We Need to Talk about Immigration

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In today’s Money Morning…too many jobs…the demographics…not just jobs…and much more…

Today I want to talk about what can be a divisive issue.

Immigration!

To some, it’s a dirty word, and for others, a reason to celebrate. I’m not particularly interested in the politics around it.

I want to talk about some of the economic impacts of immigration. In fact, one of our neighbours and close allies is an excellent case study for us to consider. There’s also an important reason why this is something we need to be talking about right now.

But first, we need to set the stage with what is happening right here at home.

In the 2021 financial year, 88,800 more people left the country than moved here. This is the first time since 1946 that we had a net migration loss. The following chart tells the story:

Fat Tail Investment Research
Net overseas immigration graph – Australia

Source: Abs.gov.au

[Click to open in a new window]

Since the end of the Second World War, immigration has been critical to Australia’s population growth. Our birth rate has fallen by about 50% over that time, so our immigration policy is a big deal.

Last year, we effectively closed our borders not only to foreigners but also to Australian citizens and permanent residents who were stranded overseas.

The Australian Bureau of Statistics (ABS) estimates that Australia’s population is currently decreasing by about 22,770 people per year.

Too many jobs

So it should be no surprise then that we’ve not enough people to fill available jobs. Unemployment is falling quite rapidly. I’ve spoken to many business owners who are struggling to fill job vacancies.

The Reserve Bank of Australia (RBA) is betting that inflation in Australia is transitory. They see wage inflation as being critical to inflation sustainably within the 2–3% range. When the Wage Price Index is released on 23 February, the RBA is betting it will be weak.

Maybe they’ll be proven right. After all, it may take some time for employee shortages to lead to higher wages. However, at some point, these shortages will bite, and wages will have to go up.

Australian borders are reopening to tourists and other non-residents on 21 February. Two days before the Wage Price Index data is released.

There are two big questions on my mind.

Firstly, how quickly will people rush back into Australia? Are they really going to rush back in just as quickly as they left? Or will there still be a lingering sense of caution?

It’s hard to say. It’s highly dependent on the stances of other governments and the situations in other countries. So I’m not going to even try to predict that, but it’s something I’ll be watching out for.

The second question is how many people will be looking for work, compared to how many will be tourists. We still have a half-shuttered tourism industry that has been waiting eagerly for the return of international travel.

The thing is, once those doors open, the tourism industry itself is going to start needing more workers.

So in the short term, is opening the borders going to relieve the worker shortage, or is it just going to make the problem worse?

There’s one more topic this situation brings to the fore.

The demographics

We will get new census data in June of this year. The data was taken in August last year, right in the middle of the toughest part of the lockdowns and border closures.

I’m quite curious to see what the data will look like. There’s one demographic aspect I suspect will be emphasised by the lockdowns.

That’s Australia’s aging population.

The baby boomer generation is starting to retire. They’re now 58–76 years old. In the 2016 census data, there were more people aged 55–59 than those aged 10–14.

Well now, six years later, those aged 10–14 are 16–20, and they’re starting to enter the workforce and move out of home. On the other end, those that were 55–59 are now 61–65, many of whom are transitioning to retirement.

So we’ve a generation that is retiring that is bigger than the generation entering the workforce. This is causing a natural decrease in the workforce supply.

But that’s not all. That retiring generation is still consuming products, and our population is still growing over the longer term.

The following chart shows the change in percentage of the population at each age bracket between 2011 and 2016. The proportion of the population above 65 years old is growing.


age structure of Australian population

Source: Profile.id.com.au

[Click to open in a new window]

So while our consumer population is growing through better life expectancy, our domestic worker population is shrinking.

In the first chart, it’s clear that we’ve had a surge in immigration in the last 20 years. Australia is a rich country. There is no shortage of people who want to live here.

So we have the luxury of being able to control unemployment to a large extent through our immigration policies. With a retiring baby boomer generation, we may have to rely on increased levels of immigration to fill the gap.

Not just jobs

But it’s not just about jobs.

Population growth is a key driver of economic growth.

With population decline, we wouldn’t have much of a construction industry. Houses suddenly start to look more like a liability than an asset. After all, it becomes a market of constantly decreasing demand.

We don’t need to look very far to see how a declining population can impact economic growth. Japan’s population growth started to stagnate in the 1990s and is now in decline. They’ve got a quickly aging population and low birth rates.


Australian population growth rate

Source: MacroTrends.net

[Click to open in a new window]

Japan is one of the most xenophobic countries in our region. They rigidly preserve their culture and ethnic purity, and their immigration policies reflect this.

In 2019, Scott Morrison vowed to cap the number of refugees Australia takes at 18,750 per year. In that same year, Japan accepted just 44 refugees. Keep in mind that Japan is the third largest economy in the world.

The result of this declining population is zero inflation for almost three decades. Check out the following long-term chart of Japan’s consumer price inflation:


World population growth graph

Source: Worldbank.org

[Click to open in a new window]

This is despite the Bank of Japan’s extreme quantitative easing agenda that seems to have no end. Just last week, they announced a plan to buy ‘unlimited quantities’ of government debt this week to maintain their yield curve target.

And the impact on house prices? The following chart is an index of Japanese property prices:


residential property prices graph

Source: Fred.stlouis.org

[Click to open in a new window]

There are two points I want to leave you with today.

Wage inflation could hit businesses quite hard this year, and that would have a flow-on effect to the rest of the economy. We may see evidence of it in this month’s wage index print, or perhaps it will take a little longer to show up. Regardless, it’s something to watch out for this year.

Secondly, if we want to balance out our decreasing birth rate, we need to seriously consider an increased rate of immigration. If we can’t do this, then you can kiss goodbye to the equity in your family home.

Until next week,

Izaac Ronay Signature

Izaac Ronay,
Editor, Money Morning

Izaac is also the editor at Exponential Stock Investor, a stock tipping newsletter that hunts for promising small-cap stocks. For information on how to subscribe and see what Izaac’s telling subscribers right now, please click here.

About Izaac Ronay

Izaac Ronay is an Editor at Money Morning.

He has traded equity index and interest rate futures since 2012 across various exchanges and products. His trading focuses on the relationship between markets and how to maximise return while controlling risk.

Izaac studied Management and International Business and has worked in…

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