Wednesday, September 29, 2010

Did immigration worsen the recession?

There is an interesting comment in economist Stefan Karlsson's blog about the role of "labour mobility", the ease of migrants to move around for work, in recessions.

...while immigration during booms and emigration during slumps increases and decreases respectively the supply of labor in accordance with the movements in demand of labor, immigration during a housing boom will temporarily further increase housing demand and so help worsen the bubble. Similarly, if foreign (or domestic) workers leave during housing slumps, this will further reduce demand for housing and increase the gult of unsold homes and cause further declines in construction activity.

During the housing boom of these countries, both Spain and Ireland in fact had a massive influx of foreign workers, many of whom worked in the construction industries, something which helped fuel an already unsustainably high level of housing construction activity (as these new workers of course wanted some place to live and so increased housing demand). Now particularly Ireland, but also Spain, are experiencing net emigration of workers, something which will further increase the crisis in the housing sectors in those crisis.
Over the last few years I've heard people make the observation that Ireland was importing immigrants to build houses for immigrants to live in, to build more houses. This was a casual remark to indicate the absurdity of the housing bubble, but Karlsson's remarks show it in another light.

In 2004 the EU expanded into eastern Europe, but most old EU countries placed migration restrictions against citizens of the new member states. Only Denmark, UK, Sweden and Ireland remained open to the new eastern members, and the result was a flood of immigration into those countries, particularly UK and Ireland. That, along with widespread immigration from Britain and scattered immigration from non-European countries, meant that by 2006, 10% of the people living here were non-Irish.

It's an interesting perspective that our liberal immigration policies actually worsened the boom-and-bust cycle. The Poles and Latvians who were employed to build too many houses here during the boom are now leaving them empty, with prices collapsed.

On the other hand I wonder if the present emigration may also have a positive effect in speeding the collapse of house prices so that the bubble bursts more quickly and we can continue building stable wealth? It's a nice thought, but I didn't pay enough attention in university Macroeconomics to be sure, alas!

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