ECON413 - Term paper

Nam Phan - ID: 300338806

May 29, 2016
Abstract
This report will analyze the working paper Migration and Macroeconomic performance in New Zealand: Theory and Evidence by Julie Fry from the Treasury
which discussed the variety of impacts of migration on New Zealand economy.
Among the impacts discussed in the paper, addressing the specific skill shortages
and international connectedness appear to be obvious benefits of encouraging an
open immigration policy. Nevertheless, the negative impact on housing market such
as pushing up the house prices and creating asset bubble is non-trivial. Both economic theory and history imply that immigration reduces real wage in host country.
However, this effects seems to be negligible in New Zealand

Addressing the specific skill shortages

New Zealand has been pursuing an open and selective immigration policy since 1987
though it was slightly tighten up in 2003. The point-based system New Zealand has been
using is similar to other developed countries like Australia, Canada and Switzerland. It
can effectively address the specific skill shortages via immigration by granting particular
points for applicants who qualify certain criteria. For an open economy that operates
below capacity, such a policy can improve the productivity in short term. New Zealand
also has a flexible labor market and offers high wage for jobs which are in the skill shortage
list which can potentially attract many skilled immigrants.

Red bars inidicate the hourly wage of jobs which are in skill shortage list. Obviously they offer
higher wage than other jobs

After the introduction of Immigration Act 1987, the productivity of many sectors
which are in the shortage list such as Construction, Financial services and Information
Technology have increased.

Productivity in some sectors have increased

In contrast, the productivity in professional services, education and training have

slightly decreased. By putting these jobs in skill shortage list, New Zealand seeks to
improve the productivity of them in near future.

Productivity in some sectors have decreased

The international evidences from Australia and Canada also prove the same point. In
brief, address the skill shortages through immigration does improve the overall productivity of New Zealand.

International Connectedness

There are many different ways that international connectedness can improve the international economic activity of New Zealand. Bilingual immigrants can facilitate communication, immigrant networks can improve information flows and raise trust. Migration
encourages trade; more trade with improved information flows encourages more migration. Migration also leads to small increases in tourism flows. Nevertheless, immigrants
may cause society disturbances.
With the openness index of 55% to GDP, New Zealand depends greatly on international trade. However distance still remains as a big challenge as it takes longer and costs
more to get New Zealands good and services to many other countries. The fact that
84% by value of New Zealands merchandise trade is transported by sea pins down the
importance to ensure that shipping lines have an incentive to service New Zealand well.
On the other hand, service exports have been increasing and became a significant source
of income. New Zealand tourism industry will benefit considerably from diffusing 100%
Pure New Zealand image to the world.

New Zealand Balance of Payments clearly shows an increasing trend of service exports
(Source: RBNZ)

The author states few statistic facts regarding International Connectedness. Law et.
al (2009) finds that 10% increase in immigrants from a country leads to a 0.6% increase
in exports to that country and 1.9% increase in imports from there. Whereas Qian (2008)
finds exports increase by 0.56% and imports by 1.35% A 10% increase in migrant flows
from a country increases the number of New Zealanders visiting that country by 4% and
raises the number of people from that country visiting New Zealand by 2%.
In short, migrants can spread New Zealands reputation widely which in turns facilitate the international economic activity of New Zealand

Labor Market Impact: Reducing Real Wage

Hatton and Williamson (2006) concludes both economic theory and history tell us that
immigration reduces real wages in host country due to factor price equalization. Nevertheless this impact on New Zealand economy seems trivial.

Real Wage in New Zealand has been slightly increased during 1989-2015 period. It is hard to
conclude that without large immgration the real wage would have increased or decreased

Overall for New Zealand, it can be argued that labour market institutions have responded well to increased immigration since the 1990s.

Housing market impact: pushing up the house

price

The impact of migration on housing market has been long a debate among policy makers
and victims of this population movement. Migration affects housing demand since
immigrants require accommodation and emigrants vacate accommodation. As housing
supply does not adjust immediately, prices will initially go up.

New Zealand House Price Index (HPI) and House Sales data. While the number of house sold
does not increase over the time, the HPI increases significantly which might indicate that
demand outstrips supply

Coleman and Landon-Lane (2007) found that a net migration flow equal to 1% of the
population led to an increase in house prices of around 10McDonald (2013) found that
1% increase in the population caused an 8% increase in house prices over the following
three years International evidence suggested that a positive migration shock of 1% of
population leads to a 1-2% increase in house prices

Migration appears to be positively correlated with house price

Countries with high net migration like Australia and Canada apparently suffer from
the same issue.

International evidence from Vancouver, Canada. House price hugely soared up

International evidence from Australia. House price index increases at much faster pace than
CPI (Source: ABS)

In conclusion, the positive net migration does pressure the housing market.