The Long Term Effects of Ageing and Immigration Upon Labour Supply and Per Capita Gross Domestic Product: Australia

The Long Term Effects of Ageing and Immigration Upon Labour Supply and Per Capita Gross Domestic Product: Australia 22-262 Peter McDonald and Jeromey Temple Demographic Insight P/L Canberra: October 23 FINAL REPORT Page

Report Disclaimer This report presents results of a series of GDP per capita, population and labour supply projections calculated for the Department of Immigration and Citizenship as a guide only. Projections are not and should not be considered forecasts. The state based projections should be considered as experimental. The authors do not guarantee, and accept no legal liability whatsoever arising from or connected to, the accuracy, reliability, currency or completeness of any material and accept no responsibility for any decisions that users may make as a result of using the data herein. The authors recommend that users exercise their own skill and care with respect to their use of these data and that users carefully evaluate the accuracy, currency, completeness and relevance of the resource for their purposes. Page 2

EXECUTIVE SUMMARY Like other industrialized countries, Australia is facing the challenges of population ageing. Population ageing is the result of sustained low fertility rates in combination with increasing levels of life expectation. In this situation, the size of the aged population relative to the working age population increases. Ageing is a challenge because the public costs of aged persons are higher than the costs of persons at other ages. The effects of ageing can be offset through economic growth which is dominated by the rate of growth of productivity. Nevertheless, for any given improvement in productivity, increases in labour force participation and increases in the relative size of the population in the working age groups have an additional beneficial effect upon addressing the ageing challenge and, from that perspective, are worthy of policy consideration. This report examines the extent to which the labour supply to population ratio and the growth rate of GDP per capita are influenced by changing levels of net overseas migration to Australia. Specifically, the objectives of the report are:. To model the effects of varying levels of net overseas migration on future population size, the age structure of the population, the size and age structure of the labour force and the growth of GDP and GDP per capita. 2. By examining changes in the marginal effects of increasing levels of net overseas migration on the growth rate of GDP per capita, to determine whether any particular migration level or range of levels marks a turning point where the advantage of further migration is likely to be outweighed by the disadvantages of increased population. 3. To examine the effects of assuming that migrants have the same or different levels of labour force participation and labour productivity compared with the general population. 4. To compare the relative outcomes for states and territories of varying assumed levels of international migration to Australia. Page 3

The report s focus is not upon levels of labour demand and immigration in the immediate future but upon the impact of immigration on the growth rate of GDP per capita across a 5-year period. It examines how migration changes the age structure of the population and the impacts that these changes have upon the labour force and GDP growth over a long period of time. The report provides results based upon a set of assumptions that are described in detail in the report. While every effort has been made to make reasonable assumptions about the future, the report has limitations and these are described in Appendix. Note also that only the production side of the equation is modelled; no account is taken of costs such as demand on infrastructure, services and externalities such as congestion or pollution. The report initially examines recent trends in net overseas migration and age and sex specific labour force participation in order to establish the early trajectories to be used in the models. It is notable that, in 22-3, the two main permanent categories (skilled and family) contributed a total of only 8,6 to Net Overseas Migration (NOM). This number contrasts with a total in the realised permanent Migration Program intake of 9,, a difference of 9,4. This difference is very close to the combined NOM for the four major temporary migration categories (subclass 457, students, working holiday makers and tourists) of 9,8. Thus, much of the permanent program intake is taken up by people shifting onshore from a temporary to a permanent visa. These onshore changes also explain why temporary arrivals remain well above temporary departures over the long term. The report concludes that, aside from short-term surges in temporary movements, it is the level of the permanent migration program that largely determines the level of net overseas migration. In recent years, labour force participation has fallen for those aged less than 25, especially for men. In the prime working ages (25-54), participation has been static for men but has risen slowly for women. At the older ages, participation rates have risen strongly, especially for women. The report concludes that participation strategies are essentially low-skills strategies. They provide employment to those that need it and Page 4

reduce the government s social security bill, but do not meet the higher skills needs of the broader economy. Immigration has continued to be strong in Australia because the demand for young, skilled workers has out-stripped the domestic supply of such workers. Young skilled migrants complement the additional workers at older ages generated by increased older age participation. Two innovations are introduced in the modeling in this report: The model allows for migrants to have different labour force behaviour and different labour productivity compared with the general population while their children take on the labour force characteristics of the domestic born. The modelling is done at the State and Territory level as well as at the national level. The effects of different levels of migration upon the outcome measures are described using four scenarios of future net overseas migration: zero,,, 8, and 3, (Table ES). Subsequently, the marginal effects of each successive increment of, migrants are investigated for annual net migration levels ranging from zero to 36,. Table ES. Population outcomes for Australia with varying levels of net overseas Level of Net Overseas Migration Population 263 (millions) Rate of Population Growth, 253 (%) Per Cent of Population Aged 5-64, 253 (%) Per cent of Population Aged 65 and Over, 253 (%) 26 56 28.4, 32.5 58 25.2 8, 38.8 6 23.4 3, 46.2 62 2.2 Current level 23.7 67 4. Ageing of the Australian population is inevitable but it is significantly reduced with increasingly higher levels of net overseas migration. But do these gains justify the substantial increase in population resulting from migration? Note also that the rate of Page 5

