Are the Govt’s labour market policies coherent?

In the big picture view, are labour market policies working correctly together? Victoria University of Wellington's Simon Chapple thinks there are inconsistencies in both the high and low ends of the workforce.

There are times when it is worth pulling back from the minutiae of what a government is doing in a specific policy area and asking the question whether the totality of what they are doing makes coherent sense. Given the dominant partner in the coalition is Labour, one might particularly ask this question over the government’s labour market policy.

Let’s consider three major legs of current labour market policy. First, the government spends a lot of money on education and training, in large part to prepare people for the world of work, and loans lots of money to tertiary students at cheap rates to upskill. Second, it sets a minimum floor on pay and conditions in the labour market, mostly via the minimum wage. Third, it allows large numbers of people to immigrate, both permanently and temporarily, and supply their labour in the New Zealand market.

At both the high and low skilled ends of the labour market, these three labour market policies arguably fail a test of strategic coherence.

At the low skilled end of the labour market, the government’s policies have involved substantially raising the minimum wage. When the Labour–Green–New Zealand First coalition came into power in 2017, the minimum wage was $15.75 an hour. They raised it to $16.50 in 2018 and again to $17.70 in 2019. The government is committed to raising the minimum wage further to $20 by 2021.

This policy is based on the presumption that as minimum wages rise, pushing up wages for low skilled workers, there is no great reduction in demand for low skilled labour. In the jargon of labour economics, the policy assumption is that demand for low skilled workers is highly inelastic. Indeed, inelasticity is the conclusion drawn from the international literature by the government’s labour market advisers, the Ministry for Business, Innovation and Employment (MBIE), in their contribution to the 2018 minimum wage review. 

Our immigration policy explicitly allows the entrance of large numbers of people and permits them to supply labour in the New Zealand market. Some of these people have temporary work visas. In June 2017, for example, MBIE estimated there were 75,578 foreigners in New Zealand on student visas, most of whom have the right to work, and 152,432 people on temporary work visas. Others have permanent residency – the immigrant inflow from this source is currently a little below about 50,000 people a year. Many people from both groups are likely to supply significant amounts of labour in the low skilled end of the labour market.

The only way these low skilled inflows cannot damage the job prospects of low skilled New Zealand workers is if these additional workers can be costlessly absorbed by expanding labour demand, with no reductions in local wages. Again, in the jargon of labour economics, the policy assumption here is that demand for low skilled workers is highly elastic.

Thus, immigration policy and minimum wage policy, at least as far as low skilled workers are concerned, are predicated on two diametrically opposed beliefs about how responsive labour demand is to wages. 

The question for the government’s labour market advisers in MBIE is which stylised fact best describes the demand for low skilled labour? Elastic or inelastic? Governments can’t logically have it both ways.

If, in fact, low skilled labour demand is inelastic, justifying current minimum wage policy, low skilled immigration will cause lower local unskilled employment rates. If low skilled labour demand is elastic, justifying current immigration policy, minimum wage increases will lower unskilled employment rates. Either way, in other words, policies will reduce low skilled employment.

To make labour market policy consistent at the low skilled end, change is needed. The most obvious policy choice for a Labour-led government is to drastically reduce the supply of immigrants who have the right to enter the low skilled labour market and allow unskilled wages for New Zealanders to be pushed upwards by market forces, reinforcing rather than pulling against active minimum wage policy. Wage rises aided by demand growth will create rewards for lower skilled people and will reduce the number of New Zealanders dependent on welfare benefits, freeing up taxes to be used elsewhere.

Now, consider the high skilled end of the labour market. New Zealand spends large sums of public money subsidising New Zealanders’ university educations. The hope is that they will enter the high skilled end of the labour market, earn good salaries and pay off their student loans. 

At the same time, we run an immigration policy that brings in people at the top end of the labour market. Indeed, the coalition has just made further policy changes to work visas making it easier for employers to bring people in who are paid just above $100,000 a year in the five main centres and $50,000 outside them. Inevitably, such policies flood the skilled labour market and create downward pressure on high skilled wages. 

Hence our skilled immigration policy makes it more difficult for young New Zealanders to obtain work at good wages in the high earning years that are supposed to follow their graduation. It undermines the premise of a career reward for young Kiwis acquiring student loans and a good tertiary education, as well as working against the large subsidies taxpayers give them to obtain that education. Finally, by reducing job options for newly skilled locals, the policy further encourages young qualified New Zealanders to permanently seek better options offshore, creating more inter-generational social disconnections. Immigration into New Zealand’s skilled labour market is not simply a matter of back-filling job vacancies created by emigration of skilled Kiwis – the justification frequently given for the policies encouraging immigration of skilled people. Skilled immigration can cause skilled emigration.

But there’s another kick in the teeth for those of our young people trying to get ahead via tertiary education. Historically, many young people in tertiary education fund their education and keep their debt low via working part-time in the low skilled area of the labour market while studying. Yet we have an immigration policy that allows large numbers of immigrants into low paid labour markets. Foreign and New Zealand students, after all, are likely to be operating in similar labour markets while studying. The consequence here, too, is likely to be lower local student employment and higher student debt.

Restricting skilled immigration options more tightly to those with skills we clearly cannot economically build in New Zealand would again seem to be the appropriate policy here – some highly trained medical specialists, perhaps. But maybe not someone to run Fonterra.

Dr Simon Chapple worked as a senior researcher and principal policy adviser on labour market issues in what was then the Department of Labour.

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