## 1. Effects of Migration Inflow Shocks on Output and Labour Outcomes

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**Canonical URL:** [1. Effects of Migration Inflow Shocks on Output and Labour Outcomes](https://www.imf.org/-/media/files/publications/cr/2024/english/1ausea2024002.pdf)

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### Summary and main conclusion
- Migration in Australia has historically been a significant source of population growth, with a third of the population born overseas.
- Migration surges have historically been associated with higher growth and favorable labor market outcomes, with negligible price pressures except in the housing market.
- Cross-country instrumental variable analysis confirms a positive impact of migration on output, employment, and productivity, without significant inflationary impact.
- Housing affordability is affected at the margin; this likely reflects structural supply shortages and would be best addressed by boosting supply.

### Recent trends in migration (Australia)
- Population and demographics:
  - Population: 26 million.
  - Average population density: 3.5 persons per square kilometer.
  - Median age: 37.5 years.
  - Life expectancy: close to 84 years.
  - Sex ratio: 0.99 males per female.
  - Old age dependency ratio: 30 (number of individuals aged 65 and over per 100 people of working age (20 to 64)), compared with OECD average of 33.
- Fertility and role of migration:
  - Total fertility rate (TFR) peaked at 3.55 babies per woman in 1961 and fell to 1.66 in 2020-21 (replacement rate is 2.1).
  - Over the last decade, net overseas migration’s contributions to Australia’s population growth increased to roughly 60 percent.
- Recent migration flows:
  - Net overseas migration was 152,000 people in the March 2023 quarter and 454,000 people over the year to March 2023 (largest net inflow on record).
  - Surge driven by higher arrivals, particularly students from India and China; largest share of new migrants were students, followed by skilled permanent and temporary migrants.
  - Working holiday maker arrivals increased in 2022.
  - Net migration gains recorded across all states and territories, largest shares in New South Wales and Victoria.

### Australia in an international context
- Foreign-born share:
  - Around 30 percent of Australia's population was foreign-born in 2019, versus OECD average of 14 percent.
  - Comparators: Canada 21 percent, France 13 percent, Germany 16 percent, United Kingdom 14 percent, United States 14 percent.
- Urban concentration and education:
  - Migrants constitute 40 percent of the total population in large metropolitan regions (metropolitan area > 1.5 million inhabitants).
  - Almost 60 percent of the migrant population in Australia has attained tertiary education (compared to around 40 percent of migrants in other OECD countries).
  - Estimated 69 percent of recent migrants held a non-school qualification before arriving, of whom 79 percent had a bachelor’s degree or higher and 13 percent had a diploma.

### Migrant characteristics and labour market outcomes
- Visa composition: largest share of new arrivals are students, followed by skilled permanent and temporary migrants; humanitarian migrants and refugees are relatively low shares.
- Labour market indicators:
  - Migrants generally have high labor force participation and favorable employment outcomes, particularly men and higher-skilled migrants.
  - Proportion of migrants (working age) who received unemployment payments in 2019-20: 11 percent, compared with 13 percent of the total Australian population aged 15-64 years.
  - By migrant category: skilled migrants 8 percent; humanitarian migrants 31 percent.
- Education gaps: the difference between shares of tertiary-educated among native-born and migrant populations is biggest in Australia, with a gap of 20 percentage points.

### Analytical approaches to identify impacts
- Three complementary approaches:
  - Correlation analysis using 4-quarter moving averages of the share of migration to overall population and macroeconomic indicators (real GDP growth, inflation, unemployment rate, employment growth, wage growth, housing prices). Data from 2020 onward excluded to neutralize pandemic outliers (results robust to including pandemic).
  - Event study analysis focusing on economic outcomes before and after peaks in migration episodes (peaks identified by 4-quarter MA growth in migration share).
  - Cross-country instrumental variable analysis focusing on push factors to isolate causal impacts of large immigration waves on growth, productivity, prices, wages, and housing.

### Key quantitative co-movements and correlations
- Simple correlation results (4-quarter MA of migration share versus indicators):
  - Migration and GDP growth: 0.09.
  - Migration and unemployment rate: -0.80.
  - Migration and employment growth: 0.45.
  - Migration and housing prices: 0.13.
- Wage dynamics:
  - Positive but modest correlation between migration and wages; wage series (Wage Price Index) is more stable due to compositional controls.
  - Wage Phillips curve relationships are statistically significant when augmented by migration.

