Back in 2021, I wrote a post about a shortage of agricultural labourers on Australian farms. Australian farmers were offering incentives to attract New Zealand farm labourers to move to Australia. I want to revisit that post, but this time from the perspective of the New Zealand markets for agricultural labour and agricultural land.
First, consider the market for labour, as shown in the diagram below. The market starts in equilibrium, where the demand curve D0 meets the supply curve S0. Equilibrium agricultural wages are W0, and Q0 agricultural labourers are employed. As Australian farmers attract New Zealand farm labourers to cross the Tasman, this decreases the supply to S1. That pushes the equilibrium agricultural wage up to W1, and decreases the quantity of agricultural labourers employed to Q1.
How does that affect the market for agricultural land? The demand for agricultural land depends on the value of the marginal product of land. With fewer agricultural labourers available to work the land, the marginal product of land (the amount of production from the next hectare of land) will decrease. That means that the value of the marginal product of land will also decrease - land is not providing as much value to farmers. Now consider the market for agricultural land shown in the diagram below. The market starts in equilibrium, where the demand curve DA meets the supply curve SA. Equilibrium land rents are RA, and QA agricultural land is being utilised. As the value of the marginal product of land decreases, the demand for land decreases to DB. That decreases the equilibrium land rent to RB, and decreases the quantity of agricultural land being utilised slightly, to QB.
It is little wonder that New Zealand farmers were worried about Australian farmers attracting New Zealand farm labourers to leave. Even without considering farm profits directly, not only would it increase farm wage costs, but it would decrease the value of land (which is, as you may expect, related to the rental value of land).
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