What this paper is about
This paper investigates the impact of expansionary immigration shocks on the New Zealand economy using sign-restricted structural vector autoregression (SVAR) models. By analysing quarterly data from 1992 to 2019, the research seeks to distinguish immigration-driven changes from broader macroeconomic fluctuations to understand how new arrivals affect the labour market, consumer prices, house prices, and labour productivity.
Key findings
- An expansionary immigration shock leads to a significant and persistent decrease in the aggregate unemployment rate and an increase in labour force participation.
- While the impact on headline consumer price levels remains statistically insignificant, there is a statistically significant increase in the price levels of non-tradables.
- Immigration shocks significantly increase house prices and household credit.
- Despite New Zealand’s focus on high-skilled migrants, the study finds a statistically insignificant impact on aggregate labour productivity.
- Immigration shocks are a major driver of the New Zealand business cycle, accounting for 30% of the variation in both real GDP and the unemployment rate after three years.
- Robustness checks reveal that “younger” immigrants (aged 15–29) have a more pronounced effect on lowering unemployment, while “older” immigrants (aged 30–44) are more closely associated with labour productivity gains.
Why we did this research
We conducted this research to better understand how migration shapes New Zealand’s business cycle, consumer prices, house prices, and labour productivity, particularly as our immigration rates are among the highest in the OECD. While migration is a frequent topic of public debate, there is limited structural evidence on how immigration shocks transmit through the broader economy. By employing advanced sign-restricted models, we aimed to move beyond simple correlations and provide a clearer, more robust picture of how new arrivals influence critical macroeconomic variables. Ultimately, this research seeks to clarify the extent to which migration acts as a catalyst for economic activity, price pressures, and productivity shifts.
What data have we used?
The study uses quarterly New Zealand data spanning from 1992q1 to 2019q4. This period was chosen to align with the era of inflation targeting and to avoid the extreme economic distortions caused by the COVID-19 pandemic. The dataset was compiled from several key institutions, primarily Stats NZ, the Reserve Bank of New Zealand (RBNZ), and FRED Economic Data.
To identify migration shocks, we constructed an immigration rate using accumulated net migration relative to the working-age population. Our core economic indicators include production-based real GDP, real wages, the unemployment rate, and the labour force participation rate. Furthermore, we utilise data on house prices and household credit, as well as various measures of consumer price index (CPI), such as headline CPI, core CPI, and the sub-components of CPI: tradables, non-tradables and services. To capture the policy and financial environment, we also included the official cash rate (OCR), 3-month interbank rate, and the exchange rate.