Population and Growth

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Some business lobby groups are apparently opposed to Julia Gillard’s plan to reduce immigation rates, and hence population growth. It is argued that reducing population growth rates would reduce economic growth. Unfortunately this is far from clear cut. The workhorse model of economic growth, the neoclassical growth model, suggests that rising population growth reduces steady state living standards, and has no effect on per-capita economic growth.  The simple and intuitive reason for this is that higher population growth increases investment required to keep the capital stock growing, which becomes more difficult the faster is population growth. If Tony Abbott cuts infrastructure spending and increases population growth we have pretty much a recipe for reduced living standards, according to the standard model. More recent work on economic growth, both empirical and theoretical,  has come to conflicting conclusions about the relationship between population and growth. Some of  Michael Kremer’s work suggests that larger populations increase innovation and economic growth. Becker suggests that it is not growth per se, but fertility rates that affect economic growth (what is clear is that the type of immigration will affect economic growth, with skilled immigration likely to increase growth).

It is almost certainly the case that changing immigation rates will affect the composition of economic growth, with the construction sector for example more dependent on a growing population. But it is far from clear that reducing population growth reduces economic growth.

19 Responses to "Population and Growth"
  1. This anecedote is not supported by any study I have ever read of, but it has been suggested that the USA’s entrepreneurial strength (and presumably long-run growth) is due in part to ongoing high levels of immigration. The people with the most “adventurous” DNA get up and leave to exploit opportunities elsewhere. A different empirical perspective, maybe? 

  2. That’s consistent with the Becker story above – high natural birth rates are problematic, but if you get the right type of immigrants then this need not be detrimental to growth. Your argument is consistent with Australia’s focus on skilled immigration – Canada has in recent years also followed Australia in making it easier for skilled immigrants to enter and more difficult for other immigrants, in the belief that this leads to better economic outcomes.

  3. Mark,
     
    Are you confusing total economic growth with per capita economic growth.  I would imagine that it is total growth that business is concerned about and this is likely to be promoted by immigration.  Isn’t it?

  4. No confusion at all. As I say above, a rise in the population growth rate in theory does not affect steady state per capita growth, but lowers living standards. If it doesn’t lower per capita growth then it must be, as you say, that aggregate GDP growth rises with population growth. But it’s not clear to me why business would prefer higher growth if that means lower per capita GDP? I thought business people were supposed to dislike being poor?

  5. Mark. Business does not care about GDP per capita. They support high population growth because more people means a larger consumer base and (potentially) higher profits.

  6. late at night but,,,,,,if the average australian is the same as the average immigrant than we may be putting a drain on the fixed capital stock…but if we are tagetting higher gdp per capita bring in people with more skills, more money or more motivation to work the latter may drop wages and may or may not lift productivity and total income,,,,but business may get a bigger share of the higher income level

  7. …but less profit per businessperson, so if businesspeople thought this through they’d be worried. Think China – lots of people, profit per businessperson not much. By the way, I’m not opposed to immigration, but I don’t buy the population equals growth argument and it’s not supported by economics. I also don’t buy the sustainable Australia line that Gillard is pushing. Surely global sustainability is at least as important, and on that front it is probably better to have a few more people in Australia and a few less people elsewhere.

  8. Mark

    A larger population implies larger GDP in absolute terms, even if the GDP per capita might be lower than otherwise (there are a bunch of reasons why the neoclassical model might be wrong on that though). Larger GDP means a larger market to exploit, which many of the business groups would expect to benefit from.

  9. sorry Jeff, that was my answer to Leith and yours hit as I submitted. Again, you’re right, see research on Australian immigration and wages by Chris Worswick and others (his is a paper I know, I’m sure there are others).

  10. Mark, the businesses the push the population line are not representative of the average business. There is no reason to believe for example that Woolworths would be less profitable under a higher population scenario unless you think that the larger market would encourage more entrants and push down profit margins.

  11. Mark,
    It is the big business CEOs – or their mouthpieces – that you hear from.  Simplistically, CEOs get paid in proportion to the size of their companies.  So, economic growth means growth of existing companies means salary growth for existing CEOs.
     
