Immigration and inflation

I have just been flicking through the NZX submission on monetary policy, thanks to a link kindly provided by Lucy.

While I disagree with most of the submission (for the reasons I gave yesterday about higher interest rates being structural), I was happy to see that they discussed immigration.

Now immigration is an interesting issue, ignoring any social issues (i’m an economists after all), I’m going to focus on the link between immigration and inflation.

Some people say immigration causes inflation, as it increases the demand for goods and services, driving up the price. Other people say that immigration drives down inflation by increasing labour supply, and thereby driving down real wage demands, preventing wage inflation.

Now the way I see it is that immigration increases demand and supply. After all labour is an input to production, but once labour has been paid they turn into consumers, who purchase the goods. As a result, whether inflation rises or falls with immigration depends on the productivity of the immigrants. If we bring in a whole lot of untrained, unproductive workers it will cause inflation. If we bring in workers that have the highest marginal product (so in the places where firms are begging for labour) then it should decrease inflationary pressures.

It seems incredibly simple, the difficult issue is actually identifying and bringing in skilled, hard working labour. However, i’m not sure that cutting immigrant numbers when we have shortages of unskilled and skilled labour is a good idea. I’m sorry RBNZ, but I think the NZX is right on this one.