Enough chairs to go around: Immigration and employment

Most of us would have played the game of musical chairs when we were younger. The game is simple. There is a fixed amount of chairs and there are always more people than chairs. Music plays and the players circle the chairs. When the music stops everybody tries to sit on a chair and those who fail are eliminated from the game. Whilst I have nothing against this game, having derived much entertainment and joy from it as a child, it is problematic when people view the labour market as a game of musical chairs.

The musical chairs analogy came from an Athenian economics professor named Antigone Lyberaki in a recent IQ2 debate on EU immigration. She was arguing against the motion that “Europe should shut the door on immigration” and made the point that most politicians misunderstand the relationship between immigration and employment. Many politicians view the labour market as a game of musical chairs. Lyberaki pointed out that the distinguishing feature is that in musical chairs the number of chairs is fixed whereas the number of jobs in an economy is not fixed.

Those debating for the motion failed to respond to this crucial point. Instead they used various cultural and social arguments (considerations that nonetheless are important in immigration policy) and attempted to frame the debate in terms favourable to them (an obvious political strategic manoeuvre).

Economic theory tells us that the number of jobs is not fixed. The labour market is in a state of constant flux – what economists call a stochastic equilibrium. This is the explanation of unemployment offered by job search theory. It can be visualised on the simple diagram below.


(Sourced from Principles of Macroeconomics by Prof. John B. Taylor and Prof. Akila Weerapana, published by South-Western Cengage Learning, pg. 195)

Another key point on the relationship between immigration and employment often overlooked is that immigrants do not just result in a subtraction from the amount of jobs available. Immigrants have to spend and every dollar they spend is another dollar of income to somebody else in the economy. The net effect may well be an increase in the number of jobs in the economy. This was the key point Professor Stephen King attempted to remind our politicians of in a recent article on 457 visas.

In his article, Professor King quoted research conducted by the Melbourne Institute on the effect ‘working holiday makers’ (WHMs) had on the domestic labour market. That research concluded that “for an annual intake of 80,000 WHMs, about 41,000 effective full-year jobs will be taken by WHMs, but about 49,000 effective full year jobs will be created through the WHM expenditure”.

Similarly, in the US, a 2010 Brookings Institute survey of the available economic literature concluded that “on average, immigrants raise the overall standard of living of American workers by boosting wages and lowering prices.” This survey formed one of the key arguments in a recent Time Magazine article on the economics of immigration.

One final misapprehension commonly held on the issue of immigration is that immigrants are always low skilled and don’t bring anything other than their labour to the economy. This is also incorrect. A paper by University of California economist Gordon Hanson posits that perhaps “the most underappreciated evidence about immigration is its link to innovation.” His argument is based on increasing patent activity among high skilled immigrants. A similar argument can be found in a recent Economist article on start-ups founded by immigrants that are creating jobs all over the USA. In essence, it is manifestly incorrect to assume that the only factor of production that immigrants bring is labour. There is much evidence to demonstrate that they bring entrepreneurship too.

This Sunday, 14th April, the ABC will be broadcasting a Future Forum on the topic of “Does Australia’s Future Prosperity Depend On Immigration?” Unfortunately, the submission deadline for this article is prior to this forum airing. However, it is worth bearing in mind the common misconceptions pointed out in this article if you chose to watch the forum.

Let’s hope the panel of experts and leading Australians discuss the topic without pandering to any of the misinformed stereotypes of ‘job-stealing’ or ‘unproductive’ immigrants. Hopefully, the panel recognises the fact that the labour market is not a game of musical chairs. This would grant me, and many others, a sigh of relief as so much of our political debate on this issue is focused on fear mongering rather than the employment and productivity benefits often associated with immigration.

The low quality of the debate on immigration thus far is probably because politicians hope to use misinformation to their electoral advantage. I guess this demonstrates the truth of the old adage: what is good politics is often bad economics.