    The effects of immigration are likely to be a lot more complicated than this, of course.  But business lobbying is rarely sophisticated.
     

  12. Mark, it is disturbing that you claim that economics does not support the idea that population growth is not proportional to GDP growth, all else held equal. Of course we wouldn’t say the same about GDP per capita, but overall GDP growth, yes, it certainly does say that – the major growth theories have this phenomenon in common, and it is born out in a lot of the literature.
    I hope the 3rd year macroeconomics course that I took 6 months ago at Melbourne Uni is not already out of date…
    (anyway, if you think business people are upset about a lot of people coming into Australia, then how do you explain their desire to expand their businesses overseas?)
     

  13. Mark,

    Using the neoclassical growth model to suggest that reduced population growth will increase living standards is silly.  It assumes a communist state where new people share equally in the extra output as a birthright without paying anything.

    Having extra people in a neoclassical world without market imperfections increases the gains-from-trade. The original people have increased opportunities to trade because the new people exist. Its like removing a prohibitive tariff so that Pareto welfare gains must inevitably result.  This is first-year economics.

    The ‘common property’ error says that new people gain access to a society’s assets woithout paying anything. In fact extra people (migrants or your children) must either buy assets (housing, equities) from pre-existing people on terms that are acceptible to the owners or have them assigned as voluntary bequests and this increases gains to these original people.  Provided the new people are happy living (the newborn don’t wish to suicide and migrants don’t want to go home) then the newcomers are better-off as well.

    Of course the neoclassical model itself is wrong in this situation but the case against population growth has nought to do with spreading the capital stock more thinly.  It has to do with distortions in marketsw which mean extra people don’t add to welfare – subsidised education, the existence of unpaid for public goods and environmental externalities such as congestion are all enough to mean extra people do not mean welfare gains to all.

    In addition equity issues arise. Extra people switches the functional distribution of income against labour.

    All these concerns can be vaddressed by pricing the externalities and taxing the capital gains asset owners derive – a broad conclusion myself (and many others) have been arguing for 20 years or more. Another way of putting this is to say that the better we price the environment and get rid of pure public good inefficiencies the more we can enjoy the gains-from-trade advantages of a large population. Ditto if we are prepared to remedy equity concerns with redistributive taxes.

    But the communist inspired myths of thye neoclassical growth model parable tell us zero about how competitive economies respond to population.  The problem is that an externality has crept into this model – namely that assets are common property and not individually owned. 

  14. In addition equity issues arise. Extra people switches the functional distribution of income against labour.
     
    I think you’re wrong harry.
    That isn’t a given at all. This is dependent on the capital/labor ratio with labor being the numerator.
    You don’t seem to understand it.
     
     

  15. Quite apart from debating the merits or otherwise of classical growth models, I thought a key point in the posting was that fertility (or bringing in younger skilled immigrants) is one of the keys to continuing economic growth.

    I’m puzzled by some of the cynicism expressed within these postings regarding the motives of business leaders. I should imagine business is very concerned with the supply of skilled labour as a means of productive capacity to produce the goods and services behind their profits, and not just total population growth as a means of increasing the consumer base for said goods and services.

    You only need to look to ‘”old” Europe or Japan to see the demographically-shaped future associated with (currently) high quality of life, large levels of debt, and low birth rates and immigration. The bill for that ‘sustainable’ population is falling due shortly.

  16. Harry, my point is that theory (and empirics) are ambiguous. Of course the bog standard NCG model is too simple. But it is far from clear cut that a rising population has net benefit, and I’m pretty confident that the policy environment will not look as you hope in your second last para.

  17. Mark, I agree with that – it isn’t at all clear that we are better off with a larger population.  But that is due to possible externalities and equity arguments. It doesn’t stem from increasing demands on capital which gets harder to support as population growth increases.

    The paradox is that with higher population growth and no externalities I am always better off because the market for the assets that the next generation has expanded. I’ll get more offers.

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