Skilled migrants: a solution to our growth dilemma?

Australia’s productivity growth slowdown requires policy changes around skilled migration and economic impact, writes UNSW Business School's Petr Sedlacek

“Growing at its lowest rate in 60 years”; “22 per cent lower than that of the United States”; “Fell from sixth in the OECD to 16th”.

Diehard fans of the Productivity Commission will recognise these quotes. Yes, they refer to Australia's productivity and growth. Or lack thereof. The government is keen to kickstart productivity growth once more, and with good reason. After all, productivity growth has been the key driver of the spectacular improvements in Australians' living standards over recent decades.

Sound like a good way to try to escape today's cost-of-living crisis? Right, so how to do it? Fortunately for Australia, it is not alone in this predicament. In fact, productivity growth is anaemic in most developed countries and, therefore, quite some research has gone into tackling how exactly one could reignite productivity growth. Get ready, though; Australia might just need help from abroad.

Research-and-development tax credits, grants and other subsidies have a solid track record of raising innovation. But a common criticism is that only a small fraction of firms actually push the technological “frontier”. The Productivity Commission reckons, in Australia's case, this is only about 1-2 per cent of businesses. Yes, other companies could piggyback on the success of the small fraction of innovative firms, but such positive “spillovers” are always tricky to measure and quantify.

A different suggestion, however, enjoys almost universal support – among economists and politicians. And it would help not just the most innovative businesses, but also the “bottom 98 per cent” of firms. What is it? A better educated and skilled workforce. But there is a different drawback to this recipe: it takes time! Fortunately, though, there is a fast-track lane: skilled migration.

The virtues of skilled migration are well documented, both abroad and in Australia. They range from increased labour force participation to higher wages and – perhaps most importantly – positive contributions to productivity growth through innovation and a diversity of skills. Overall, Treasury estimates permanent skilled migrants have a (large) positive lifetime fiscal impact. In other words, they hand over to the government considerably more in taxes than what they receive back in public services. At the same time, there is no evidence skilled migration harms Australian-born workers, according to the Committee for Economic Development of Australia.

So how could Australia attract more skilled migrants for its tight labour market in which almost two-thirds of businesses report having trouble recruiting, mainly because of a lack of suitable applicants? Well, this is the snag. According to a 2021 Treasury paper, the dominant source of permanent skilled migration is international students. Specifically, more than one-third of permanent skilled migrants were initially on student visas. In this context, the recently announced cap on international student numbers may raise a few eyebrows.

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Of course, the caps were not designed to raise productivity. They are officially dressed as a measure to strengthen the integrity of higher education. In the background, there are hopes they will help ease the burden migration puts on Australia's infrastructure and housing market. Moreover, as the e61 Institute recently pointed out, there are legitimate concerns an increasing number of international graduates fail to apply themselves successfully. Instead, they engage in “visa hopping” and morph into “permanently temporary” residents.

However, it is important to consider possible unintended negative consequences of policies and weigh them transparently against the desired pros. Various institutions and pundits have already pointed out that capping international student numbers may slow the economy through a direct effect on exports and weaker demand. Australia's already meagre productivity growth might be another baby that gets thrown out with the bath water.

Petr Sedlacek is a Professor of Economics at the UNSW Business School. Prior to joining UNSW, he was a Professor at the University of Oxford (where he is still an Associate Member). His research focuses primarily on labour markets, worker and firm heterogeneity, and the influence of start-ups on the economy. This article was originally published in The Australian.