RBA Governor Philip Lowe caused a stir when he said immigration was depressing wages. Now we know why he said it.

RBA Governor Philip Lowe caused a stir when he said immigration was depressing wages. Now we know why he said it.
Australia's borders are closed and its impact is a matter of debate. (Tracey Nearmy, Getty Images)
  • The RBA conducted internal research into the relationship between migration to Australia and wage growth earlier this year.
  • The analysis informed Governor Philip Lowe when he made comments last month suggesting closed borders could help grow some wages.
  • The research obtained by Business Insider Australia through a freedom of information request sheds some more light on what Lowe meant and how the RBA views immigration.
  • Visit Business Insider Australia’s homepage for more stories.

The Reserve Bank of Australia (RBA) kicked a hornet’s nest when it claimed high immigration was partially responsible for low wage growth, and now we have a clearer idea of why it said so.

Last month, Governor Philip Lowe suggested the ability of Australian companies to bring in foreign workers “dilutes the upward pressure on wages”, and has potential “spillover” effects on other industries.

“In my view, this is one of the factors that has contributed to wages being less sensitive to shifts in demand than was once the case,” Lowe said at the time, as he mused on how the central bank might finally deliver long-missing wage growth.

The suggestion came at a time when Australian migration is going backwards for the first time in a century and economic fears are at the forefront of public debate. In a nation that celebrates itself as a successful multicultural society yet routinely wrestles with its failures on race and integration, the comments were always going to hit a nerve.

Almost immediately, the Department of Home Affairs disputed the claim with its own research. So too did a host of economists including one at the Committee for Economic Development of Australia (CEDA), who argued that if anything migration had “a small-to-negligible positive effect” on wages owing to their net economic benefit.

It led to some questions as to why a typically diplomatic Lowe, who holds a doctorate from MIT, would wade into the debate, and what research he was looking at when he did.

Internal research obtained by Business Insider Australia under the FOI Act has shed some light on the thinking.

Does migration hurt or help wage growth?

The documents show that two months ago the question was posed internally in an email between RBA departments.

The economics analysis unit wanted to know, “what happens next year when the supply of temporary workers increases again as the borders gradually reopen[?]”.

Assuming that unemployment had plummeted in the intervening period, the RBA considered two possibilities. The first was the extra workers coming in could push wage growth down. The second was that the extra demand they injected in the economy would help the economy and wages to grow.

As Australia sought to maintain momentum in the recovery, it was a critical consideration it needed to make as part of its forecasting.

It’s complicated

Given the complexity of the question, and the many different parts of the economy that migrants and population growth have an effect on, there’s no simple answer. But the RBA’s partly redacted research does reveal a few of its key conclusions.

Firstly, the Economics Analysis (EA) team notes that there “has been persistent spare capacity in the labour market for at least the past decade…[which] has coincided with declining wages growth across all sectors of the economy.”

It says it is “uncontroversial” to link spare capacity – higher unemployment – with lower wages. But it also notes that there are several structural issues “most likely contributing to persistent spare capacity and subsequently low wages growth”.

In this mix, it includes “changes in Australian immigration policies and the composition of the immigrant pool” on a list that has otherwise been withheld. Lowe, for the record, listed a rising participation rate and slack in underemployment as two others reason for sluggish wages back in July.

It elaborates though that two decades of high migration has changed the labour market but that different types of workers have had different impacts.

With roughly 80% being unskilled workers, the RBA notes this group is largely substitutable for local workers and “tend to work in the lowest paid jobs” such as hospitality, food services, and cleaning.

On the other hand, skilled migrants might be responsible for relieving wage pressure in their specific occupation, but don’t increase spare capacity generally. The implicit conclusion there is that skilled migrants aren’t hurting wages, nor are they taking jobs because they tend to bring specific skills shortages that aren’t being met by local workers in industries like IT.

Their partners, who are given full work rights, do create spare capacity, the RBA concluded, implying that this specific group may in fact easily substitute local workers and subsequently hurt wage growth.

What it all means

While different groups may rush to make their own conclusions, the gist of the RBA research isn’t so cut and dry and the real world conclusions are significantly more nuanced than the old trope of “foreigners taking our jobs”.

Take unskilled workers, who make up the vast majority of all migrants. Given the typically poor conditions experienced by many in these jobs, which range from food delivery to farm hands, it would surprise no one to learn that Australians aren’t keen on doing them.

Reported wages of $3 a day and sexual harassment have meant that most Australians aren’t rushing to move to regional areas to pick fruit or help harvests, even when offered $6,000 by the federal government. Some of those that have tried to find work have also reported that in some instances employers have turned them away due to the wages locals would demand.

Indeed, there’s an argument to be made that cheap fruit and food in many first world countries is enabled by a cheap source of foreign labour. When it comes to the annual review of the minimum wage, many business groups claim they can’t afford higher wages across all manner of industries. While these arguments may be subject to debate, it underlines how complicated these issues are by nature.

Turning an eye to skilled workers, similar constraints can be seen. Local tech workers might rejoice at the prospect of a six-figure raise with border currently closed, but even the most hyped companies cannot sustain that kind of growth long-term.

Which leads us to the partners of these skilled workers, a small group on balance. As the RBA’s own research shows, skilled workers make up less than 15% of all migrants that come in each year. Beyond the central bank’s conclusions, it is worth pointing out that the ability to bring their partner enables skilled workers to migrate to Australia in the first place.

Beyond increasing economic demand, it also helps Australia to fill all manner of skill shortages which in turn allow businesses to continue to grow. Certainly, Lowe did attempt to express the complexity of it all in his original comments.

“With all these moving parts, and the uncertainty about the future strength of labour demand, it is challenging to determine exactly when the spare capacity in the labour market will be absorbed and, hence, when we can expect a sustained lift in wages growth,” he said.

In other speeches, he has explicitly identified population growth and net migration as major drivers of the Australian economy.

As he and the RBA try to get the country booming, it’s highly likely those down at Martin Place would prefer the borders to reopen and the economy to normalise once again.