Views of immigration are changing. Back in the mists of time, when I first came to the conclusion that ongoing demographic changes were going to be important, the voices in favour of a reconsideration of immigration policy were few and far between. Perhaps the first and most notable of these voices was the UN population division. Now things are different, and a series of recent international conferences and reports highlighting the positive advantages of immigration as an economic motor only serve to underline the fact that discussion of this important topic is very much back on the agenda.
Earlier this week the Japanese Ministry of Intrenal Affairs announced that on April 1 2005 there were 150,000 fewer children under 15 in Japan than there were on April 1 2004 . This was the 24th consecutive annual drop.
As a fraction of the total population, Japan’s 13.8 percent for the 0-14 age bracket is among the lowest in the world. Whatsmore this percentage has been on the decline now unabated for the last 31 years. To get a measure of how far the Japanese have gone we could note that US the equivalent figure is currently some 20.7 percent, whilst in Germany the age group has dropped to an all time low of 14.7 percent of the population.
Now before going any further I want to make clear that this post is not primarily about fertility. It is important to take on board the simple fact that any improved fertility in our societies would – if we assume a labour market entry age of twenty as a rule-of-thumb working measure – not have any impact till 2025, and between now and then increased fertility would only constitute a net fiscal liability. The key question is how some of our economies are going to sustain growth during the intervening years (even assuming fertility could be increased, which is far from clear).
Why does growth depend on population? Well there is no big mystery here, the gross national product of any country is simply the result of combining the two principal inputs – labour and capital – with the relevant technological mix.
Now according to another sub-section of economics – growth accounting – you can break-down those annual economic growth numbers into three components: more labour, more capital, and improved efficiency in the combination of the two (or productivity if you prefer). Despite a lot of obfuscation there really is no big mystery at all here.
Now lets apply this simple understanding to the case of Italy. Italy’s working age population is already declining. A recent OECD report on ageing and employment in Italy suggests that if the participation rates remain constant (ie the proportion of the working age population actually employed doesn’t change) then the 2000 workforce of 23.6 million could be reduced to 16.8 million by 2050.
As the OECD points out, the Italian labour force grew at an average rate of 0.4% per year between 1950 and 2000. Under the constant participation assumption it would decline by 0.67% per year. This change is estimated to knock 0.7% of Italy’s growth potential. This may not seem like a lot, but remember that in recent years Italy has been struggling to achieve 1% growth, so even this small reduction may imply a flatline for Italian output.
It is also important to remember two more things here: firstly that the reduction in labour force is only one of the negative consequences, other factors need to be added (or should that be subtracted), and secondly most financial stability projections for things like pensions and health services assume something like a growth potential of some 2%. Zero growth, if it arrived, would have important consequences.
Now all is not lost here. Clearly the entire Lisbon agenda exists precisely to help to find ways to increase employment levels across EU economies. A lot could be said about this process, but this is not the place. I would merely note that to date we have not been startlingly successful in achieving specified objectives. Additionally there is no good reason why we need to put all our eggs in one basket, and lean on one exclusive policy pillar.
If we need to wait 20 years to increase our workforces via improving fertility, importing workers via immigration is obviously a far more rapid (and indeed cheaper) means to the same result. Immigration also has the added advantage that it attracts people over a range of ages, and thus can help with another aspect of our demographic change: the inversion of the age pyramid. Obviously immigration cannot stop this process, but it can ease it.
So it is that, as I mentioned at the start, the positive desireability of immigration is gradually working its way as a theme into our economic literature.
Perhaps the most recent and possibly startling example of this trend can be found in Japan. The latest economic strategy paper of the Japanese government ? the Takenaka Report – advocates that Japan greatly expand the skill sectors where immigrants are permitted, and that the government take steps to guarantee those same immigrants against discrimination in the workplace. Peter has more info and the original Morgan Stanley link over at EuroPolyphony. Now this may well be a case of ‘far too little, far too late’ in the case of Japan, but it is revealing as an indication of the way things are moving.
Again the EU in itsFirst Annual Report on Immigration and Integration published last July had this to say:
Economic theory is relatively optimistic with respect to the economic impact of immigration, suggesting overall welfare gains. Immigrant workers can improve the allocation of workers to firms and may ease labour shortages in areas in which natives do not want to work. As they tend to be more responsive than local workers to labour market conditions, immigrant workers may help to smooth the adjustment of labour markets to regional differences or shocks. Moreover, the increase in human capital from immigration contributes to long-term growth, in addition to the purely quantitative impact of increases in the labour force.
The IMF in last September’s World Economic Outlook had a whole chapter on demographic issues: How Will Demographic Change Affect the Global Economy. The IMF illustrate how migration could help with the aid of a study:
The role that labor mobility could play in helping economies respond to demographic change was investigated in a simple two-country, two-period model…………. The model features an advanced and a developing country, each with a population composed of two age groups (workers and the retired). The population characteristics of each country are set to represent actual UN projections for advanced and developing countries, so that the advanced country ages more quickly than the developing country………..
The implication of allowing full capital mobility (with no labor mobility) was compared with the situation where there is full labor mobility (with no capital mobility). The results?in terms of per capita consumption, a proxy for household?s welfare?of having full capital mobility are broadly similar to those discussed earlier.
Specifically, demographic change will reduce per capita consumption growth in advanced countries and will raise it in developing countries over the next half-century. If there is labor mobility but no capital mobility, the results change. Specifically, the advanced country benefits from labor mobility, and its per
capita consumption loss is considerably less than when there is no labor mobility. This is because the advanced country already has in place the capital stock, and without inward migration the declining size of the domestic workforce?as its population ages?means this capital stock becomes less productive. Consequently, migration cushions the impact of the declining work-force, although growth is still slightly negative over the period.
The IMF goes on to note that migration is, of course, only a ?temporary? remedy to the aging of populations. In the long term, population ageing is a global event, and one that migration alone cannot solve, given that immigrants themselves get old and over time also tend to embrace the fertility standards of the host country. But what this temporary remedy can do is ease an impending crisis and buy time, time to look for better solutions to handling all of this on a global basis.
In conclusion I would simply like to state the obvious: with unemployment running at the 10% level in some major EU countries it will be an uphill struggle to convince some people that systematic immigration is part of the solution to our problems (but then someone once had difficulty getting people to accept that the earth orbited the sun), even with the economic evidence running in favour it will only really be possible to move forward if we can also make progress in improving the labour participation rates amongst the existing population, and that means the Lisbon agenda, structural and labour market reforms etc etc.
Update (8 May): I’ve just notice that New Economist blog has a handy link to a couple pieces on migrant labour in the UK which have some relevance to this post.