### Event study findings (migration surges 1988, 2008, 2017)
- Method: deviations from the 10-year average for each indicator, averaged over the 5 years before and after each peak migration wave; does not control for other concurrent macro factors.
- Real GDP growth:
  - GDP growth tends to increase in the five years leading up to migration peaks and decline after migration surges.
  - Interpretation constrained by endogeneity and omitted variables (2008 GFC, 2020s pandemic).
- Inflation:
  - No consistent association between migration surges and broad changes in inflation (headline and core CPI).
  - Peaks in migration often align with relatively high headline inflation contemporaneously, followed by declines given lagged labor market effects.
- Labour market dynamics:
  - Unemployment rate: typically drops for two years after a migration peak, then rises over the subsequent three years in most cases.
  - Employment levels: employment rises two years after the peak, then stabilizes.
  - Wages: WPI data indicate declines in average wages five years after the migration peak for episodes coinciding with the financial crisis and the pandemic.
- Caveats:
  - The 2008 episode coincided with the global financial crisis; the 2017 episode includes pandemic impacts in 2020-2022. These events contaminate post-peak periods.

### Housing and inflation implications
- Housing price dynamics:
  - Housing prices show a positive association with migration at the margin; simple correlation 0.13.
  - Housing price index pattern: "rises slowly approximately five years before the next migration peak" and "accelerates further five years after the peak".
  - The observed housing price pattern may reflect factors beyond migration, "including the GFC/pandemic (and the associated policy responses)."
- Empirical magnitudes (cross-country IV analysis):
  - Economic output increases by 1.2 percent by the fifth year following a migration shock.
  - Labor productivity rises by almost 1 percent five years following a large migration shock.
  - BIS nominal house price index increases by 1 percent within 2 years, but the effect is not statistically significant.
  - House price-to-income ratio is lifted by about 2 percent within 4 years of a migration shock; this effect is only marginally statistically significant in the second year of the forecast horizon.
  - Impact on house price-to-rent ratio is not statistically significant.
- Inflation:
  - Inflation increases following a migration shock, the impact is muted and not statistically significant.
- Interpretation:
  - Housing affordability effects are present at the margin and reflect structural supply shortages rather than broad inflationary pressure.

### Cross-country panel and identification strategy
- Data and sample:
  - Panel of 34 countries, with data from 1995 to 2018, including 11 episodes of large immigration waves.
- Empirical approach:
  - Follows Engler et al. (2023) combining episodes of large immigration waves with an instrumental variable (IV) technique.
  - Uses local projections methodology (Jordà, 2005) and a 2SLS IV approach to estimate dynamic effects of migration shocks.
  - Shock variable: immigrant flows (∆ІІІІ_{it}) relative to previous period total employment (E_{i,t-1}).
  - Controls: country and time fixed effects and a vector X_{i,t-1} of lagged controls (including the dependent variable, GDP growth, and employment).
- Instrument construction:
  - Instrument = sum over origins j of (share of migrant stock from origin j in destination i over the past 5 to 10 years) * (total outflow of migrants from origin j in year t).
  - Migration stock data is only available at five-year intervals.
  - IV data winsorized at the top one percent.

### Robustness checks
- Robustness steps:
  - Baseline specification stripped of all lagged controls (Annex Figure A1).
  - Specification including the lagged dependent variable alone as a control (Annex Figure A2).
  - Estimates restricting the database to only advanced economies.
- Outcome:
  - The results are reported as very similar and robust to the different specifications.

### Conclusion and policy-relevant implications
- Migration role in Australia:
  - Migration is an important source of population growth and higher skilled labor force participation in Australia.
  - Nearly a third of the working age population was born overseas and the importance of migration is set to increase further as the rate of natural increase declines with population ageing and falling fertility rates.
  - Migrants are generally highly educated, often more than the native population, and comprise mostly skilled workers and students, with favorable labor market outcomes and high labor force participation rates.
- Aggregate macroeconomic assessment:
  - Cross-country IV analysis confirms a positive impact of migration on macroeconomic outcomes—output, employment, and productivity—without significant inflationary impact.
  - The key channel is via productivity gains, which becomes significant given subdued productivity growth in Australia over recent years.
- Housing policy implication:
  - While housing affordability is impacted at the margin, this represents structural supply shortages and is best addressed by boosting supply.

*Source: 1ausea2024002 - 1. Effects of Migration Inflow Shocks on Output and Labour Outcomes*

### 1. Effects of Migration Inflow Shocks on Output and Labour Outcomes ______________ 13

### 1. Effects of Migration Inflow Shocks on Output and Labour Outcomes

### Summary and main conclusion
- Migration in Australia has historically been a significant source of population growth, with a third of the population born overseas.
- Migration surges have historically been associated with higher growth and favorable labor market outcomes, with negligible price pressures except in the housing market.
- Cross-country instrumental variable analysis confirms a positive impact of migration on output, employment, and productivity, without significant inflationary impact.
- Housing affordability is affected at the margin; this likely reflects structural supply shortages and would be best addressed by boosting supply.