population growth falls continually in Australia even if net migration is as high as 3, per annum. This is due to the substantial fall in natural increase in an ageing population. The comparative marginal effects of net overseas migration on population and labour force growth By 223, the marginal effect of migration on labour force growth is always greater than its marginal effect on population growth at every level of migration and the difference between the two remains much the same from low migration to high migration (Figure ES). That is, the first, migrants (NOM shifting from zero to,) and the last, increment (NOM shifting from 35, to 36,) contribute about equally to the difference in the marginal effects on labour force growth and on population growth. By 233, the marginal effect on labour force growth remains larger than the marginal impact on population growth right up to the 35, level but the effect is much reduced at the high end of migration compared to the low end, the first, migrants. The largest differences between the marginal effects on the population and labour force growth rates are for 243 although, once more, the difference in the two effects is much reduced at the high migration end. Page 6

Figure ES. The Marginal Effects on the Rate of Labour Force Growth and the Rate of Population Growth of a, Increase in Net Overseas Migration for the Years 23, 223, 233, 243 and 253 for Different Assumed Levels of Annual Net Migration (zero to 36,).7 23 223 233 243 253.8.7 23 223 233 243 253.6.6.5.5.4.4.3.3.2.2.. 4 7 3 6 9 22 25 28 3 34 4 7 3 6 9 2 2 2 5 2 8 3 3 4 Population Growth Labour Supply Growth As these results are all due to movements in the age structure of the population resulting from migration, it may be that 243 stands out in this way because of the impact of the second generation born in Australia entering the labour force while their migrant parents are still in the older ages of the labour force. By 253, the migrant parents have retired and the outcomes are not as favourable when constant numerical migration is assumed. Indeed, by 253, at higher levels of migration, the marginal impacts on labour force growth and population growth of an additional, migrants are the same meaning that the labour force to population ratio is not increasing. This situation applies for net migration levels of around 22, and above. Thus, the conclusion about what might be appropriate levels of migration based on improvement to the labour force to population ratio varies according to the end point year at which the evaluation is made. If the end point for evaluation is 253, increases in NOM are favourable up to about 22, per annum. If the end point for the evaluation is 243 or any earlier year, then there is continuing benefit using this criterion up to NOM levels of 36, per annum. Page 7

Effects of varying levels of migration upon GDP per capita The impact of retirements on the labour force in the next decade leads to substantial falls in the growth rate of GDP per capita irrespective of the level of migration, but the extent of the decline is much reduced as the level of migration rises (left panel of Figure ES2). GDP per capita growth rises between 225 and 235 after which it falls again. The right panel of Figure ES2 shows the effect of assuming that the growth of labour productivity is higher for migrants than for non-migrants. This is justified on the grounds that most migrants are selected on the basis of skill or they are family members of a person selected on the basis of skill and hence more likely to be skilled themselves; the children of immigrants normally have higher achievement than third generation Australians; and, by meeting an unfilled labour demand, migrants are able to help to raise the productivity of other workers, in particular, young skilled immigrants are likely to have complementary skills to older Australian workers who remain in the labour force and hence enable them to raise their productivity. Assuming that migrants have higher growth of labour productivity makes a very large difference to the results roughly doubling the increment from the immediately lower level of assumed migration of GDP per capita growth. This is an experimental result but it indicates that the argument that migrant s increase Australia s productivity needs to be considered Compared to the past, the current methods of immigrant recruitment seem also to be increasing the labour force participation of immigrants. Page 8

Figure ES2. The effects of varying levels of migration upon the growth rate of GDP per capita, Australia, 23-253 under two assumptions about migrant labour productivity.9.8 8 3.9.8 8 3.7.6.5.4.3.2.7.6.5.4.3.2 2 3 2 5 2 7 2 9 2 2 2 2 3 2 2 5 2 2 7 2 2 9 2 3 2 3 3 2 3 5 2 3 7 2 3 9 2 4 2 4 3 2 4 5 2 4 7 2 4 9 2 5 2 5 3 2 3 2 5 2 7 2 9 2 2 2 2 3 2 2 5 2 2 7 2 2 9 2 3 2 3 3 2 3 5 2 3 7 2 3 9 2 4 2 4 3 2 4 5 2 4 7 2 4 9 2 5 2 5 3 Assuming migrants have the same labour productivity growth as nonmigrants (.6%) Assuming migrants have higher labour productivity growth (2%) The marginal effects of, additional immigrants on the growth rate of GDP per capita are shown in Figure ES3 for the same two assumptions about migrant productivity. As discussed above in relation to labour supply, the outcomes at 243 are more favourable than the outcomes at 253 presumably because of the double effect on the labour supply in 243 of the immigrants and of their Australian-born children (left panel of Figure ES3). At 243, the marginal effect of an additional, migrants is still strong when migration is as high as 36, per annum. By 253, however, the marginal effects are much lower and leveling off rapidly when the level of migration reaches about 22, reaching zero at a level of migration of about 26,. Page 9

