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Skilled labour migration removes incentives to invest in education

By Cameron Murray - posted Monday, 19 July 2010

The shrill from commentators warning of Australia’s apparent skills shortage is deafening. But there are a number of reasons why this claim, and the inevitable recommendation for government to increase quotas of skilled migrants, is flawed, and why the solution is not in the best interests of Australia in the long run.

For the acute observer the transparent falsehood of the claim jumps right out at you:

… skilled labour in an area like project construction is an international problem, so poaching what we need from overseas is not going to be easy.

ACIL Tasman points out that LNG project specialist workers are globally mobile, moving from site to site (and often between projects at varying stages of development) - wherever their services command the highest price. As the consultants warn, opting for less-experienced personnel carries with it the dangers of higher error rates in construction and resulting delivery delays and still more expense.


Translation: if you want the skills you need to pay.

A government with backbone would tell industries crying poor to sort it out themselves. Large mining and gas projects have very long lead times - long enough in fact to train some of the existing workforce in skills that may be required for future projects. If you need the slam-dunk of skills and experience, you are inevitably poaching people from another project - experience only comes from a finite number of places.

LNG project specialists, discussed in the linked text above, can only develop specialised skills and knowledge of LNG projects by actually working on LNG projects. A company aware that the industry is expanding rapidly would be wise to have succession plans and internal training programs in place to plan for this highly predictable competition for workers.

Domestic companies have numerous options available to ensure adequate skills are brought to a project, but costs are kept to a minimum. Labour efficiency could be improved through better task delegation for example. Administrative tasks can be time consuming, and an administrative assistant could be shared among a few technical people to greatly improve their productivity. Other technical innovations may also be possible in addition to the paying more to attract Australian workers back from abroad.

What is most bizarre about most of the skills shortage claims is that there is never a mention of salaries. In claiming any shortage in a market economy, neglecting prices will undermine your analysis. Furthermore, a recent study suggests that migration itself can accentuate the problem:

Less than a third of people from non-English speaking countries who migrate to Australia on skilled workers' visas are gaining work in their fields and many of them are adding to the skills crisis they were brought in to solve.


Government intervening to increase migration quotas of skilled workers results in a number of problems. First, governments inevitably pick winners and losers. The industry that lobbies hardest to get their skills on the list can expand without having the added cost of paying their technical people higher salaries. It also raises the question of why we should limit migration to highly skilled people. Wouldn’t letting anyone through the door keep the wages of unskilled people down as well? Wouldn’t that also keep inflation down, and interest rates low? At least that’s the argument of one infamous spruiker.

Second, and in my mind more important for the long run, people who invest the time, effort and money to acquire skills need a return on that investment. Why would I spend more than $100,000 and seven years of my life studying to be a doctor when I will end up earning the same as a plumber? Not until I have invested more than ten years of training into a specialisation will I end up charging a premium for my time. Acknowledging the importance of this return to education highlights a key feature in labour markets relevant to this debate.

Part of the return on education investment for Australians is the opportunity it creates for working abroad and earning a much higher salary. Doctors can easily be attracted to work in the US or the UK or for those with linguistic skills, continental Europe. The same applies for doctors and engineers from India and South-East Asia. Their investments in education have opened the door for them to come to Australia. Put simply, skills in demand get raided by countries that can offer better pay and quality of life. Australia is a middleman in a global game and our departures statistics confirm (PDF 105KB) this (I apologise for the age of this data).

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First published in the author's blog, Observations of an economist environmentalist, in July 2010.

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About the Author

Cameron Murray is an economist with a broad range of interests. Cameron runs a blog site Observations of an economist environmentalist where he aims to challenge conventional wisdom, and make readers think twice.

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