Mixed blessings of more migration and fall in adult population


ECONOMICS:Immigrants, who had been toughing it out after losing their jobs, are starting to leave

‘THIS TIME it’s different.” This is recognised as the most costly catchphrase in the lexicon of economic analysis. It captures the delusion, periodically suffered by large crowds of investors or indeed whole societies, that they have somehow discovered the elixir of permanent uninterrupted economic growth, or a means of liberating themselves from the rules that normally govern the behaviour of asset prices.

We in Ireland suffered our own mass “this time it’s different” delusion during the recent building boom/property bubble.

The delusion drew on a number of propositions, but probably the single most potent one had to do with demography.

A great many influential people – in construction, banking and the policy-making establishment – bought into the notion that continuing strong population growth, fuelled by an endless wave of inward migration, was a given, and would sustain a brisk pace of building activity and high property values more or less indefinitely.

This, as we have now discovered to our immense cost, was a treacherous belief, but it was fed by seemingly authoritative analysis, and a ready supply of quixotic long-range population projections.

My own “eureka” moment in relation to this thinking came in 2005 when construction industry experts, who had previously been estimating that we needed to build 40-50,000 houses a year, suddenly revised that figure upwards to the 70-80,000 range.

The sharp upward revision reflected the housing needs of the tens of thousands of immigrants who had started to pour into the State. The fact that a goodly proportion of the immigrants were construction workers prompted me to think that what was going on had some of the hallmarks of a giant pyramid scheme.

In more technical terms, the belief that demography drives economic activity amounts to treating demographic factors like migration as exogenous. And, in the short run, it is true that migration flows influence economic activity, through their effect on demand.

It makes much more sense, though, especially when considering the medium to long term, to think of the relationship as being the other way round. In other words, to think of migration flows as endogenous, as responses to economic conditions.

Why did such large numbers of eastern Europeans flock here during the boom? Why did large numbers of Irish people who might otherwise have emigrated remain here? The answer is that strong economic growth had created plentiful employment opportunities here at attractive wage levels.

So, far from being a given, net inward migration is more like a barometer of economic conditions. This raises the rather obvious questions of what has been happening to migration flows since the onset of recession here, and what are the prospects for the next few years.

As to what has been happening, we have some indicative data.

A couple of weeks ago, I noted that the number of foreign nationals on the live register had started to fall. In fact, the number of foreign nationals on the register has now fallen (albeit marginally) in each of the last two months, even as the total register has risen by another 20,000.

Incidentally, the number of foreign nationals from the so- called EU accession states on the register peaked in April, and has fallen by almost 2,000 since. This would suggest that immigrants, who had previously been toughing it out here after losing their jobs, have started to leave.

Another indication of what’s been happening to migration flows, as Colm McCarthy has pointed out, is provided by the CSO’s quarterly estimates of the labour force and labour force participation rates.

Combining these two sets of figures generates estimates of the adult population. The numbers are instructive. They suggest that the adult population increased by just 13,000 in the period between the first quarter of 2008 and the first three months of this year, compared with an average rise of 73,000 over the previous five years. More tellingly, the data suggests that the adult population actually declined by about 5,000 in the first quarter of this year.

Given the rate of natural increase in the adult population (the margin by which the numbers coming of age exceed adult deaths), which is about 30,000 per annum, these estimates suggest that net outward migration has recommenced and may have amounted to 15-20,000 in the 12-month period to Q1 2009.

Unsurprisingly, it looks like this was heavily concentrated in the last three months of this period.

What about the next few years? Well, migration forecasts have proven notoriously unreliable in the past, even at times when the vast bulk of the migrants were Irish nationals whose behaviour local demographers and economists might have been expected to have a good handle on. Now that there is a very large number of recently arrived foreign national immigrants in the mix, the problem of generating reliable forecasts is compounded.

That said, it seems reasonable to expect, given the relatively poor outlook for the Irish economy and labour market compared with the generality of European countries and the US, that net outward migration will gather pace over the next few years and bring with it a decline in the adult population, if not the population as a whole.

This would be a decidedly mixed blessing.

On the one hand, it would mean that unemployment would peak earlier and at a lower level, and that pressure on social and physical infrastructure would be relieved, all of which should help the expenditure side of the government’s budget.

On the other hand, it would mean higher dependency ratios and reduced domestic demand. More particularly, it would mean reduced demand for housing, and would exacerbate the current problem of excess supply in the housing market.