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Country focus: Migration strongly affects New Zealand’s business cycle

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
June 2005
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In New Zealand, as in the United States, Canada, and Australia, immigration has been a major source of population growth. But unlike in these other countries, net migration flows to New Zealand have been highly volatile, partly reflecting significant emigration. Such swings have had important effects on the cyclical behavior of the economy and, in particular, on unemployment.

International migration both to and from New Zealand is large. During the past 20 years, permanent and long-term migrants arriving and leaving New Zealand each year have averaged about 1¾ percent of the total population, or 3½ percent of the labor force. As to origin, the number of Asian immigrants has increased in the past decade and accounted for more than one-third of the total in 2003, with immigrants from the United Kingdom and Australia making up the bulk of the rest. Australia has been the most popular destination for those who have departed, attracting more than 40 percent of the total outflows, followed by the United Kingdom and Asian countries.

Compared with the broadly steady inflows to other countries receiving immigrants, flows to and from New Zealand are quite volatile. For New Zealand, net migration flows have oscillated from being significantly positive to being significantly negative. As a result, population growth in New Zealand has also been more volatile than in most other advanced economies.

Migration and unemployment

The effects of migration flows on the economy, especially unemployment, is a key policy issue in New Zealand. From a theoretical perspective, the effect of migration on unemployment is ambiguous. On the one hand, net immigration increases the labor supply. In the short term, this is likely to raise unemployment if immigrants have skills that substitute for those of existing workers, or if they lack suitable skills to obtain work. On the other hand, immigrants create job opportunities by increasing aggregate demand through their consumption and investment. Their skills can also complement existing jobs and stimulate job creation. In addition, the characteristics of immigrants, such as their countries of origin, education, and skill levels, may also matter for the effect on unemployment.

New Zealand’s economy poised to remain strong

New Zealand’s economy has continued to perform well, recording average growth of 4 percent a year over the past six years as a result of extensive structural reforms in the 1980s and 1990s, sustained sound macroeconomic policies, and high immigration in recent years, the IMF said in its annual economic review. Job creation has been exceptional, reducing unemployment to the lowest rate among the countries of the Organization for Economic Cooperation and Development. Government debt has been declining steadily, and inflation has remained within the central bank’s target range. The IMF praised the skillful implementation of sound monetary and fiscal policies and wide-ranging structural reforms.

Economic growth rose to almost 5 percent in 2004, led by strong domestic demand. Household consumption was buoyant, reflecting strong income growth partly due to improvements in New Zealand’s terms of trade. Fixed investment accelerated as firms enjoyed high profitability and robust sales, leading to tightening capacity constraints.

Inflation picked up as the economy reached a very high level of resource utilization, prompting the Reserve Bank of New Zealand to tighten monetary policy. Considering that risks to inflation are predominantly on the upside, the IMF supported the authorities’ decision to maintain a tightening bias, while noting that monetary policy would face a difficult balancing act to avoid an unduly sharp slowing of activity. In addition, while New Zealand’s fiscal position is strong, the scope for expansionary policy is limited.

Growth in the near term is projected to slow as consumer spending moderates as a result of a cooling of the housing market and the effects of higher interest rates. In the medium term, growth is expected to average above 3 percent. With limited scope for further increases in labor utilization, the IMF agreed with the authorities that increasing productivity is the key policy challenge.

2005
New Zealand2001200220032004Projections
(percent change)
Real GDP2.64.73.44.82.8
Domestic demand2.65.65.38.03.6
(percent of labor force)
Unemployment5.35.24.63.93.8
(percent of GDP)
Net public debt17.014.213.710.88.7
Data: IMF Public Information Notice, May 5, 2005.
Data: IMF Public Information Notice, May 5, 2005.

To illustrate the importance of swings in migration flows for the business cycle in New Zealand, Chart 1 shows how changes in the real exchange rate (measured as the difference between the inflation rates in nontradable and tradable goods and services) tend to follow net immigration flows, suggesting that higher net immigration is associated with an increase in domestic demand. Immigrants’ effect on demand is particularly evident in the housing sector, where it helped fuel sharp rises in prices in recent years (see Chart 2).

Chart 1.More immigrants, higher demand

changes in the real exchange rate following net migration suggest that higher immigration is associated with increased domestic demand.

(percent change)

(percent of population)

1Advanced three quarters and measured as the difference of the inflation rate between nontradable and tradable goods and services.

Data: CEIC data and IMF staff calculations.

Chart 2Migration and housing

Migration has affected housing prices over the years

(year-on-year percent change)

(percent of population)

Data: Reserve Bank of New Zealand.

For New Zealand, empirical analysis shows that an increase in net immigration tends to reduce the unemployment rate while increasing labor force participation. For the analysis, a system of equations including the unemployment rate, real wage, net migration rate, and labor force participation rate is estimated to take into account the interdependence of these variables. The results suggest that immigrants, through their effect on demand, help raise labor force participation by enhancing job prospects. In addition, by generating greater demand and limiting wage growth, they create more jobs than they themselves occupy.

The effect of migration on unemployment depends on the composition of the migration flows in certain respects. Net migration from Australia is found to induce a stronger reduction in the unemployment rate than that from other countries, suggesting that migrants to and from Australia may have a better match in their skill set with local workers than those from other countries. This conclusion is perhaps to be expected, as New Zealand has a common labor market and other close economic ties with Australia. However, a higher share of skilled migrants in the net inflow—measured by their declared occupations—does not seem to have an additional effect on the unemployment rate, suggesting that skilled migrants have not in general been more successful in their job search than unskilled migrants.

Policy considerations

Looking ahead, the slowdown in net immigration experienced by New Zealand in 2004 is expected to continue in the coming years as the global economy is projected to remain relatively strong. A simulation indicates that the projected reduction in net immigration would lead to a rise in the unemployment rate by close to half a percentage point over the next two years, which would tend to dampen inflationary pressures. These results highlight the continuing need for New Zealand’s economic policymakers to take into account the outlook for international migration flows, which depend on economic developments in other countries as well as in New Zealand, when formulating domestic monetary and fiscal policies.

More information on New Zealand can be found in IMF Country Report Nos. 05/152 and 05/153, which are available on the IMF’s website (http://www.imf.org).

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