### Recent trends in migration (Australia)
- Population and demographics:
  - Australia has a population of 26 million.
  - Average population density: 3.5 persons per square kilometer.
  - Median age: 37.5 years.
  - Life expectancy: close to 84 years.
  - Sex ratio: 0.99 males per female.
  - Old age dependency ratio: 30 (number of individuals aged 65 and over per 100 people of working age (20 to 64)), compared with OECD average of 33.
- Fertility and role of migration:
  - Total fertility rate (TFR) peaked at 3.55 babies per woman in 1961 and fell to 1.66 in 2020-21 (replacement rate is 2.1).
  - Over the last decade, net overseas migration’s contributions to Australia’s population growth increased to roughly 60 percent.
- Recent migration flows:
  - Net overseas migration was 152,000 people in the March 2023 quarter and 454,000 people over the year to March 2023 (largest net inflow on record).
  - Recent surge driven by higher arrivals, particularly students from India and China; largest share of new migrants were students, followed by skilled permanent and temporary migrants.
  - Working holiday maker arrivals increased in 2022.
  - Net migration gains were recorded across all states and territories, with largest shares in New South Wales and Victoria.

### Australia in an international context
- Foreign-born share:
  - Around 30 percent of Australia's population was foreign-born in 2019, versus OECD average of 14 percent.
  - Comparators: Canada 21 percent, France 13 percent, Germany 16 percent, United Kingdom 14 percent, United States 14 percent.
- Urban concentration and education:
  - Migrants constitute 40 percent of the total population in large metropolitan regions (metropolitan area > 1.5 million inhabitants).
  - Almost 60 percent of the migrant population in Australia has attained tertiary education (compared to around 40 percent of migrants in other OECD countries).
  - Estimated 69 percent of recent migrants held a non-school qualification before arriving, of whom 79 percent had a bachelor’s degree or higher and 13 percent had a diploma.

### Migrant characteristics and labour market outcomes
- Visa composition: largest share of new arrivals are students, followed by skilled permanent and temporary migrants; humanitarian migrants and refugees are relatively low shares.
- Labour market indicators:
  - Migrants generally have high labor force participation and favorable employment outcomes, particularly men and higher-skilled migrants.
  - Proportion of migrants (working age) who received unemployment payments in 2019-20: 11 percent, compared with 13 percent of the total Australian population aged 15-64 years.
  - By migrant category: skilled migrants 8 percent; humanitarian migrants 31 percent.
- Education gaps: the difference between shares of tertiary-educated among native-born and migrant populations is biggest in Australia, with a gap of 20 percentage points.

### Analytical approaches to identify impacts
- Three complementary approaches:
  1. Correlation analysis using 4-quarter moving averages of the share of migration to overall population and macroeconomic indicators (real GDP growth, inflation, unemployment rate, employment growth, wage growth, housing prices). Data from 2020 onward excluded to neutralize pandemic outliers (results robust to including pandemic).
  2. Event study analysis focusing on economic outcomes before and after peaks in migration episodes (peaks identified by 4-quarter MA growth in migration share).
  3. Cross-country instrumental variable analysis focusing on push factors to isolate causal impacts of large immigration waves on growth, productivity, prices, wages, and housing.

### Key quantitative co-movements and correlations
- Simple correlation results (4-quarter MA of migration share versus indicators):
  - Migration and GDP growth: 0.09.
  - Migration and unemployment rate: -0.80.
  - Migration and employment growth: 0.45.
  - Migration and housing prices: 0.13.
- Wage dynamics: positive but modest correlation between migration and wages; wage series (Wage Price Index) is more stable due to compositional controls. Wage Phillips curve relationships are statistically significant when augmented by migration.

### Event study findings (migration surges 1988, 2008, 2017)
- Method: deviations from the 10-year average for each indicator, averaged over the 5 years before and after each peak migration wave; does not control for other concurrent macro factors.
- Real GDP growth:
  - GDP growth tends to increase in the five years leading up to migration peaks and decline after migration surges.
  - Interpretation constrained by endogeneity and omitted variables (2008 GFC, 2020s pandemic).
- Inflation:
  - No consistent association between migration surges and broad changes in inflation (headline and core CPI).
  - Peaks in migration often align with relatively high headline inflation contemporaneously, followed by declines given lagged labor market effects.
- Labour market dynamics:
  - Unemployment rate: volatile; typically drops for two years after a migration peak, then rises over the subsequent three years in most cases.
  - Employment levels: employment rises two years after the peak, then stabilizes.
  - Wages: available WPI data indicate declines in average wages five years after the migration peak for episodes coinciding with the financial crisis and the pandemic.
- Caveats:
  - The 2008 episode coincided with the global financial crisis; the 2017 episode includes pandemic impacts in 2020-2022. These events contaminate post-peak periods.

