There has to be a better way

September 22, 2017

If you ask a typical economist if migration is good for a country, they are likely to say yes.

If you ask them why it is good, they will say that the evidence shows that immigration has a small positive impact on the total level of production in an economy – gross domestic product – and increasing GDP is their preferred measure of success. They might even go a bit further and say that immigration modestly increases GDP per person, which is an even better measure of success.

If migration is good for economies, why don’t the promoters of Brexit, Donald Trump or the parties of the right in Europe call for more immigration? Aren’t they interested in improving economic performance?

A cynical answer is that people are intolerant or xenophobic, and appealing to those sentiments is a sure-fire vote winner. We think there is another, more plausible reason for the gap between the views of economists and those of voters: economists are using the wrong measure of success.

GDP is very good at measuring the total value of goods and services traded in markets. It has many advantages as a measure of total output: statistical agencies use standard methodologies to calculate GDP, meaning that it is comparable across countries and through time.

But GDP doesn’t include many of the things that people care about. GDP only counts transactions that take place in markets. Voluntary work and work in households is not captured. All production is given the same weight: as first-year economics students soon learn, guns and butter are counted equally. GDP says nothing about the distribution of income within the community. Nor does it not measure directly any effects on human capital, social capital and the environment.

When it comes to migration, this means we don’t factor in people being annoyed by longer commute times, or crowded beaches, or longer waits for medical treatment.

Economists have known about these issues for years and have been working, with some success, on alternative ways of judging national social and economic progress.

The OECD’s “How’s Life” framework draws on one of the most prominent new approaches – wellbeing economics –  which is based on the work of the Nobel Prize-winning economist, Amartya Sen. Sen says we should focus on the capabilities people have to lead the kinds of life they value and have reason to value. An increase in capabilities results in an increase in wellbeing.

As part of NZIER’s Public Good Program, we have started to use a modified version of the OECD’s framework to sketch out ways that migration policy objectives might change if we focus on improving the wellbeing of New Zealanders instead of on increasing GDP. We are still developing our ideas, but you can see our initial suggestions in special election issue of Policy Quarterly, published by the Institute for Governance and Policy Studies in Victoria University of Wellington’s School of Government here.

What are some examples of how a wellbeing approach might lead to different outcomes?

We argue that the economy should have the capacity to house all migrants and existing residents to a standard that is acceptable. Since we don’t have control over flows of New Zealand citizens or Australians, in practice this means we would recommend lower non-citizen inflows until New Zealand’s housing supply gets better at responding to increases in demand.

We worry that migration is being used to mask policy failures in the New Zealand education system. Our goal should be to admit people who do not have skills that could be supplied by properly educated and trained locals. That would point to smaller numbers of people coming in through working holiday schemes, and reductions in work rights for students.

Because the wellbeing of employers matters, too, we need to view this as a medium-term project: gradually improving the capability of locals as we reduce migrant numbers.

When thinking about environmental impacts, we should aim to bring in migrants who will maintain or increase environmental quality. We need to do more research so we can determine which factors are most important in New Zealand.  But research in other countries finds rising immigration does not necessarily degrade the environment. Effective management of common property resources such as freshwater resources and coastal and marine ecosystems matters more than population variables like population size, growth, density, age and sex composition, urbanisation, fertility and mortality.

As economists, we view migration as a good thing. As migrants ourselves (Peter and his family moved to New Zealand from Australia in 1990, and Julie splits her time between Motueka and New York), we have experienced many benefits, including better jobs, wider cultural experiences, and more diverse friends.

But overstating benefits and ignoring genuinely-held (even if not always evidence-based) concerns about costs has not always led to good outcomes in other countries. The fact that economists are developing tools to surface, discuss, and where possible, address the worries people have is very good news.

Adopting a wellbeing-driven migration policy could make New Zealand an even better place to live. At the very least, it should help us to avoid whatever constitutes the New Zealand equivalent of Brexit.