Could record migration grow New Zealand’s population by 2% without having a significant impact on the economy, inflation, or wages?

New Zealand may have 100,000 new residents by the end of 2023 as strong net migration has returned, reviving concern about how the stretched economy will absorb so many new people.

On one hand, it seems like this could be a remedy to the critical worker shortages which have been putting the brakes on the economy and driving inflation. 

But experts say the impact of migration is much more balanced, with new arrivals adding more demand than supply — at least in the short term. 

Peter Wilson, a principal economist at New Zealand Institute of Economic Research, said migration wasn’t likely to be a silver bullet for structural economic problems. 

“Migration is a story of balance between supply and demand, you’ve got to think about them both,” he said. 

NZ was running out of workers and immigration was one way to cope in the short term, but businesses should be making capital investments to reduce the need for labour long term. 

“The government should be looking to make sure that its migration settings are supporting its long term economic development goals, which are higher productivity and more capital.”

Sheep per capita 

Earlier this week, Statistics NZ reported the ratio of sheep-to-people had fallen below five-to-one for the first time in 170 years.

The Agricultural Production Census found the national flock fell 2% to 25.3 million sheep in June 2022. The human population was 5.1 million at the time, so that’s 4.96 sheep each.  

Wilson said the falling sheep-to-person ratio was likely an example of the New Zealand economy seeking out higher productivity, rather than just the growing population. 

Dairy farmers can make use of semi-automated milking machines, while sheep farmers need crews of shearers to manually shear sheep each year. And so, some sheep and beef farms have converted to dairy. 

“The switch from sheep to cows has probably reduced demand for farm labourers because sheep are a bit more labour intensive,” Wilson said. 

This type of switch helps to grow productivity and lifts gross domestic product per capita. Net migration grows the nominal size of the economy but doesn’t create a lot of extra wealth per person. 

“All the evidence is that you get a bigger economy, but you don't tend to get big improvements in GDP per capita,” he said.  

In his pre-budget speech, Finance Minister Grant Robertson said the Labour government wanted to support industries that could grow high wage, low emission jobs.

The term ‘high wage economy’ was another way of saying ‘more productive economy’. 

“It's just that ‘productivity’ is one of the most boring words in the English language, so we found a better frame for it,” he said. 

One common criticism of the National government was that it propped up the economy with immigration, while failing to invest in things such as healthcare and housing. 

Wilson said successive governments had focused too much on the supply side of migration and not done enough to meet demand.

“And so, the economy did seem to be stretching to breaking point on a couple of dimensions and that was particularly housing, the health system, and in particular transport.” 

Bus bosses boast

Also this week, bus bosses claimed an “intense recruitment campaign”, aimed at finding enough bus drivers to get public transport networks functional again, had been a success. 

Some 560 bus drivers have been hired, mostly from overseas, and will be deployed in major cities around NZ, but mostly in Auckland where the problems are most critical. 

The city alone was short 570 drivers at its worst moment, and while the shortage has halved, the network isn’t expected to be running at full capacity until September. 

Cancelled buses and long queues for the few that are running are a highly visible and frustrating example of the shortage of workers in New Zealand.

The unemployment rate has been at record lows (3.4%), as have broader measures such as the underutilisation rate (9%). Employment has been at record highs (69.5%).  

This has been partly caused by abnormally low rates of net migration during the pandemic. A net 20,000 people left NZ in the year ended March 2022. 

But that trend has dramatically reversed and changed the country’s economic fortunes. 

The year ended March 2023 saw a net 65,400 people flow into the country and NZ is on track for an annual inflow of 100,000 people in the current year. 

Economists at Westpac NZ said that would be the fastest rate of population growth seen in decades, if it were to pan out. 

The rise in net migration would see population growth rising to 2.4% by the close of this year, from just 0.5% at the end of 2022. Westpac no longer expects a recession in 2023. 

This could help to further lower our sheep-to-person ratio and alleviate our critical worker shortage. But it will also boost demand; Westpac no longer expects a recession in 2023. 

The extra buyers would be felt first in consumer goods such as groceries and household furnishings and it would increase demand for housing, particularly for rentals. 

While this could be inflationary in the short-term, the influx of workers could also relieve wage pressures which have been fueling inflation, Westpac economists said. 

“With New Zealand’s immigration policies tuned towards bringing in those of working age and with high skill levels, the rise in arrivals also signals a sizable boost to the nation’s human capital — i.e the size of our labour force and depth of our skills base”. 

Past mistakes 

There has been a lot of housing being built and the government has set aside a lot of money for infrastructure, but it is not clear that capacity has improved significantly. 

For what it is worth, Treasury estimated in the Budget Economic and Fiscal Update that higher rates of migration would support both employment and wage growth. 

Jacques Poot, a professor of Population Economics at the University of Waikato, said this would concern the Reserve Bank, which wants to create slack in the labour market. 

High migration also affects house prices, he said, although not as much as people have sometimes assumed. A 1% increase in population might lead to roughly a 1% lift in prices. 

Wilson said it was unlikely that net migration would suddenly drop back to the 40,000 average Treasury has forecast from 2024 onwards — which itself is a relatively high level. 

To make the most of migrant inflows, NZ’s government needed to get “boring details”, such as planning rules, set right, so that economic capacity can increase smoothly with the population.