Figure ES3. The Marginal Impact on the Growth Rate of GDP per Capita of, Additional Migrants for Different Levels of Net Overseas Migration, as at 223, 233, 243 and 253 under two assumptions about migrant labour productivity.8.6.4.2 23 223 233 243 253.35.3.25 23 223 233 243 253..2.8.5.6.4..2.5 -.2 4 7 3 6 9 2 2 2 5 2 8 3 3 4 Assuming migrants have the same labour productivity growth as non-migrants (.6%) 4 7 3 6 9 2 2 2 5 2 8 3 3 4 Assuming migrants have higher labour productivity growth (2%) Using the data in the right panel of Figure ES3, the marginal effects are considerably larger (note the change in the vertical scale) for all outcome years but the relative difference in outcomes at 243 and 253 are lower than in the left panel of Figure 9. Beneficial effects of migration on GDP per capita are still evident for both 243 and 253 with migration at a level of 3,. Beyond that level, the 253 marginal effects move rapidly to zero. To draw a more definite conclusion, if the aim is to optimize GDP per capita growth through to 253, NOM between about 6, and 22, seems to do this if it is assumed that the migrants have Australian labour productivity growth. If it is assumed that migrants have a higher level of labour productivity growth, NOM up to 3, still provides worthwhile increments to the rate of growth of GDP per capita. Page

Conclusions: Australia. In relation to economic outcomes including labour supply, GDP and GDP per capita, migration is able to moderate the effects of population ageing to a large extent in both the short and the long term. 2. In the current short term, zero migration would sharply reduce the growth rate of the economy necessitating economic adjustment measures. 3. Positive outcomes are contingent upon migrants being selected on the basis of age and skills as they are in present policy. Highly skilled young immigrants are likely to be a complement to the increasing labour force participation of the domestic population at older ages. Outcomes are greatly enhanced if migrants have high labour productivity. 4. Outcomes are also enhanced if migrants have high levels of labour force participation and low levels of unemployment. Selecting permanent skilled migrants from among those already employed in Australia on temporary residence visas is likely to support this objective. A skilled temporary migration stream that is responsive to Australian labour demand is a necessary component of this strategy. 5. The analysis points to levels of net overseas migration in excess of at least 6, being desirable in the short and the long term from the perspective of the economic outcomes used in the report. Very high migration, up to 36, per annum continues to produce small beneficial outcomes to about 243. However, by 253, the marginal impact on the growth rate of GDP per capita is rapidly approaching zero with levels of migration in excess of 26,. 6. To draw a more definite conclusion, if the aim is to optimize GDP per capita growth through to 253, NOM between about 6, and 22, seems to do this if it is assumed that the migrants have Australian labour productivity growth. If it is assumed that migrants have a higher level of labour productivity growth, NOM up to 3, still provides worthwhile increments to the rate of growth of GDP per capita. 7. It is not suggested here that contemporary migration policy should be based upon the marginal impacts of migration upon the growth rate of GDP per capita in Page

253. Contemporary policy should be designed to be highly responsive to the needs of the Australian labour market in the present and in the immediate future. What the analysis shows is that, even relatively high levels of migration, do not have negative effects on the economic outcomes examined in the report, either in the short-term of the long-term. On the contrary, the effects of relatively high levels of migration (5,-26,) on the growth rate of GDP per capita are positive. State and Territory Differences With NOM set at zero, the labour supply in New South Wales in the next 5 years would fall from 3.8 million workers to 2.9 million, that is, by 24 per cent. The speed of the decline in the labour supply would be accelerating. With zero net migration, falls in labour supply over the 5 years would also apply to the Northern Territory (46%), Tasmania (6%) and South Australia (2%) while Victoria s labour supply in 263 would be the same as it is now. Even with NOM of,, the labour supply would fall in the next 5 years in Tasmania and the Northern Territory and the increase in New South Wales would be small (5%). In contrast, Western Australia s labour supply, even with zero NOM, would increase by 78 per cent in the 5 years to 262 and by 23 per cent with NOM of,. Victoria and Queensland tend to occupy the middle ground with outcomes similar to the national average. With zero net overseas migration, the labour supply would reach negative growth in the next 4 years in all of the states and territories, excluding Western Australia. The labour force growth would become negative in New South Wales and the Northern Territory in 26, in Tasmania in 27, in South Australia in 22, in Victoria in 23, in the ACT in 246 and in Queensland in 25 (Figure 25). Negative labour supply growth is still experienced in the next 4 years in all these states and territories with net migration of, and in Tasmania even with net migration of 8,. Declining labour supply is not in itself a problem but the rapid declines that some states and territories would experience in the near future in the absence of immigration would Page 2

