Radical Reform

New Zealand's Path to 21st Century Prosperity | Mitchell W. Palmer


Immigration is an important contributor to our economy. As a small growing nation there is no way we could possibly provide enough skilled labour from the current population stock to maintain the current rate of growth in the economy and in living standards. Immigrants also provide a buffer against our ageing population, contributing to their healthcare and Superannuation through significant net tax contributions. The current approach, however, is flawed.

The current system assigns to the Government responsibility for determining what occupations need immigrant labour the most. This it does through various visa programs and lists of in-demand occupations like the Long-Term Skill Shortage List. Our immigration system is centrally planned.

Given its poor record in running economies, why should we believe central planning is a decent way of running an immigration system? It has resulted in absurdities like tour guides being our most-imported occupation (Swasbrook & Hickey, 2016). Surely, some of the 14,400 New Zealanders [1] who have been unemployed for over a year could be trained for these positions. At the same time, other professions remain stubbornly in shortage – many, like teaching, have many qualified foreign workers who would love to work in New Zealand available. Treasury and Immigration officials, no matter how smart, do not have adequate information to make an informed decision on where immigrants would be most valuable to our economy.

At this point some, particularly my fellow libertarians, would suggest the State simply step aside and permit unlimited immigration. This is an idea with significant pedigree. The Economist, for instance, have recently campaigned in favour of open borders – suggesting the global economic gains would exceed US$3 trillion if it was adopted worldwide. Jeffrey Miron, one of the economists I most admire and the Director of Undergraduate Studies in economics at Harvard, has recently argued for them on behalf of the venerable Cato Institute (Miron, 2018). I will admit that, prima facie, this idea has significant personal appeal to me. It does not, however, measure up.

The Case for Immigration Restrictions

The State is entirely within its rights to restrict new entrants to preserve the lifestyles of incumbent residents. The social contract exists between the current residents of the State and their government, because those current residents are the only ones who have given up their freedoms to that state in return for its protection. Foreigners, who have given no freedoms to that state, are not as entitled to its protection.

The question, therefore, becomes whether allowing unlimited immigration would improve or worsen the lifestyles of incumbent residents. Consider if New Zealand was the only country to unilaterally remove its immigration controls. This is the only proposal on the table. Open borders worldwide are certainly not just around the corner – the immigration anxiety displayed in America’s election of President Trump and the British vote to leave the European Union has made sure of that. In this world of unilateral free movement into New Zealand, how many people would move here? There are billions whose lives would be significantly improved if they lived in a country like ours: almost 6.6 billion people live in countries with a GDP per capita of less than half of New Zealand’s. If we were the only similar country to open our borders, a significant proportion of those people would come to New Zealand. I have the utmost sympathy for those who are seeking higher wages and a better living environment for their families, but we simply could not accommodate them and maintain our present standard of living. Yes, there exists a self-regulating mechanism whereby if the population becomes so high that the living standards are worsened, fewer immigrants will come. Still, however, a worse New Zealand is significantly better than most of the world and people will still come. With a significant influx of migrants, even my most liberal housing policy would struggle. We would be essentially required to build on some of our most precious national parks and to endure significant congestion in our major cities – at least until infrastructure can be built, which even with a significantly increased population is not a doddle. Air and water quality would surely suffer. The costs of open borders on the most policy-relevant – i.e., present New Zealand residents - are therefore significant.

Free Market Immigration Restrictions

We are thus left with no option but to restrict who may live and work in this country. Central planning has not worked and will never work. Instead, we should use the price system to allocate immigration permits. Essentially, we should sell the right to live and work in New Zealand.

There are two options available to us. The Government could:

a) limit the quantity of immigrants allowed into the country and allow the price to float (a visa auction); or,

b) set the price of immigration and allow the number to be set by the market (an immigration tariff).

These options mirror those available to us in the Environment section. There, setting the quantity of allowed carbon emissions would require an emissions trading scheme, while setting the price of carbon emissions would require a carbon tax.

Which we choose depends on how we prefer the uncertainty inherent in any market-based allocation to manifest. In an auction, the Government (and infrastructure planners) is given certainty about the number of immigrants they must account for. However, firms (and immigrants) face uncertainty about the price of immigration. This makes it more difficult for them to plan their future labour costs. In a tariff model, the opposite is true. Government, and infrastructure planners, are given little certainty about the number of immigrants who will enter the country, while firms (and immigrants) can know for certain how expensive it will be to immigrate to New Zealand. In both cases, the Government has no certainty about the amount of revenue it will receive from the system – either the price or quantity will vary.

