Unemployment and trans-Tasman migration

The New Zealand Herald reported earlier this month:

Record numbers of people leaving New Zealand to work in Australia could have a negative affect on the workforce over the medium-term.

A report by economic think tank Infometrics shows Australia’s rate of unemployment was lower than New Zealand’s in the first quarter of this year, which was a break from the average rate between 2014 and 2018 when Australia’s rate was 0.7 percentage points higher than New Zealand’s.

“There is a definite correlation between transtasman migration and the relative labour market performances in New Zealand and Australia,” Infometrics director Gareth Kiernan said in the report.

Correlation doesn't necessarily mean causation. The New Zealand Herald article's title is therefore misleading: "‘Drain’ leaves NZ’s unemployment higher than Australia". Now, there are two problems with the New Zealand Herald article here, especially in terms of the title. First, there could be reverse causation - higher unemployment in New Zealand, and lower unemployment in Australia, causing more migration, not migration causing changes in unemployment. To see why, consider the incentives for workers in New Zealand. If unemployment in Australia is lower than New Zealand, then if wages were similar, Australia would more a more attractive option. Workers would start moving to Australia. Wages are not similar though - they are higher in Australia. That increases the incentives to move from New Zealand to Australia even further. The takeaway is, though, that unemployment differences may be causing migration, not the other way around.

The second issue is that, based on a simple supply and demand model of the labour market, migration could affect unemployment in both countries, but the effect would be in the opposite direction to what the New Zealand Herald suggests. To see why, consider the diagrams below, which show the labour markets of Australia on the left, and New Zealand on the right. In both labour markets, the market wage (W1 in Australia, and WB in New Zealand) is above the equilibrium wage (W0 in Australia, and WA in New Zealand). This means that there is excess supply of labour in both countries. There are more people wanting to work than there are jobs available. That is, there is unemployment in both countries. This excess supply of labour is the difference between QS1 and QD1 in Australia, and the difference between QSB and QDB in New Zealand.

Now consider what happens as workers more from the New Zealand labour market to the Australian labour market, as shown in the diagrams below. Supply of labour decreases in New Zealand from SLA to SLC, and at the market wage, the quantity of labour supplied decreases to QSC. This decreases the excess supply of labour in New Zealand (to the difference between QSC and QDB), so unemployment decreases. In the Australian labour market, the supply of labour increases from SL0 to SL2, and at the market wage, the quantity of labour supplied increases to QS2. This increases the excess supply of labour in Australia (to the difference between QS2 and QD1), so unemployment in Australia increases. So, the migration of workers from New Zealand to Australia should have the effect of decreasing unemployment in New Zealand, and increasing unemployment in Australia, not the reverse.

Now, there are many alternative models of the labour market, aside from the model based on supply and demand for labour. However, I don't think those alternatives would suggest decreases in labour supply would increase unemployment. For example, in a search model of the labour market, fewer available workers in New Zealand might mean that job vacancies remain unfilled for longer, since it would take employers longer to find a suitable worker, but unemployment would be unaffected (on the other hand, wages would increase, because with fewer workers available, each worker has slightly higher relative bargaining power).

So, there may be a correlation between unemployment differences between Australia and New Zealand, and trans-Tasman migration. But that doesn't mean that the migration will make unemployment differences worse.