Labour market testing doesn’t work. Increase prices instead.

If you have been following the debate on the China-Australia Free Trade Agreement, you might have noticed the phrase labour market testing. This is bureaucracy-speak for advertising jobs.

Should employers have to advertise jobs before they hire foreign workers? This question has become the be all and end all in the political debate over skilled migrants.

Often overlooked, a bipartisan consensus exists that Australians should have first dibs on jobs in Australia. This should be the end of the story on whether to advertise jobs first. Yet as with much public policy, there is something amiss here. There is no evidence to suggest forcing employers to advertise jobs has any effect at at all on Australian employment.

A thought experiment can help here. Imagine all employers are either good employers or bad employers.

Good employers will comply with all the rules of hiring skilled migrants. More importantly, they will undertake due diligence before they decide to hire a skilled migrant. They will seek out employment from the local labour market if available. This does not occur because they are altruistic but because it is a good business decision. If a business complies with the law, hiring Australians is cheaper than hiring migrants. For these good employers, labour market testing is a hurdle to pass through when there is no locally available option. This points to the superfluous forcing employers to prove they have advertised jobs.

Bad employers are different. Bad employers will not comply with the rules of hiring skilled migrants. They will underpay them and force extra hours on them. They will seek out employment on the cheapest terms possible, sometimes within the law but also outside the law. They will use skilled migrants as an alternative source of labour to Australians to lower their wage bill. For these employers, mandatory job advertising is useless as they have no intention in using Australians in the first place. They can put up 10 Facebook ads and 20 Seek ads and ignore them. In fact, they are happy to do so as it provides the veneer of respectability, allowing them to go about exploiting skilled migrants.

This is the worst part of labour market testing: an utterly false sense of achievement at meeting the broader goal of getting Australians into the workforce.

Some people say you can get labour market testing to work if you enforce it more effectively. This is belies the fact public servants are not very good at figuring out what is going on inside businesses. Thankfully, there is an easier alternative.

Employers respond to prices above all else. By making skilled migrants more expensive, the government would create a better incentive to hire Australians. Instead of creating mountains of paper and internal checks, higher fees would force employers to consider a broader set of options in hiring practices.

This was the original justification to pay equal wages for skilled migrants. If wages are the same between Australians and skilled migrants, all else being equal, the added costs of participation (administration, recruitment etc) in the 457 visa program would see utility maximising firms choose local workers first. However this has broken down in recent years as more skilled migrants are already in Australia, eliminating previously high recruitment costs. Higher fees will ensure Australian’s are ‘cheaper’ without touching wage structures. Coupled with compliance activities, this is a more effective method to improve the treatment of skilled migrants while protecting existing wages and conditions.

The vast majority of businesses do not shirk their responsibilities with regard to migration. They might feel unjustly burdened by a fee increase. However the 457 visa program is too important to be left to its own devices and overtaken by crooks and shonks. There need to be regulated methods at weeding out those who seek profit at the expense of migrants and Australians. A fee increase is a price worth paying for long-term acceptance of the importance of skilled migration and insurance against knee-jerk policy reactions.

I’ve never quite understood why those opposed to the 457 visa program don’t seek to increase the cost structure and instead advocate for a mess of legislative changes. The revenue raised from higher fees would; deter bad employers from using the program, increase the funding available to compliance operations and provide support for things like English language for spouses of skilled migrants. Each of these outcomes are positive for migration policy.



What difference is the Chinese-Australia Free Trade Agreement going to make to migration?

I’ve been pretty unimpressed with the coverage of the Chinese-Australia Free Trade Agreement. A central question has been missing from an avalanche of think-pieces, FactChecks and hot-takes.

What difference will the agreement make if it is passed compared to the status quo we are living in now?

This is my best attempt to answer this question.

  • The removal of labour market testing for Chinese citizens

There are three types of occupations in the 457 visa program: Skill Level 1, Skill Level 2 and Skill Level 3. The first two categories do not attract labour market testing. An employer can hire an overseas worker without advertising the job, regardless of the country of origin. Only Skill Level 3 occupations require labour market testing. Using visa grant data from the Department, there were 6207 Skill Level 3 visas granted from July 2014 to March 2015, from a total of 38,134 visas in the program. Using current trends, this means 84 per cent of the 457 visa program is not subject to advertising jobs (source: visa grants pivot table).

In 2014-15 to March 2015, there were 2569 primary 457 visas granted to Chinese citizens. Of these, 269 were classified as “Skill Level 3”, those subject to labour market testing. The Agreement will remove this requirement. These 269 visas are equal to 0.7 per cent of the 457 visa program from July 2014 to March 2015. It may be the case that removing the requirement to labour market testing will induce more migration. However I find this unlikely as wages and economic growth have traditionally been a much greater influence on 457 visa trends. Further, there was no labour market testing from 2001 to 2013.

My best guess is that based on current trends, at most an additional one per cent of the 457 visa program will be exempt from labour market testing if the Agreement passes.

The Agreement also means Australia cannot cap the number of standard 457 visas granted to Chinese citizens. This is exactly as today, given the entire 457 visa program is uncapped and has been since its inception in 1996. This is a common clause found in past FTAs. The highest number of 457 visas granted to Chinese citizens in any financial year was 2012-13 at 3727, equal to 5.4 per cent of visas that year.

  • The removal of mandatory skills assessment for Chinese citizens.

Mandatory skills assessment is where a government-approved Registered Training Organisation supervises an exam to certify a visa applicant has the skills relevant for the nominated occupation.

This only applies to citizens from the following countries: Brazil, China (including Hong Kong and Macau), Fiji, India, Papua New Guinea, Philippines, South Africa, Thailand, Vietnam, Zimbabwe.

