The Impact of Continued High Level Immigration On New Zealand

In the last year we have experienced record population growth, and economists are warning this is placing a strain on housing and infrastructure. Yet the Government still refuses to revisit immigration levels. In July under pressure from farming and the dairy industry in particular, the National Government backed down on their proposed immigration changes. 

Prior to the changes, the definition of skilled migrants was based on job titles rather than income – so of course businesses gave everyone a promotion (without a pay rise) to meet the criteria. To combat this National proposed ensuring that the definition of ‘skilled’ included earning at least the average wage of $25 per hour ($48,000 per year for a full time worker). For incomes less than this the person would have to leave after a maximum of 3 years.

If anything this proposal was on the timid side, but it was still opposed by farmers, particularly the dairy industry. In response the National Government has reduced the earning threshold to $41,000 per year, effectively declaring anyone earning $20 and over – the Living Wage – is skilled enough to stay in New Zealand indefinitely. Continuing the open season for importing such low cost labour into New Zealand is a kick in the teeth for low wage Kiwis.

This is incredible when you think about it. Why is it that our biggest and most successful industry can only pay such meagre wages, or can’t be bothered investing in training young New Zealanders? The answer is because it can get away with it, because we have a government that doesn’t actually prioritise increasing wage rates as a goal for a successful economy.

The problem – our low skilled low wage economy

We are generating economic growth on the back of increased production and keeping wage rates down. The higher income generated is all accruing to profits, higher wages are not a feature. When the supply of labour gets tight, the government simply allows industry to ship in more workers.

Meanwhile the rivers and lakes in many parts of the country are under severe pressure – simply because of this volume-driven expansion in dairying. Farmers get a free-ride by not being charged for their pollution, nor for that matter the water they use.

This outcome reflects our policy settings. The aspirations of employees have been smashed by cheap foreign labour and the determination not to allow wage rates to rise, all while environmental externalities go un-priced. The easiest way for farmers to make more money given these settings is to intensify production.

Intensification and over-investment in farming is encouraged by an income taxation regime that favours some forms of income over others. In particular, there is every incentive for the farming sector to minimize its cash profits (which are taxable) and to maximize the portion of their investment return that is capitalized in the value of their asset (and not taxed). This loophole sees taxable profit as a share of assets deployed, permanently down at negligible levels – all of the return is in the capital appreciation of the land as the low effective tax rate keeps the demand for this type of asset insatiable. To fuel further the frenzy the industry borrows with the interest bill ensuring the net cash income (taxable) returns remain paltry.

It’s not hard, given the loophole in our tax regime, to see why most farmers live like paupers until they pocket their tax free capital gains when they sell the farm. Meanwhile their intensification of production requires more farm workers, and there isn’t much cash to pay them. Keeping wages low is a must.

TOP’s tax and immigration reform would fix this distortion pretty quickly. A deemed minimum taxable income would reduce at least the impact of the tax loophole and cutting off access to low skilled, low wage labour would require this business to disperse a greater share of its profits to the workforce. The removal of the free ride the sector is enjoying for its environmental destruction would clearly impact it as well.

Subsidising an industry to the extent parts of the farming sector have been makes no economic sense – it is pure political expediency. Indeed the damage to the economy is substantial because the industry soaks up resources that could otherwise be used for greater economic gain.

Why can’t Kiwis do the work?

Employers claim that the economy is creating 10,000 jobs per month, and there is no way that Kiwis can do all the work. Yet we still have unemployment above the ‘natural rate’ as well as high rates of underemployment (when people have work, but not as much as they want). 

The two major impediments to getting Kiwis into these jobs are (a) a benefit system that traps people in poverty meaning they lose more from going into paid work than they gain, and (b) wage rates that have not kept up with the cost of living (particularly accommodation costs) meaning that there simply isn’t enough compensation to make these jobs viable. TOP will reform the benefit system by moving to the UBI (unconditional basic income) which will raise labour force participation because people don’t lose the benefit when they work. We will also address the low wage scenario by tightening immigration rules to exclude low skilled labour.

Generally immigration has a small but positive impact on the host country. However, the statistics are clear that New Zealand is stuck in a low wage, low skill economy. Many of the immigrants coming in are relatively low skilled. There is some evidence that this is shutting young Kiwis out of the job market in some regions.

More importantly the removal of any limits on the supply of low skilled labour is stopping wages from rising for everyone. Bernard Hickey has made the link between immigration and the toxic combination of rising rents and low wage growth. BNZ economist Jason Wong has noted this is one reason wage inflation is so low:

"In New Zealand’s case we can add strong net immigration as a possible factor weighing on wage inflation."

These worries could be questioned or written off as short term “growing pains”. The more concerning point is that this reliance on low-skilled immigration may be one of the things preventing us shaking off the yoke of being a low-skilled economy.

The fact is that these farming jobs are hard work in an isolated location with long hours. To coax Kiwis out to the regions farmers would need to pay more, and some farmers have such terrible true profitability they can’t afford it. In a normal industry, the businesses that can afford to pay more will do so and prosper, and the ones that can’t will go out of business. We shouldn’t be at all upset about that; this is the creative destruction that lies at the heart of capitalism and is the way that markets work. It’s not like overall production will drop, in the case of farms someone else will buy the land and take over operations.

This sort of creative destruction is good for the economy because it drives productivity growth. To afford to pay workers more, businesses have to invest to ensure those workers are more productive. Steady increases in the minimum wage are also good for the economy for the same reason; they keep the pressure on businesses to invest so they can afford to pay more.

Michael Reddell makes the case that large numbers of low-skilled immigrants are in fact holding back business investment, and in turn dampening productivity and income growth. We would argue that it isn’t just immigration, our tax loopholes around property and slack environmental regulations add to the problem also.

What can we do?

How can we transition from a volume-based approach to one based on generating higher profitability after all costs are properly incurred? A series of policy changes will be needed to shunt farming – and in fact our whole economy – onto another trajectory. TOP suggests three major reforms:

Our tax reform will ensure all asset owners pay their fair share of tax – and those that are already doing so will receive a tax cut. This will encourage investment in productive assets, rather than profits being capitalized in land prices.

TOP will also ensure polluters pay for the environmental damage they cause. Those polluting above an agreed level will pay, and that money will go to other farmers who are polluting less. All money stays in the farming industry, and within the catchment. This will reward farmers that farm in an environmentally friendly way.

At the same time, we need to reform our immigration system to break the morbid addiction to low-skilled foreign labour. We need to focus much more on attracting skilled people that add to our economy and society, rather than people that suppress wages. That will mean that businesses relying on low skilled labour either have to increase wages and invest in training to attract local workers or close.

Together this policy package will reward farmers that produce high margin, environmentally friendly produce. The same principles apply to all our businesses as we look to move to a highly skilled, high wage economy.

Meantime, instead of doing PR puff adverts during prime time, to shore up their reputation Fonterra should spend their money working out how to train and employ more young Kiwis in the industry.

Instead of this ambitious future, the National Government doesn’t want to rock the boat. Of course that will win some farming and business votes short term, but it is keeping us trapped in the low wage, low skilled economy. Farmers and businesses that care about the future should vote TOP – it’s a no brainer.