Immigration and Unemployment: The Economic Evidence

By Freebairn, John | Review - Institute of Public Affairs, March 1997 | Go to article overview
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Immigration and Unemployment: The Economic Evidence


Freebairn, John, Review - Institute of Public Affairs


THERE is a large body of detailed research evidence which shows that changes in the level of net migration have had a negligible effect on the overall rate of unemployment. On the one hand, immigration adds new workers and a new supply of goods and services. But on the other hand, immigrants also add demand for goods and services, thus leading to the creation of new jobs. On average, over the last fifty years, the increase in overall demand and new jobs associated with immigration roughly equates with the number of extra jobs sought by the immigrants.

In the period since World War II, immigration has accounted for about one half of the growth of the Australian work force. From 1950 to 1996, the work force more than doubledfrom under 3.5 million people to 9.0 million people. Immigrants have tended initially to have a higher workforce participation rate and higher skills than native-born Australians. Over time, however, it becomes more difficult to distinguish the immigrants from other Australians.The frequently-expressed view that immigrants take the jobs of existing members of the workforce tells only half of the more complex story of the effects of immigration on employment and unemployment.

Immigrants, just like other Australians, demand goods and services, and increase demand in several ways. First, immigrants spend on goods and services for household consumption purposes, including food, housing, clothing, and recreation. In fact, several studies find a higher average propensity to spend among immigrants than among other Australians. Second, governments provide services to immigrants along with the rest of the population-services such as housing, education and infrastructure. Third, the employment of additional Australians, whether immigrants or native-born, requires complementary investment in machinery, buildings and suchlike by business enterprises. And fourth, these firstround expenditure effects of a larger population then set off a series of second-round, or 'multiplier', effects bringing further increases in consumption, investment and government expenditure.

The increase in overall demand for goods and services is translated into an increase in demand for labour, and other productive inputs, to provide these goods and services. Some of the additional demand can be met by using existing resources better, from stocks, or from imports. But none of these avenues is large, and they are not sustainable over an extended period. Most of the increase in demand arising from immigration then finds its way into an increase in demand for more jobs to provide the goods and services sought by households, businesses and governments.

A key question for the discussion of the link between immigration and unemployment is the relative size of the effects of immigration on increasing either the demand for jobs or the supply of jobs. If immigration adds more workers than demand for new jobs, then it causes pressures for a combination of a fall in real wages and an increase in unemployment. Conversely, if immigration adds more to demand than it does to supply capacity, the pressures are for an increase in real wages and less unemployment. Should the two effects roughly balance, then immigration would have a negligible effect on real wages and overall unemployment. Ultimately the answer to the question is an empirical issue.

Fortunately, considerable research analysing the effects of immigration on employment and unemployment, and on other measures of economic performance, have been undertaken in Australia.

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