Macroeconomic Analysis – New Zealand Immigration Policy

Application of a Theoretical Model

  • Research Question

The immigration policy of New Zealand is centered on the assumption that the macroeconomic effects of immigration may be substantially positive, with small negative impacts at worse. Nonetheless, both large and small macroeconomic effects are possible.  On that account, the main objective of this paper is to investigate the macroeconomic effects of New Zealand’s immigration policy. Another objective is to determine the effect of immigration and other types of population growth on New Zealand’s housing market.

  • Motivation

Upon review of studies, findings suggest that whereas immigration, at times, has had substantial net benefits, it also has negative impacts. In particular, over the last few decades the positive impact of immigration on productivity, per capita growth, mitigating aging of the population, and fiscal balance is uncertain. There is also evidence that suggests that immigration, along with other types of population growth has exerted pressure on the country’s housing sector, which fails to cater to the needs of the market. Attending to the infrastructure requirements of immigrants in an economy with a moderate level of national savings may also have diverted key resources from more productive economic activities, leading to negative macroeconomic effects. More needs to be done to examine the probable net benefits of increased immigration. This should be done as part of the strategy to hunt the cluster and scale impacts through increased population, or whether a decline in immigration could enable a lower exchange rate, lower interest rates, and growth that is more balanced.

B) Analysis and Evaluation of Policy

1.) Literature Review

Like other OECD nations, New Zealand has high rates of population inflow and outflow. In fact, there are some associations between the two; Since the start of the 1990s, the government has engaged in a policy to replace the New Zealanders that go to live abroad with immigrants. Substantial benefits were projected by enhancing the quality and number of individuals working within New Zealand’s institutions and an economy that had undergone a recent transformation.

Until the late 1980s, New Zealand used a “Country-of-origin” immigration framework which favored migrants from certain countries. The points framework that replaced this system in 1991 originally permitted anybody who earned or surpassed the target points to gain residency. There were no efforts to interweave the demands of the labor market with the skills of the migrants. From the mid-1990s, progressive changes were made to place more attention to labor demand. From 2001, the Cabinet has been approving a set target for the number of immigrants who gain residence status.

Over the past few decades, there have been extensive studies that seek to comprehend the effects of these policies. The results in New Zealand are in line with international proof implying that immigration has only had moderate effects on total growth per capita, living standards, and productivity. According to Hodgson and Poot (2010), immigration has had a positive contribution to economic outcomes in New Zealand. However, the authors are keen to pinpoint the negative economic effects of lower wages, enhanced unemployment, and net fiscal expenses. Regarding population outflow, Glass and Choy (2001) assert that migrants heading to Australia from New Zealand were largely non-skilled since there is a sufficiently common labor market between the two nations. For the rest of the globe, Glass and Choy (2001) highlighted a “brain exchange”, whereby both immigrants and emigrants seemingly more skilled than the New Zealanders who do not leave the country. Nonetheless, Manning and SriRamarantam (2010) found that the distribution of skill of individuals leaving New Zealand has transformed over time. They consider the increasing probability that individuals leaving New Zealand were highly skilled due to the increased demand of skilled workers globally, along with a higher percentage of highly skilled people among the New Zealand population. Even though migrants to Australia usually have an average level of skill, migrants to the rest of the world are typically university graduates.

Nickel (2007) states that an influx of migrants decreases the ratio of capital labor, decreases the real wage, and increases the return on capital and develops a net welfare benefit for the natives.  The benefits realized by the owners of capital are larger than the losses encountered by the suppliers of labor. In the long-term, the increased return to capital facilitates investment. It also increases the real wage, the marginal product of capital. In addition, the capital-labour ratio will return to its initial levels under continuous returns. The natives do not benefit or lose, and the economy grows slightly bigger. Nickel (2007) asserts that in the long run, migrants may eternally decrease the equilibrium unemployment rate. This happens when the migrants make the labor market more dynamic and reduce the mismatch of skills, or if the migrants are more motivated, flexible and reliable suppliers of labor. In the short-term, Nickel (2007) states that increasing the population via increased migration will enhance both the aggregate supply and demand. If the impacts of demand are dominant, migration will probably lead to enhanced output in the short run and increase the pressures of inflation. If the impacts of supply are dominant, there will be smaller impacts on output and reduced inflationary pressures.


2.) Application of a Macroeconomic Model

GCE (Computable general equilibrium) models facilitate an economy-wide perspective, illustrating the multifaceted associations between industries and sectors, imports and exports, and consumption. CGE models are more superior than partial analyses of certain markets or two-sector models. The model leverages extensive data sets to examine how market forces come back to the economy to equilibrium after a shift in immigration, through a transformation in wages, price, consumption, and production. The economic impact of the numerous traits of immigrants (like language, country of origin, age, or skills) and different flows of immigrants can be analyzed.

Nana et al (2009) conducted simulations of the macroeconomic effect of enhanced immigration on the New Zealand economy utilizing the GCE model. Increasing the inflow of migrants by 20,000 per year increased the population of the country by 6.1% over a period of one and a half decades; the population in 2021 was determined to be around 4.81 million. Similar to the baseline, the yearly GDP growth increased to 3.6% from 3.1%. Over the entire period of simulation (15 years), the real GDP per capita increased by 1.5%. The increase in GDP per capita is due to the increased migrants since most of them move to New Zealand to work. It is assumed that capital will increase in response to the enhanced supply of labor to preserve the ratio of capital-labor. Both output and input prices will be lower in relation to the baseline; this reflects the increased supply. Decreased prices enhance the competitiveness of the country on an international scale. Nonetheless, increasing more labor to decrease wages is a strategy that is counterintuitive, especially for an economy that has been determined to be shallow on capital. Already, New Zealand has relatively low wages for an economy that is developed.


Effectiveness of New Zealand’s Immigration Policy

The preceding section has discussed the macroeconomic effects of migration. Macroeconomic effects are a key subset of the array of factors that should be regarded as a living standards structure, which would consider a broad range of economic impacts, along with environmental and social effects. Empirical evidence implies that the net impacts of New Zealand’s present immigration policy are small. Nonetheless, it is probable that much larger impacts could surface in the future due to the interaction of enhanced scale, diversity, and agglomeration. On the other hand, it is probable, although it is hard to determine empirically, that the immigration policy of New Zealand has already had large negative impacts on the country’s macroeconomic performance, and that these negative impacts could last in the long run. Overall, migration policy needs to take into account the full range of benefits and costs, offsets and interactions, and contain preconditions in other policy sectors that may need to be fulfilled of policy is to meet its goals.

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