require considerable economic adjustment, especially when there are no plans for decline. When the majority of jobs are in services of one type or another and in jobs where the speed of productivity improvement is slow, a declining labour supply will mean that services will be more available to those that are able to pay. This is not an ideal scenario in the context of an ageing population that will require services. Declining labour supplies are also likely to be a problem in addressing Australia s infrastructure back-log as much of the construction industry is labour-intensive. Construction of new housing is a particular example of this problem. Figure 28 in the report body shows for each state and territory the marginal effects upon the growth rate of GDP per capita of an additional, migrants for levels of national migration from zero to 36, and four points in time. The differences between outcomes in 223, 233, 243 and 253 are similar to what has already been described for Australia as a whole so here the discussion will be focused only on outcomes in 253. The initial effects as migration rises above zero are largest by far in the Northern Territory and quite large in New South Wales. The initial effects are moderate in Victoria, Queensland and the ACT but low in South Australia, Western Australia and Tasmania. Using the point at which the marginal effect reaches.5 to show the differences between states as migration moves to higher levels, this point is reached in Western Australia when migration is at,, in South Australia at 8,, in Queensland and Tasmania at 2,, in Victoria at 25,, in New South Wales at 27, and in the ACT at 32,. Thus, from a state and territory perspective, the best national level for net overseas migration based on the criterion used here varies widely. The impending declines in labour supply growth are much more immediate and severe in New South Wales and South Australia and, in relation to GDP per capita growth, these two states need migration in the short term more than Victoria and Queensland do. In Western Australia, the GDP per capita growth rate starts at a very high level compared with other states and territories and does not fall away as rapidly in the coming years. Different levels of migration also do not change the growth rates as much as is the case in Page 3

the other states and territories. Western Australia s population is younger and ageing is taking place much more slowly than in other states and territories. Hence, the beneficial impact of migration on the age structure and on the labour supply is not as great. In the Northern Territory, GDP per capita growth begins at a high level but then falls away continuously and strongly irrespective of the level of migration. The ACT also begins at high level, falls initially but then levels off in the 22s before resuming the decline from the 23s onwards. Variations in GDP growth are associated with variations in population growth. Trends in the growth rates of GDP per capita, therefore, are more meaningful. However, as with the labour supply, sharp changes in the growth of GDP imply a problem of economic adjustment. Figure 26 shows that zero migration is associated with immediate precipitous decline in the growth rate of GDP in all states and territories. The declines are moderated quite significantly by immigration. Accordingly, zero migration is a very unlikely prospect in the next decade. Page 4

BACKGROUND Like other industrialized countries, Australia is facing the challenges of population ageing. Population ageing is the result of sustained low fertility rates in combination with increasing levels of life expectation. In this situation, the size of the aged population relative to the working age population increases. Ageing is a challenge because the public costs of aged persons are higher than the costs of persons at other ages. Rapid ageing is threatening the viability of social security systems in some European countries (European Commission 25). Australia s fertility rate, now around.9 births per woman, is among the highest in the OECD countries and, if it remains around this level, ageing in Australia will be a substantially smaller challenge than it will be in some countries of Europe and East Asia where fertility rates have been below.5 births per woman for many years. While the Australian challenge of ageing is moderate compared to most other OECD countries, it remains an important consideration in planning for Australia s longer-term future: Population ageing reduces the proportion of working age people supporting people aged over 65 years. The rate of improvement in average living standards is projected to fall, placing pressure on Australia s capacity to fund the spending pressures associated with an ageing population, particularly in terms of health spending (Department of the Treasury 2: vii). The Intergenerational Report (Department of the Treasury 2) discusses the potential for the effects of population ageing to be modified by changes in labour productivity, labour force participation and the proportion of the population in the working age. As the report concludes, among these three possibilities, economic growth is dominated by the rate of growth of labour productivity. Small changes in labour productivity can have a larger effect on the growth of per capita gross domestic product than relatively large changes in participation and population age structure. The Intergenerational Report (Department of the Treasury 2) considers that the best opportunities for improved labour productivity lie in improvements to social and economic infrastructure and that these should be vigorously pursued. Nevertheless, for any given improvement in labour Page 5

productivity, increases in labour force participation and increases in the relative size of the population in the working age groups have an additional beneficial effect upon reduction of the ageing challenge and, from that perspective, are worthy of policy consideration. While having positive macro-economic effects, increases in labour force participation may have detrimental effects as well. For example, if participation in the work force draws young people away from education, it may reduce future levels of labour productivity and social integration. Increased participation at old ages may mean the diminution of the opportunity for a well-earned retirement. Parents of young children may also wish to combine part-time work with parenting and pressure to work full-time would reduce their capacity to do so. This, in turn, could reduce fertility. Increases in paid parental leave could potentially reduce labour force participation but still be regarded as socially desirable. Thus, it is relevant to ask what forms and levels of increased labour force participation are desirable. Likewise, increases in the population of working age through immigration can have detrimental effects deriving from rapid population increase. If planning and provision lag behind population growth, rapid increases in population will lead to increased housing shortages, urban congestion, strains on the provision of water and energy and environmental degradation. Even if planning for future population growth is well done, rarely the case in Australia, there will always be a limit where the improvements to age structure brought about by immigration are no longer worth the effort that is involved in managing the consequent population growth. In this report, we examine the marginal impacts of immigration upon the age structure of the population, upon the labour force and upon the per capita rate of growth of gross domestic product (GDP). It is well known that there are diminishing returns to scale in relation to the impact of immigration upon population ageing (McDonald and Kippen 2). In previous reports, McDonald and Temple suggested that the marginal increases in growth of GDP per capita tended to level off more markedly when annual net overseas Page 6