### Housing and inflation implications
- Housing prices show a positive association with migration at the margin; simple correlation 0.13, but event analysis shows consistent declines then rises in housing prices around migration peaks.
- The housing affordability impact likely reflects structural supply shortages rather than pure demand-driven inflationary pressure.
- Recommended policy response: boost housing supply to address affordability issues.

*Source: 1ausea2024002 - 1. Effects of Migration Inflow Shocks on Output and Labour Outcomes*

### 21.      The housing price index demonstrates a steady rise following migration peak. This

### 21.      The housing price index demonstrates a steady rise following migration peak. This

### Housing price dynamics and migration timing
- The housing price index remains stable between significant migration waves but:
  - "rises slowly approximately five years before the next migration peak"
  - "accelerates further five years after the peak"
- The observed housing price pattern may reflect factors beyond migration, "including the GFC/pandemic (and the associated policy responses)."

### Cross-country panel and identification strategy
- Data and sample:
  - Panel database of 34 countries, with data from 1995 to 2018, including 11 episodes of large immigration waves.
- Empirical approach:
  - Follows Engler et al. (2023) combining episodes of large immigration waves with an instrumental variable (IV) technique.
  - Uses local projections methodology (Jordà, 2005) and a 2SLS IV approach to estimate dynamic effects of migration shocks.
  - Equation (1) estimates impacts on a set of macroeconomic outcomes: output, total employment, native-born employment, total labor force, labor productivity, total factor productivity, inflation, the capital-output ratio, the unemployment rate, and the housing price index.
  - The shock variable is immigrant flows (∆ІІІІ_{it}) relative to previous period total employment (E_{i,t-1}).
  - Controls include country and time fixed effects and a vector X_{i,t-1} of lagged controls (including the dependent variable, GDP growth, and employment).
- Instrument construction (equation (2)):
  - Instrument = sum over origins j of (share of migrant stock from origin j in destination i over the past 5 to 10 years) * (total outflow of migrants from origin j in year t).
  - "Migration stock data is only available at five-year intervals."
  - IV data is winsorized at the top one percent to account for extreme values.

### Key empirical findings: output, employment, and productivity
- Migration inflows have positive effects on output and productivity:
  - "economic output increases by 1.2 percent by the fifth year following a migration shock."
  - "labor productivity, which rises by almost 1 percent five years following a large migration shock."
  - Total factor productivity (TFP) increases following the migration shock, prompting responses in the capital stock and a rise in the capital-labor ratio.
- Employment effects:
  - Employment increases, but the increase is "not statistically significant" and explains the remainder of output growth beyond productivity gains.
  - Native employment: "employment in the native population rises modestly five years following the migration shock, but the increase is not statistically significant."
- Classification of large immigration episode:
  - A large immigration episode is classified where annual inflow of migrants (as a share of population) is greater than the host country’s median inflow during 1980-2018 and greater than the median inflow experienced by all OECD countries during the previous five-year period and the following five-year period.

### Inflation and housing price effects
- Inflation:
  - "inflation increases following a migration shock, the impact is muted and not statistically significant."
- Housing prices and affordability:
  - "the BIS’ nominal house price index increases by 1 percent within 2 years, but the effect is not statistically significant."
  - "the house price-to-income ratio is lifted by about 2 percent within 4 years of a migration shock," reflecting the small increase in housing prices; this effect is "only marginally statistically significant, in the second year of the forecast horizon."
  - "the impact on the house price-to-rent ratio is not statistically significant."
- Overall interpretation:
  - Housing affordability effects are present at the margin and reflect structural supply shortages.

### Robustness checks
- Robustness steps reported:
  - Baseline specification stripped of all lagged controls (Annex Figure A1).
  - Specification including the lagged dependent variable alone as a control (Annex Figure A2).
  - Estimates restricting the database to only advanced economies.
- Outcome of robustness checks:
  - "The results (available upon request) are very similar and robust to the different specifications."

### Conclusion and policy-relevant implications
- Migration role in Australia:
  - "Migration is an important source of population growth and higher skilled labor force participation in Australia."
  - "Nearly a third of the working age population was born overseas and the importance of migration is set to increase further as the rate of natural increase declines with population ageing and falling fertility rates."
  - Migrants "are generally highly educated, often more than the native population, and comprise of mostly skilled workers and students," with "favorable labor market outcomes and high labor force participation rates."
- Aggregate macroeconomic assessment:
  - Cross-country IV analysis "confirms a positive impact of migration on macroeconomic outcomes—output, employment, and productivity—without significant inflationary impact."
  - The key channel is via productivity gains, "which becomes significant given subdued productivity growth in Australia over the recent years."
- Housing policy implication:
  - While housing affordability is impacted at the margin, this "represents structural supply shortages and is best addressed by boosting supply."

*Source: IMF staff estimates and analysis in the provided chapter content.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1ausea2024002.pdf_