Migration: Economic benefits - the Reserve Bank's take

Geoff Bascand, Deputy Governor and Head of Operations at the Reserve Bank of New Zealand, in a speech delivered to Otago University in Dunedin few months back, explained in detail “how migration affects the economy”. He made some pertinent points, which persuaded this newspaper to report on what he explained.

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Demand
Migration increases aggregate demand in the economy. New arrivals require goods and services, and their household spending puts upward pressure on inflation. With housing supply fixed in the near-term, higher demand for housing increases rents and house prices and eventually encourages residential investment. The boost to demand from migrant spending and increasing activity generates additional demand for labour.

However, recent work at the Reserve Bank suggests that the current migrant inflow may be having a smaller impact on demand and inflation than in previous cycles, partly due to the higher share of young migrants. This is probably because younger migrants arrive with fewer financial assets, spend less, and are less likely to purchase a house.

Labour supply
Migration also boosts labour supply. In this cycle, fewer families and more work visas are likely to have boosted migrant participation. While students usually have lower participation, the recent relaxation of rules allowing migrants on student visas to work up to 20 hours per week may have boosted participation.
Current cycle

Much of the current surge in net immigration is explained by weakness in the Australian labour market that has made New Zealand a relatively more attractive place to live. In particular, when migration is caused by weakness in the Australian economy (or the rest of the world), it increases labour supply at a time when our businesses are facing lower demand, and hence need less labour. This results in higher unemployment and lower inflationary pressure.

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