A catalyst for economic development

It was not that the economy grew because we imported more foreign workers but that foreign workers came because the economy was growing.

A recent Malta Today survey of the top five concerns of the population revealed that almost 22% were worried by the amount of foreigners living in Malta   ̶   this  was the second top concern after inflation and came ahead of corruption. It was scant consolation that the percentage had decreased by three percentage points from the previous survey in October.  It is also telling that concern about foreigners remains higher among Labour (27%) voters than among Nationalist ones (16%). 

Is it justified?  The Opposition tells us so in no uncertain terms.   Mind you, I do not believe for a minute that most of the leadership really thinks so; they are just exploiting the issue for electoral purposes, not having much else to convince voters that they have a clue as to what is happening in the economy.  But this does not mean that they are not inflicting damage, not least by feeding the narrative of Norman Lowell’s jingoism.

So, I ask again, “is it justified?”.  No.  Don’t take my word for it.  Rather than listening to the rubbish on social media, follow the evidence.  There’s nothing better than relying for the facts on an institution that doesn’t care a hoot about petty local politics   ̶   the International Monetary Fund (IMF). 

In a paper on Immigration and the Labour Market in Malta, its economists find that immigration has been positive for Malta, as it has helped boost growth, employment, productivity and incomes. The increased availability of foreign labour, they say, has also helped contain wage inflation (and hence probably also price inflation) in recent years, contributing to maintain competitiveness in the face of a booming economy. The results suggest that foreign workers have helped contain aggregate wage inflation.

This is not a conclusion plucked out of thin air.  It is based on a Phillips curve analysis (an economic theory that inflation and unemployment have a stable and inverse relationship), an empirical analysis of the drivers of wage dynamics, the NAIRU (non-accelerating inflation rate of unemployment), a decomposition of the various variables that feature in the relationship between immigration and the labour market, and the use of regression analysis.  I won’t bother you with the statistical techniques.

Eight key take-aways

1. One key take-away is that foreign labour has helped support several years of strong economic growth in Malta, averaging around 7% over 2013–19   ̶   nearly four times higher than the EU average. Foreign workers added an extra 18% to the size of the labour force over the period 2013–18 on top of the nearly 10% added from Maltese nationals. Meanwhile, the unemployment rate declined to record lows and total employment grew by 29%, compared to just around 9% in the period preceding the global financial crisis (2002–07).

2. A second take-away is that immigration has been positive for Malta, as it has helped boost employment, productivity, and incomes.  Foreign labour has also helped contain wage and price inflation in recent years, contributing to maintain competitiveness in the face of a booming economy.

3. A third one is that migrants are helping to meet the shortage of workers to meet growing and broad-based labour demand.  In other European and advanced economies, immigrants tend to have lower labour force participation and employment rates than natives. In Malta, however, the very low and declining unemployment rate among foreign workers, from 1.8% in 2011 to 0.3% in 2018, along with a declining unemployment rate among Maltese workers, points to the demand-pull nature of migration to Malta. I suppose that you noticed the concluding words of the previous paragraph about the “demand-pull” nature of migration.   In simple words, it was not that the economy grew because we imported more foreign workers but that foreign workers came because the economy was growing.   Will Jerome Caruana Cilia, Ivan Bartolo, and Ivan J. Bartolo please note and stop disinforming or misleading people! Excess demand for labour is pulling foreign workers into the Maltese economy and integrating them into a growing labour market, potentially fueling even more demand for labour via aggregate demand effects. Indeed, the number of job vacancies nearly doubled between 2013 and 2018 even as the labour force was expanding, employment was rising, and unemployment was declining. Administrative data indicate that increases in job vacancies are widespread across sectors and occupations.

4. A fourth take-away was that immigration has been broad-based. The sectors that experienced the largest increases in the volume of foreign employment over the same period were mainly labour-intensive services across the skill spectrum, from professional services to retail to accommodation and food services. The broad-based nature of foreign employment highlights the range of labour shortages across sectors with varying skill requirements. In percentage terms, the largest increase occurred in arts, entertainment and recreation (which includes the remote gaming sector), where the share of foreign workers in the sectors total employment rose by over 47% in 2005–18, followed by tourism and other services sectors. Manufacturing and construction also experienced notable increases of 15% and 24%, respectively.

5. Fifth, foreign employment in Malta has grown across a range of occupations and skill-levels. While higher-skill occupations such as managers, technicians, and professionals tend to have a larger share of EU nationals and elementary occupations tend to have a larger share of non-EU nationals, both sets of migrants are found across high, medium, and low skill occupations and sectors. Overall, workers from the EU account for around 60% of foreign employment

6. Sixth, as foreign workers have helped fill labour shortages, there are signs that Maltese workers have been upgrading into higher skill occupations. Over 2012–17, the number of Maltese workers employed in elementary occupations or as clerical support workers declined by nearly 18% and 9%, respectively. These declines were more than offset by increases in high and medium skill occupations, mainly in services sectors. Maltese workers employed as managers increased by 25%, professionals by 23%, and services and sales workers by nearly 20% over the same period.  This will support stronger productivity growth and wages over time.

