Flat White

Rethinking the guest worker economy

14 December 2016

2:52 PM

14 December 2016

2:52 PM

MEXICO-MICHOACAN-VIOLENCEA spirited debate has broken out about the use of temporary labour programmes in Australia, but the simultaneous political cross-dressing by Labor and the Coalition on different policies reflects enormous confusion within as well as between the parties. Many in the community are apprehensive about the trajectory towards greater use of these schemes, but what has been missing in the hurly-burly of the debate is an anchoring principle to guide sensible policy.  

What follows is a guide to rebasing the policy debate on firmer ground, but first let me explain how the situation has evolved with a stylised model of developed countries. (I will strip out permanent migration and some other real world factors to establish the logic of the argument, then add them later as relevant). 

Let’s start with a simplifying assumption that developed countries started with no temporary labour programmes, and that occupational outcomes operated on an essentially free market basis where supply and demand were the dominant factors dictating the price (remuneration) of different jobs. In this largely market-driven scenario, occupations ranging from accountants to zookeepers found their fortunes rising and falling in line with the most efficient allocation of resources. Allowing for lags in this national market, there was essentially no such thing as labour or skills shortages – the supply of labour simply adjusted to what the ever-changing market was demanding.  

At any one time in this stylised model, a businessperson might claim a labour shortage, but what that really meant was an unwillingness or inability to pay the market rate required to attract workers. A businessperson asking the government to solve this ‘shortage’ with subsidised labour was unlikely to find success. Over time business people became aware of an alternative solution to the labour “shortage” problem: change the law to allow the temporary import of lower-cost labour from lesser-developed countries.  

Many Western governments around the world accepted the ‘shortage’ rationale and went on to create temporary imported labour schemes for certain industries. Quite rapidly, many businesses shifted their operating model to adapt to the new arrangements. Many businesses are now dependent on these government programmes to sustain profit levels, and some are so reliant on lower cost labour that ending the schemes would threaten the viability of their business. Companies that have never utilised imported labour now experience a competitive disadvantage and press for their own lower cost imported workforce.  

The limits to labour importation are often quite weak: in some countries companies are allowed to claim labour ‘shortages’ with reference to their inability to secure labour at less than market terms. The fact that certain businesses expand or even remain solvent can be cited as clinching evidence of policy success. The low bar for “success,” coupled with the absence of caps for many programmes, has seen a large expansion of these government schemes around the world. 

The new availability of lower cost labour has had significant effects on domestic workers in affected industries. Just as textbooks would predict, the introduction of the cheaper alternative has reduced demand for domestic workers (underemployment), put downward pressure on price (remuneration), and reduced investment in domestic skills development. For domestic workers underemployed due to these government schemes the debate in some countries has taken an unsettling turn: some business leaders have started criticising them for a lack of training and work ethic compared to labour from lesser developed countries.  

For many Western economists the downward pressure on wages is a feature of the system, not a bug, and they argue that even greater levels of low-cost labour would be good for business and good for people in lesser developed countries. Where would this process end? The ‘open borders’ economic assumption underpinning the advocacy is that having migration limits is inefficient while ever a domestic business does better by importing lower-cost labour. 

The logical extension of this thinking would be a radical expansion of temporary workers over time and dramatic reconfiguration of our societal structures. In Australia, for example, this model might one day see a population of forty million people being comprised of ten million lower wage guest workers. Some economists see Dubai – with eighty percent of its population comprised of guest workers – as a successful model.  

As we look at the trajectory it starts to become evident that there are deep social, political and economic consequences of these policies that economists are ignoring. Any long-term assessment of temporary labour needs to take into account social integration issues, the blurring of citizenship rights and responsibilities, confusion regarding entitlements to state services, confusion regarding taxation obligations, political instability caused by populist reaction, and the long-term economic costs of dysfunction. 

In Australia, the workplaces in some industries are increasingly characterised by a large cultural and economic distance between the owners and their lesser-developed country workforce, hinting at the development of Latin American hacienda-style structures. All of these factors can lead to dangerous social divisions in peacetime, and in times of conflict they present even greater challenges. Economists invariably ignore the strategic questions, but guest worker economies have unique vulnerabilities compared to normally structured countries.  

The deep problems with blurred citizenship were a key reason why Treasurer Peter Costello argued against guest worker programmes for Australia. Looking at different countries that had tried such schemes, Costello said that guest workers are not accorded full citizenship rights, their status is always secondary, they are not expected to assimilate, they are vulnerable to exploitation and they become a society within a society. ”Our culture and history is not compatible with the introduction of guest workers or different tiers of citizenship,” Costello argued in a speech to the National Press Club in 2006, “Our concept of an immigrant society is that all arrivals are offered the opportunity to become full, first-class citizens.”  

Addressing the various issues addressed above does not, of course, entail the abolition of temporary work, but it does require a recalibration of policies to bring them into alignment with long-term goals.  Here are some pointers for policymakers.  

Consider more deeply the desirable future quantum and structure of the population. Accept that limits on temporary workers are in the national interest, and accept the corollary that under the most efficient outcome some firms will complain about “shortages”. Recognise that governments setting wages divergent from market level (often under pressure from trade unions) can induce demands for cheaper labour, and work to minimise distortions. Accept that badly designed welfare arrangements (such as overly-accessible dole) can impair labour supply, and work to fix them. Finally, and above all, reject the naive assumptions of “open borders” economists and restore a hardheaded anchoring principle: act in the national interest.  

 David Alexander is Managing Director (Federal) at Barton Deakin. The views expressed here are his own.


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