Some more on immigration

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I’ve remarked before that higher immigration to a given country will — in the long run and holding all else constant — raise its firms’ average rate of return on investment.

The causal link may not be immediately apparent. To see that it nonetheless exists, take the following simple model of the trend or ‘equilibrium’ rate of profit in which labour supply is exogenous.

Without going into the derivation, suppose that the evolution of this profit rate (r) is governed by the interaction of  four terms: the growth rate of the workforce (n), the growth rate of labour productivity (g), the depreciation rate (d), and the share of profits that are productively re-invested in the capital stock (1-u).

So r = (n g + d)/(1 – u)

Plugging in the historical values for these four terms in Australia since the 1960s (and applying a three-year moving average) gives us the red line below, plotted against the actual profit rate. The fit is quite good.

The importance of demographic increase can then be shown by the following counter-factual scenario. Suppose Australia had, over recent decades, experienced no growth in the size of its labour force (zero natural population increase, zero net inward migration or no change to the participation rate).

To remove the effect of workforce growth, let n = 0. Plugging this value into our formula gives a new average profit rate: the green line below, plotted against the red line from above.

As we can see, the effect of zero workforce growth is to lower the economy’s average return on investment by around 2-3% annually. On the vertical axis above, the green line is below the red line by between 0.02-0.03 each year. This may not seem like much, but it’s roughly a 15% reduction in the annual mass of profit.

Remember also that we’re talking about the average profit rate: not some uniform return on investment that each Australian firm earns, but a central tendency around which the population of firm’s profit rates is distributed. Some firms will earn a higher return than this average; some firms will earn less.

Suppose the distribution of profit rates earned by business enterprises look something like a bell curve. If the entire distribution shifts leftward, then the profit rate of some firms in the lower, left tail of the distribution will be less than the commercial interest rate charged to borrow funds. These firms, who may have borrowed funds to operate or investment, will not be able to repay interest on their loans, and they’ll eventually go out of business.

Further, we may realistically presume that there is some conventional risk premium, between interest rates and industrial profit rates, that influences the willingness of firms to invest. Unless this difference between the anticipated return on real invested capital and the prevailing rate of interest reaches some positive threshold, then firms will not invest in new plant and equipment. Growth in the capital stock, as well as employment, will stagnate.

In reality, since 1970 inward migration has contributed just over 45% of Australia’s total population growth. Given that most immigrants are concentrated in the prime working-age age cohort 25-44, their relative contribution to labour-force growth is higher still. Australia’s fertility rate has revived somewhat since 2001, but it’s still at historically low levels.

The growth project of this country (more correctly, the project of that coalition of property-owning classes at the helm of Australian politics, their preferences discernible in the outlook of the policy elite) is thus irreversibly tied to an input whose supply is constrained: imported labour from regions of the world where low-cost breeding of humans is still possible.

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