migration rose above about 8, (McDonald and Temple 29) and that there are indications that migration in the range of 6, to 2, provides the most beneficial impact on the rate of growth of GDP per capita by about 25 (McDonald and Temple 2). This report re-examines these findings using more up-to-date and more detailed input data. In the two previous reports, it was assumed that migrants took on the age-sex specific labour force participation rates, hours worked, full/part time work propensity and labour productivity of the Australian population as soon as they arrived in Australia. This report relaxes this assumption by defining specific labour force parameters for immigrants and for non-immigrants. Given that many immigrants are chosen on the basis that their skills match the skills in short supply in the economy, it might be argued that immigrants have or generate higher labour productivity than non-immigrants. This report includes a scenario in which labour productivity is assumed to be higher for immigrants than for the general Australian population. Second, this report also provides results separately for each State and Territory on the hypothesis that the results will be highly variable across the country. The main purpose of the report, however, remains to examine whether some (approximate) level of immigration stands out as having a superior balance of long-term outcomes or whether no such conclusion can be drawn? The criteria examined in this report are not the only criteria that might be used in determining the size and nature of an immigration program. The paper does not consider the specific skill demands of particular industries and what ensues if these skilled demands are not met. We do not consider what the impacts are upon the economy if there is a gross excess of labour demand over labour supply, or vice versa. Wage inflation and rising interest rates are the theoretical consequences of excess demand (McKissack et al. 28) but how large and how significant might these be? The theoretical outcome of an excess of supply over demand is unemployment. Successive Australian governments have endeavoured to maintain immigration at a level that reflected the balance between labour demand and labour supply. In the past two decades, governments have attempted Page 7

to devise approaches to immigration that are rapidly responsive to changing labour demand. The paper does not consider the impacts of immigration upon wages nor the fiscal impacts of immigration. In regard to wages, a recent paper by Bond and Gaston (29) concluded that, in Australia, immigration has a positive impact upon the wages of the domestic labour force, not a negative impact as is often assumed. The authors postulate that this may indicate that there is complementarity rather than competition between migrant workers and existing workers in the economy. This would occur if immigrants filled skill gaps that were in short supply among existing workers in the economy. An associated argument has been made by McDonald and Temple (26). They argued that there is complementarity rather than substitutability between workers of different ages implying that the skills introduced through young migrant workers are a potential complement to an improvement in productivity among the increasingly larger numbers of older workers that result from increased participation rates at older ages. This is all consistent with the notion that immigrants may enhance labour productivity growth. It has been shown that immigration has a generally positive impact on public fiscal balances (Access Economics 28). This is also indicated by the improving fiscal outcomes in the three Intergenerational reports which assumed successively higher levels of net overseas migration (McDonald 22). However, the impact on fiscal balances is not examined in this report. SHORT-TERM AND LONG-TERM CONSEQUENCES OF MIGRATION The previous report in this series (McDonald and Temple 2) included a discussion of the then contemporary labour market context. Since the publication of that report, labour demand in Australia has softened somewhat as new projects in the resources sector have been put on hold reducing the projected demand for construction workers in the resources sector. Nevertheless, in the year to June 23, employment grew by.42 per cent or 63, (ABS Labour Force, Australia, Detailed - Electronic Delivery, June 23). Page 8

Growth of employment was strong in wholesale trade, warehousing and transport, in accommodation and food services, and in professional services including health and education (DEEWR 23). These are industries driven to a large extent by increases in living standards and, in both the short and long terms, increases in living standards are likely to contribute significantly to increased labour demand. It should also be remembered that net employment growth does not take account of the growing numbers of retirements from the labour force of the baby-boom generation and the leveling off of the numbers of labour force entries at young ages. Before the labour force can grow, the losses due to retirements must be offset and, with the ageing of the population, this becomes an increasingly important issue in the future. By taking a longer-term perspective, retirements from the labour force are factored into the conclusions of this report. While short term movements in labour demand are all-important in determining contemporary levels of immigration, ageing, the focus of this report and the Treasury s Intergenerational Reports, is a long-term issue. Hence, this report is not so much concerned with levels of labour demand and immigration in the immediate future as with the impact of immigration on the growth rate of GDP per capita over a 5-year period. It examines how migration changes the age structure of the population and the impacts that these changes have upon the labour force and GDP growth over a long period of time. Given this perspective, the report uses hypothetical long-term scenarios for population, participation and productivity. As the report focuses on international migration, a wide range of assumptions are made about future international migration but only one assumption is made about future fertility and future mortality. THE COMPOSITION OF NET OVERSEAS MIGRATION (NOM) It is important to note that net overseas migration (NOM) includes both permanent and long-term temporary movements into and out of Australia including the movements of Australian and New Zealand citizens. From July 26, the ABS changed its definition of a migrant in a way that made it more likely that temporary migrants were included in NOM and, hence, in the Australian population count. Immediately the definition was Page 9

changed, NOM increased substantially and it has remained on a higher plane ever since. (Figure ). In the six years to 3 June 26, NOM averaged 22, per annum. In the first year after the definition was changed, NOM leapt to 233, and in the years ending 3 June 27, actual and projected NOM averages 239,, almost double the number prior to the change in definition of NOM. The doubling of NOM is not due simply to the change in definition; it is also due to the fact that the movements that make up long-term temporary migration began to rise sharply from 26 onwards. Figure. Net Overseas Migration (NOM) Australia, Year Ending 3 June Actual Projected Sources: Actual, ABS, various issues of Australian Demographic Statistics. Projected, DIAC, The Outlook for Net Overseas Migration, March 23. As at March 23 (DIAC 23a), including New Zealand citizens, there were,765, people in Australia on a temporary basis, about one million higher than the equivalent figure ten years beforehand. The breakdown of these people across visa categories is shown in Table. Not all of these people are resident in Australia on a long term basis. To be counted into the population, a new arrival must spend 2 months out of a given 6 month period in Australia. Most Visitors and a majority of Working Holiday Makers do not stay long enough to be counted into the population but the reverse is true for most people in all of Page 2

