Immigration and monetary policy: Let’s be a bit careful

By Matt Nolan 05/05/2014

Note:  I realise I have been writing about Labour’s policies and not other parties – I have been very busy, and only write about things when I get a chance.  If you want me to write about any specific party policy, email me, and I will try to have a go :)

Labour is talking about varying migrant visa approvals in a counter-cyclical fashion, as a way of helping out the RBNZ with monetary policy.  This bears some relations with stated thinking fro some members of the RBNZ [Update: Michael Reddell, the author of the paper, justifiably pointed out in the comments that the Labour type policy is not related to his work – and that my statement was unclear.  He is completely correct – his work and a counter-cyclical visa instrument are about different things, an important point to keep in mind!].  Now this isn’t about the level of migrants coming in – only the timing – so this isn’t a way of us shutting our borders.  I would like to keep the two issues separate in this instance, so we can think about the specific policy more clearly.

Furthermore, the focus here is very much on short term variation with regards to monetary policy – not a long term view of high interest rates and the real exchange rate.  This issue is much more contentious IMO, and deserves separate discussion.

Much younger (but far less charming) me, at the start of the blog, noted how inward migration boosts “demand” and “supply” in a monetary policy sense, so we need to consider our arguments carefully!  So the idea is that, when migrants first appear they have to set up in NZ and may not get integrated into the workforce straight away.  As a result, the first thing they do is “increase demand”.  The demand for housing, for building housing, for buying other non-tradable services pushes up the interest rate (although we also have to ask how they are getting the income to provide this demand – is it that they are bringing a capital inflow with them and this is the driver?).

As a result, lowering visa quotas when the economy is running hot and lifting visa quotas when the economy is cold could help to limit variability in interest rates right?  Well, not so fast:

  1. We know that the limit in visa quotas will be binding when the economy is hot – but will people still be trying to move here, with the right points score, when the economy is running cold?
  2. This will exacerbate labour market dysfunction:  We tend to bring in skilled migrants who fit into areas of “skill shortages”.  These shortages are most acute when the economy is “running hot” and least acute when it is “running cold”.  By doing this we just make the shortage worse!
  3. The politics of increasing visa numbers when unemployment rises – this just won’t happen, implying we will have defacto lower quotas overall, and our “support to monetary policy” will be weaker.
  4. When the economy is “running hot” migrants will get work, and get integrated into “providing supply” a lot lot more quickly – as a result, the entire argument that they “cause inflation” is fairly weak.  They may well help to drive house price growth (eg if house prices grew strongly solely in the places they moved, in order to stimulate supply) – but this is a relative price shift, not the “inflation” the RBNZ should be targeting.
  5. Visa approvals do not work like that:  This is how the visa process works.  People go to an office to see if they will be accepted, they have a chat, and then go away and decide whether to apply based on that information.  They then pull together their application and sort things out at home with their families and friends.  They apply.  The visa then has to be approved to be processed (is everything filled out).  Then if it is approved it sits around for a while, and then gets approved or rejected.  Given that, the visa holder then has a period of time to decide whether they will move into the country.  All in all, the visa process takes a LONG time – nearly as long as the lags in monetary policy.  As a result, either this “tool” will be too slow – or we will actually have to turn around and change the rules on people in the middle of their visa application, which is a horrible thing to do to people!

All in all, the policy does not seem functional and just genuinely doesn’t make much sense to me.  I am glad to see the parties accept that their choices have an impact on OCR the RBNZ has to set to meet its PTA – but there are bigger fish to fry than immigrants.

Note:  I have heard a lot of people say “the thing is immigrants come here and use our services, so we are paying for them”.  My gosh that is wrong-headed.  These immigrants come into the country AFTER their education and early healthcare is paid for (when they are net tax takers), work and pay tax (when they provide net tax) then retire (tax takers again).  On average they will be SUBSIDISING the rest of us, as we never had to pay for their initial human capital investment.  I don’t even have to rely on the fact that I care about people from overseas to make this argument!