It also depends on which we think the Government can calculate more accurately. Is the government better equipped to know how many immigrants society can absorb in the next period or how much each immigrant costs in an external sense? Note, however, that either of these decisions would only be short-lived. If, for instance, government set the number of immigrants permitted too low and the auction price was very high, they could alter the number of permits available at the next auction.

In my view, auctions satisfy both of these tests better. What the level of immigration which is politically acceptable and economically viable in a given period is much more easily determined by government than the right price. For one, it recognises that the net cost of immigrants depends on their quantity. The first immigrant let in in any system will not impose a significant cost of our economy and will be of very high value. The 50,000 th, however, may be less valuable (all of the jobs which are crucial to fill will have already been filled by the 49,999 previous immigrants). Additionally, the uncertainty falling on firms is not necessarily a negative. It could encourage firms not to rely on immigrant labour as a guaranteed source of labour and simply budget for the tariff. Instead, firms may seek to mitigate the risk that they will not be able to afford immigrant labour in the future by investing in skills growth or productivity-enhancing capital investment in New Zealand.

How to Auction Visas

The Government should hold auctions regularly (perhaps, quarterly) for an announced number of fixed-term permits (for instance, for 5 years) to work in New Zealand. These auctions should be open to any New Zealand employer who wishes to hire an overseas resident, any overseas individual who wishes to move to New Zealand, or any foreigner resident in New Zealand whose visa was due to expire. The Crown should also facilitate a secondary market for these permits. Employers who no longer required a permit, because their employee had left, for instance, could resell these permits on the open market. Individuals who decided to move to another country could sell their permit and allow another immigrant to take their remaining tenure in New Zealand. However, these permits should begin counting as soon as they are purchased, to reduce arbitrage between times of high and low demand and allow authorities to predict population growth more accurately.

Workers who come to New Zealand on such auctions should still be subject to national security screening. Pre-screening on auction participants, for instance, would prohibit those with violent crime convictions or connections with terrorist organizations from even participating in the auction. They should also not be eligible for State welfare subsidies – for instance, free treatment in public hospitals and domestic fees at public schools and universities. This would avoid individuals from benefit shopping and, for instance, paying a below-market price to receive medical treatment in New Zealand. They should also be subject to deportation if convicted of a criminal offence. They should, however, be eligible for New Zealand Permanent Residency. After a period exceeding at least two ‘fixed periods’ (e.g., two 5-year terms), such people have clearly demonstrated a longstanding commitment to New Zealand and should be treated as New Zealanders, for most purposes. After a period as Permanent Residents, they should also be eligible for consideration to acquire New Zealand Citizenship.

Such a system has many benefits. Firstly, and most obviously, it allocates visas to the areas of the economy in which they are most valuable. Those who bid the most for immigration permits obviously value immigrant labour more than anyone else. This suggests a significant shortage of domestic labour in that industry. Other industries, however, where immigrant labour is less valuable will not gain immigration permits. Therefore, our limited capacity to accept immigration will be filled by the most useful immigrants.

Secondly, it provides a price signal to the government. As it stands, government lack for strong signals on whether to increase or decrease the number of immigration permits allowed. They must rely on rival claims by employers’ lobbyists and anti-immigration campaigners. When a price for immigration is revealed, the Government can use the changes in this figure to note changes in the demand for immigration. This would allow them, when this price far exceeds the cost of serving new immigrants, to invest in providing capacity for an influx and then increase the number of permits available.

Crucially too, a permit system shifts the burden of the negative external costs of immigration to those who benefit from it. Currently, the external costs of immigration, like increased pressure on our infrastructure, are borne by all taxpayers. So too are the intangible costs, for instance, the crowding of limited public spaces in nature. It is fairer that those who benefit from immigration – i.e., employers and the consumers of the goods they produce and the immigrants themselves – are required to pay for these costs they impose on every New Zealander.

A permit-based immigration system is not putting our citizenship up for sale. Rather, it ensures that, given the limited number of immigrants we can reasonably accept, those immigrants are the most able to contribute to New Zealand society.

Policy Recommendations

  1. End the ‘points-based’ system of granting work permits
  2. Auction off fixed-term immigration permits to would-be immigrants, who meet good character requirements
  3. Establish a regulated secondary market for the resale of permits for their remaining term

[1] As at the March 2019 Household Labour Force Survey, conducted by Statistics NZ.