the other categories. Virtually all long-term temporary residents are permitted to work although some have restricted work rights (Students and Working Holiday Makers). For most temporary residents, employment in Australia is a necessary condition of their continued residence in Australia; without employment, most (including students) would not be able to support themselves in Australia. The numbers in Table also include secondary applicants, that is, the partners and dependent children of the principal applicant for the particular visa type, but partners of temporary visa holders and their children if of sufficient age are also permitted to work. Conservatively estimated, about one million temporary residents are in the labour force representing about one in 2 of all workers in the Australian economy. Table. Temporary Entrants in Australia on 3 March 23 Visa Category Number in Australia as at 3 March 23 Visitor (mainly tourists) 248,25 Working Holiday Maker 7,7 Bridging 8,82 Student 332,47 Temporary Skilled (subclass 457) 9,92 Temporary Graduate (subclass 485) 4,9 Other temporary visa 3,3 New Zealand citizens 632,89 TOTAL,765,45 Source: DIAC 23a: 3. The previous report in this series (McDonald and Temple 2) predicted a fall in the number of international students coming to Australia primarily because of changes that were made in February 2 to the occupation categories that were accepted for permanent residence in Australia but also because of the global financial crisis and competition from other countries in the context of a high Australian dollar. In just one year, from 28-9 to 29-, changes in the movements of international students reduced NOM for Australia by over 57,. Net migration for other temporary categories also fell sharply across these two years as a result of the global financial crisis, most notably 457 visa holders (a fall of 9, net) and New Zealand citizens (a fall of 9, Page 2

net). These latter two categories of temporary immigrants are the most responsive to changes in labour demand. Both movements fell off during the global financial crisis but rose strongly after the bottom of the crisis, and both are now moderating as a consequence of the softening of the Australian labour market. In the first five months of 23, the number of offshore grants of subclass 457 visas was about 2 per cent lower than in the first five months of 22. From 3 March 23, all international students completing their degrees in an Australian higher education institution will be able to remain in Australia (visa subclass 485) for a period of 2-4 years depending on the level of the degree. During this period, they will be permitted to work. Initially, graduating students taking up this opportunity will not contribute to an increase in NOM because they will have already been counted into the Australian population while they were completing their degrees. However, over time, this policy change will stimulate NOM through the delayed departure of students and, more speculatively, through an increase in student arrivals attracted by the new policy. These likely trends are displayed in the DIAC projections of changes in the student movement shown in Table 2. Another very important feature of Australian migration in the past decade is that an increasingly higher percentage of new permanent residents in Australia are already resident in Australia on a temporary basis when they are granted their permanent residence. Most of these temporary residents, mainly 457 visa holders and international students are already in the Australian labour force when they obtain their permanent residence and hence they do not add workers to the Australian labour force. Table 2 shows the number of arrivals, departures and net migrants for each category of permanent and long-term migrant. It is notable that, in 22-3, the two main permanent categories (skilled and family) contributed a total of 8,6 to NOM. This number contrasts with a total in the realised permanent Migration Program intake of 9,, a difference of 9,4. This difference is very close to the combined NOM for the four temporary categories (457, students, working holiday makers and tourists) of 9,8. Note these categories relate to the visa type at the time of arrival in Australia and this visa type is not Page 22

necessarily the visa type that enabled them to remain in Australia. In other words, much of the permanent program intake is taken up by people shifting onshore from a temporary to a permanent visa. These onshore changes also explain why temporary arrivals remain well above temporary departures over the long term. We cannot expect that temporary departures will start to catch up with temporary arrivals at some time in the future. Put simply, while there may be lag effects related to temporary migration fluctuations and (as in the years 28-), the size of NOM in the longer term is determined by the size of the annual permanent migration program intake, plus the permanent Humanitarian intake, plus the balance between NOM for Australian and New Zealand citizens. If the annual permanent migration program intake remains around 9, and the Humanitarian intake is 2,, we can expect NOM for Australia to be in the order of 23, as it has been or is projected to be on average over the years, 26-7 to 26-7. Temporary migration has become a very important source of future permanent residents and citizens but it does not drive the longer-term average level of NOM. Table 2. Estimated Contributions to Net Overseas Migration in 22-3 and 26-7 by Migration Categories Category 22-3 26-7 Arrivals Departures NOM Arrivals Departures NOM Permanent Skilled 47.7 3.9 43.8 48.4 3.9 44.5 Permanent Family 39.2 2.4 36.8 4. 2.6 38.6 Humanitarian 4.. 4. 6.9. 6.9 Subclass 457 47.3 9.6 27.7 5.6 2. 3.5 Students 88.2 49.5 38.7 9.3 46.5 62.8 Working Holiday 6.8 25.4 35.4 62.7 28.2 34.5 Tourists 3.2 2.2 8. 28.7.5 7.2 Australian citizen 8.5 84.6-3. 83.4 9.6-8.2 New Zealand citizen 6. 22.3 38.8 58.5 28.4 3. Other 34.5 48. -3.6 35.2 5. -5.9 TOTAL 54.7 268. 236.7 534.9 284. 25.8 Source: DIAC 23b: 6. Page 23