7. Seventh, a simple extrapolation exercise applied to Maltese data suggests that GDP per capita gains from immigration could have been sizeable.  Applying estimated elasticity of real GDP per capita to the migration share, it appears that there was a large income gains over two selected periods: 2005–17 and 2010–17. In particular, nearly one-third of the actual increase of GDP per capita over 2005–17 and around one-fifth of the increase over 2010–17 could have been due to foreign labour inflows. That means that immigration would have boosted real GDP per capita by 13% (or around 2,000 constant euros) over 2005–17, and by an 8.4% (or around 1,300 constant euros) over 2010–17.

8. Eighth, the results suggest that foreign workers have helped contain aggregate wage inflation.  The coefficients for the usual wage Phillips curve variables mentioned above   ̶   unemployment, core inflation and labour productivity   ̶   are statistically significant and their magnitudes are reasonable. Most important, the coefficient attached to the share of foreign workers is also significant and has a negative sign, indicating a dampening effect on aggregate wage growth in the short term.

Interpreting the results

The results are qualitatively robust to different specifications and definitions of key variables, such as labour market slack  ̶   the broad unemployment rate gap, the job vacancies-to-unemployment ratio, and the headline unemployment gap.  The main results are also robust to using the change in the share of foreign workers rather than the level.

Further, the key results are robust to lagging the unemployment rate, lagging the share of foreign workers, and using growth in real compensation per employee as dependent variable.  In other unreported results, robustness was also checked to using other dependents variables such as the share of part-time workers in total employment, shares in total employment and in gross value added accounted for by manufacturing or services, the labour force participation rate, and the female employment share.

As I said, the results suggest that foreign labour has helped contain wage inflation in recent years. To identify the drivers of nominal wage growth, the IMF conducted a decomposition analysis (below) so as to calculate the contributions of each of the independent variables included in the regressions (negative readings help drive down wage inflation; positive ones help drive it up).

The results show that labour market slack (unemployment) exerted some downward pressure on wages until 2014, yet more recently helped increase wage growth. In recent years, inflation expectations have also dampened wage growth. Also, immigration appears to provide the largest negative contribution, especially since 2017. Decompositions based on other model specifications   ̶   when using the broad unemployment gap or changes in the migration share   ̶   show smaller contributions from immigration to wage growth in recent years, but in the same direction.

Overall positive effects

The IMF paper is absolutely unambiguous:  immigration has had overall positive effects on growth, employment, and income in Malta. Foreign workers have buttressed fast economic growth through employment gains and safeguarding Malta’s competitiveness.  Important productivity and real wage gains may have been facilitated by the large inflows of foreign workers.  It is likely that these favourable effects will increase over the medium to long run. 

What is even more interesting are the recommendations made in the paper for future policies.  These include facilitating healthy long-term adjustment through structural reforms, including investment in human capital and innovation. Another one is that investing in skills, education and innovation may help increase the potential productivity and wage gains from immigration by maximising the scope for complementarity.  Other policies should foster innovation through stronger public investment in human capital and research and development (R&D). Last, but not least, ongoing measures aimed at closing skills gaps, notably through training programmes, should continue to be supported and refined.

PN’s negative narrative

Contrary to the negative narrative of the PN economic spokesmen, most studies confirm that immigrants make an economy more dynamic.  “Immigrants boost economic growth, employment growth, and economic dynamism through their contributions to the workforce, entrepreneurial activities and purchases of goods and services,” according to Madeline Zavodny, an economics professor at the University of North Florida, in a National Foundation for American Policy study.

Immigration fuels the economy. When immigrants enter the labour force, they increase the productive capacity of the economy and raise GDP. Their incomes rise, but so do those of natives. It’s a phenomenon dubbed the “immigration surplus”. In addition to the immigration surplus, immigrants grease the wheels of the labour market by flowing into industries and areas where there is a relative need for workers   ̶   where bottlenecks or shortages might otherwise damp growth.

I cannot understand why the Government has been constantly on the defensive on this.  It is about time that it counter-attacks and starts convincing people that immigration is a catalyst for economic development.  All too often, this fact gets lost in the rhetoric around the issue.  This is not to say that housing, traffic, and infrastructure concerns can be ignored, but they should not be allowed to crowd out economics   ̶   and nearly everything else.

Photo: 112 Uttar Pradesh

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