still the most popular destination. If there’s a conclusion about inflation to be drawn from these kinds of outflows, it’s not one that readily comes to mind.