CHANGES IN LABOUR FORCE PARTICIPATION By OECD standards, the Australian participation rate (ages 5-64) is not especially low as is sometimes inferred; it is ranked th out of 3 OECD countries (Department of the Treasury 2: 27). Changes in Australia s labour force participation rates by sex and age group between 2 and 22 are shown in Tables 3 and 4. For men in age groups from 25-54 years, there has been little change in participation over this period. For prime age males (those aged 25-54), this is significant because considerable effort and funding has been put into welfare to work programs during this period with seemingly very little impact on aggregate participation. This is even more surprising given the fact that labour demand was very strong during most of these years. The conclusion to be drawn from this experience is that increases in participation for this group are very difficult to achieve despite the social and economic value of doing so. The Intergenerational Report (Department of the Treasury 2) points out that the participation rates of prime age males have been largely constant for a decade across comparable OECD countries as well. The IGR is not positive about the potential to increase participation among prime age males although it does point out that Australia s rate is a little lower than rates in Canada, New Zealand and the United Kingdom while being higher than the United States (see Table 5). The Access Economics open doors scenario constructed for Skills Australia assumed in contrast that participation for prime age males would rise substantially and that, for those aged 3-45, it would rise to 96 per cent in 5 years. This would be achieved through post-school training and adult education. This higher level of participation is said by Skills Australia to be achievable because international evidence shows that comparable countries to Australia do achieve higher rates of participation (Skills Australia 2: 3). However, none of the other Englishspeaking countries have rates of participation for men in this age range that approach 96 per cent (Table 5). Access Economics (29) points out that this high level of Page 24

participation would result if all prime age Australian males had post-school qualifications on the assumption that those gaining these qualifications achieved the same participation as those that already have these qualifications. While for reasons of social inclusion it would be desirable that all prime age males gained post-school qualifications in the next 5 years, this seems to be an unlikely eventuality, particularly for those who have been many years out of education. Table 3. Labour Force Participation Rates, Males by Age Group, Australia 2-22 (July) 5-9 2-24 25-34 35-44 45-54 55-59 6-64 65+ 2 59.3 87.5 93.2 9.7 87. 7.6 46.5. 2 59.9 87. 9. 9.5 87.6 7.2 47..2 22 56.9 85. 9.6 9.8 87.8 7.4 48.4.5 23 54.9 85. 9.2 9.3 87.4 72.3 5.5.5 24 58. 83.6 9.3 9.5 87. 75.4 5.9.4 25 57.4 85. 9.8 9.2 87.9 76.2 54.8 2.2 26 57. 85.4 9.9 9. 88.7 77.5 56. 2.4 27 57. 84.8 92.3 9.3 89. 77. 56.6 3.4 28 57.8 84. 92.4 9.6 88.3 76.5 57.7 4.7 29 53.4 84.4 9.6 9.4 88.7 79.2 58.4 5.8 2 53.6 83. 9.3 9.2 88.4 8. 6.7 5.3 2 52.4 82.6 9.6 9.7 88.6 8.5 6. 5.9 22 5.3 8.7 9.9 9.7 87.7 8. 62.8 6.9 Source: Australian Bureau of Statistics. Labour Force, Australia, Detailed-Electronic Delivery. Cat. No. 629..55. Table 4. Labour Force Participation Rates, Females by Age Group, Australia 2-22 (July) 5-9 2-24 25-34 35-44 45-54 55-59 6-64 65+ 2 58.9 77.9 7.8 7.5 7.3 48. 2.7 2.9 2 59.2 78.5 7.3 72.3 7. 49.2 2.8 3.4 22 56.8 76.5 7.5 7.2 73.3 49.4 23.8 3.3 23 58.5 76.9 7.2 72.2 73.2 5.7 27.8 3.2 24 59.6 75.9 7. 7.3 73.6 53.7 3.8 3.5 25 6.6 76.6 72.7 73.2 75.7 55.8 3.6 4.4 26 6.2 78.5 72.7 74.2 76.3 58.7 32.9 4.2 27 58.8 77.2 72.5 74. 77.4 59. 36.7 5.2 28 59.6 79. 73.5 75. 77.3 6. 37.6 5.6 29 55.5 75.9 72.7 75.6 78.2 63. 4.5 5.9 2 55.8 76.5 72.5 74.5 78.8 63.5 43.2 6.7 2 55. 76. 73.7 75.7 78.3 65.8 44.4 6.8 22 55.7 75.2 73.9 75.6 77.2 65.5 45. 7.9 Source: Australian Bureau of Statistics. Labour Force, Australia, Detailed-Electronic Delivery. Cat. No. 629..55. Page 25

For women in the prime working ages, participation increased from 2 to 22 by about three percentage points for those aged 25-34, four percentage points for those aged 35-44 and six percentage points for those aged 45-54 or an average of over four percentage points for the age range, 25-54 years. Comparison with other Englishspeaking countries indicates that the participation rates of women in these ages tend to be a little higher in the other countries than in Australia, except for Canada where the rates are much higher (Table 5). Canada s participation for women in this age range in 22 was 82 per cent, about seven percentage points above the Australian level at that time. It should also be noted that Australian women in these ages are much more likely than Canadian women to work part-time. At the younger end of this age range, participation for women is primarily related to their desire and their capacity to combine work with child-raising. The data in Table 4 suggest that the desire or the capability or both are increasingly slowly over time and this trend can be expected to continue into the future. Table 5. Labour Force Participation Rates in OECD English-Speaking Countries, Males and Females, Age Group 25-54 years, 22 Country Labour force participation rate, 22 Males 25-54 Females 25-54 Australia 9. 75.6 New Zealand 9.2 77.7 Canada 9.8 82.3 United Kingdom 92. 79. United States 88.7 74.5 Source: OECD Stat Extracts, accessed 24 July 23. In the two younger age groups, 5-9 and 2-24, participation for men fell significantly between 2 and 22 perhaps reflecting increased participation in education. The falls for women in these age groups were much smaller. With increasing emphasis upon postschool training and the extension of schooling, it is more likely that participation rates will continue to fall in the future than to rise. The Skills Australia open doors scenario projected increases in participation at these ages for both men and women despite the fact that participation at these ages is already a lot higher in Australia than in the other English-speaking countries. There is a strong tendency for Australian full-time students to work part-time explaining the higher participation at these ages than in other countries. Page 26

In earlier times, Australia could rely on increasing numbers of young workers entering the labour force each year. Today and into the future, the reverse is more likely to be the case as young-age labour force participation and the size of successive birth cohorts fall simultaneously. At older ages (55 years and over), participation has been rising strongly for men since 2 and even more strongly for women. Changes in the composition of the population (education, nature of occupation, self-employment, English capacity, housing tenure) will ensure that this trend continues into the future (McDonald 23). Several policy directions as described in the 2 IGR are supportive of this trend including an increase in the pension age for women, the introduction of the Work Bonus that treats earned income more generously under the pension income tests and superannuation taxation incentives to continue working to at least age 6. Higher participation at older ages can be expected for women because of the cohort effect, that is, because participation rates have increased at younger ages in the past, there is a flow on effect as women age to the older ages. Furthermore, there are a range of reasons not related to policy that older males will increase their participation. Future jobs will be less likely to be physically demanding. The next generation of 55 year-olds started work later than their older peers, so, if they work the same years, they will also end later. More people will be self-employed or have a higher degree of autonomy in their work. The next generation will be healthier and more aware of the long years that remain in their lives. The coming 55-64 year age group will have had their children at later ages and their children will stay financially dependent for more years. Simultaneously, they may have financial responsibilities for their own parents. Being the baby-boom generation, they have expectations of higher living standards in retirement than their parents had. The Aged Pension alone will not be enough. And their years living on retirement income will be longer. Because of cohort changes in women s participation, the wives of 55-64 year-old men will be more likely to be working in the future: wives will be less likely to be encouraging their husbands out of the labour force. And, maybe, the next generations of 55-64 year olds will have lives that are more work-defined and they may like their jobs more than previous generations did. Page 27

In comparison with other English-speaking countries, participation rates for older Australian males are a little higher but similar to those in all of the other countries except for New Zealand at all ages above 55 and for the USA for men aged 65-69 (Table 6). The exceptionally high rates of participation in New Zealand are probably the result of an absence of work disincentives because the age pension (New Zealand Superannuation) is not income-tested or because the age pension does not provide an income considered to be adequate. For older women (Table 7), Australian participation rates are a little lower than in all of the other English-speaking countries except the United Kingdom. Again, New Zealand has very high participation rates. Table 6. Age Specific Labour Force Participation Rates, Males Aged 55-69, OECD English-Speaking Countries, 22 Country 55-59 6-64 65-69 Australia 8. 62.6 33.8 New Zealand 88. 77.5 47. Canada 78.9 58. 3. United Kingdom 79.9 58.8 25. United States 78. 6.5 37. Source: OECD Stat Extracts, accessed 24 July 23. Table 7. Age Specific Labour Force Participation Rates, Females Aged 55-69, OECD English- Speaking Countries, 22 Country 55-59 6-64 65-69 Australia 65.6 44.4 2. New Zealand 77.4 64. 33.6 Canada 69.4 45.7 9.3 United Kingdom 69.2 37. 5.3 United States 67.3 5.4 27.6 Source: OECD Stat Extracts, accessed 24 July 23. In summary, from a present perspective, the capacity to meet Australia s future labour demand through increases in participation rates is limited. While there will be increases in participation at older ages, older workers will not have many of the skills that will be required. If those in the prime working ages who are now out of the labour force can be brought into the labour force, they also will be relatively low skilled. Thus, participation strategies are essentially low-skills strategies. They provide employment to those that need it and reduce the government s social security bill, but do not meet the higher skills needs of the broader economy. Immigration has continued to be strong in Australia Page 28