Further, the visa applicant must be nominated in one of the following 28 occupations: Automotive Electrician [321111]*, Fitter-Welder [323213], Baker [351111], Joiner [331213]*, Cabinetmaker [394111]*, Metal Fabricator [322311]*, Carpenter [331212]*, Metal Machinist (First Class) [323214]*, Carpenter and Joiner [331211], Metal Fitters and Machinists (not elsewhere classified) [323299], Chef [351311], Motor Mechanic (General) [321211]*, Cook [351411], Panelbeater [324111], Diesel Motor Mechanic [321212]*, Pastrycook [351112], Driller [712211], Pressure Welder [322312], Electrical Linesworker [342211], Sheetmetal Trades Worker [322211], Electrician (General) [341111]*, Technical Cable Jointer [342212], Electrician (Special Class) [341112]*, Toolmaker [323412], Fitter (General) [323211], Vehicle Painter [324311], Fitter and Turner [323212], Welder (First Class) [322313].

(Source: Trades Recognition Australia)

The Chinese-Australia Free Trade Agreement will remove the mandatory skills assessment for 10 of these occupations (those starred above). The total number of Chinese visa holders nominated in these 10 occupations from July 2014 to March 2015? Fifteen. 15.

For all countries subject to mandatory skills assessment, not just Chinese citizens, a total of 353 visas have been granted  in these 10 occupations. Therefore on current trends, the Agreement will remove mandatory skills assessments for 4.2 per cent of those who are currently subject to them for these 10 occupations.

However, and importantly, a total of 1184 visas have been granted in these 10 occupations for the program as a whole. This means over 70 per cent of 457 visas granted in these 10 occupations are not subject to mandatory skills assessments. If one were to retroactively apply the Agreement for 2014-15, a total of 15 Chinese citizens would have joined them.

I should note also that while the mandatory skills assessment has been removed from the visa process, all visa holders must comply with standard licensing and registration requirements. The visa process also requires they present their qualifications and experience. Visa processing officers may request a mandatory skills assessment if they believe they do not believe the bona fides of a visa application.

  • The introduction of Investor Facilitation Agreements (IFA)

Unlike the two changes above, this change cannot be tested against current trends. An IFA is a framework to facilitate individual contracts between employers and governments that governs labour mobility outside of the standard 457 visa program.

These contracts already exist. The Minister for Immigration has broad powers under the Migration Act to approve these contracts. They are available to any employer in the country regardless of industry or investment origin. Historically, the time taken to conclude a contract negotiation is between 6 and 12 months.

The two main purposes of the contracts are to slightly lower the English language requirement for visa holders and to allow the sponsorship of Skill Level 4 occupations, lower skilled occupations not allowed under the standard 457 visa program. These contracts typically cover regional and rural areas where attracting labour is more difficult.

Unfortunately, I cannot find the number of labour agreements currently in operation. This goes to the long-standing conservatism inherent in the Department of Immigration around transparency. However at Senate Estimates in February 2014, the Department of Immigration and Border Protection noted 51 had been signed in the previous 6 months.

I believe the IFA under the Chinese-Australia Free Trade Agreement is an attempt to streamline negotiations for these contracts, to reduce the length of time for approval. How many new migrants should be expected through this process?

The Roy Hill project is a good historical example. The Roy Hill Enterprise Migration Agreement covered 1715 positions for a $9.5bn project with a total workforce of 8000. However the threshold to enter into an IFA is much lower. A project must be valued at $150m, not $2bn.

Using the same ratio as Roy Hill, a construction project with 150 workers worth $150m may see about 30 positions covered by an IFA. Applications for these contracts will require detailed estimates of workforce and local training. The majority of these workforces will come from people already in Australia. Negotiations will clearly stipulate the number and type of occupations. The contracts will attract serious attention in Senate Estimates, creating pressure to ensure any agreement is limited in its scope.

I estimate between 10-15 of these agreements will be signed in the 12 months after the Chinese-Australia Free Trade Agreement is finalised. The government will want to show the process works but will not want this to be subject to an ongoing campaign. If 50 agreements signed between September 2013 and February 2014 remains the trend, then 10-15 Chinese IFAs would be a 10-15 per cent of the total number of agreements signed.

If an average of 30 migrants per contract is in the ballpark, this will see 300-450 workers who would otherwise have not entered Australia. This would be equal to about 0.8 per cent of the expected total number of 457 visa grants for that period.

There are substantial unknowns here. These unknowns are what is driving the campaign against the Chinese-Australia Free Trade Agreement. For example, if demand for these contracts exceeds what is expected, this signals the threshold investment level is likely too low. If the number of workers per contract is significantly higher than existing contracts, this signals something is amiss.

More FactChecking: The ABC on ChAFTA

This ABC FactCheck article on the Chinese-Australia Free Trade Agreement received a lot of attention this week.

Fact check: Does the China Free Trade Agreement threaten Australian jobs?

The claim: Unions say the China-Australia Free Trade Agreement “allows Chinese companies to bring in their own workforce for projects over $150 million and removes the requirement that jobs be offered to local workers first.

The verdict: The agreement allows the Immigration Department to decide that jobs should be offered to local workers before it issues visas to overseas workers, but it does not require this to happen. The ACTU’s claim checks out.

The claim addresses two distinct issues in the Chinese-Australia Free Trade Agreement. The verdict conflates these issues so much so any reader will walk away with an opinion far from “fact”.

Chapter 10 of the Chinese-Australia Free Trade Agreement has removed the requirement for jobs to be offered to local workers under the standard rules of the 457 visa program. If the agreement were retrofitted to the 457 visa program, it would affect about one per cent of all visa holders in Australia at the moment. One per cent.

For some reason the government does not want to tell anyone this. Labour market testing – the process of advertising jobs – only applies to ~30 per cent of the standard 457 visa program. Everyone knows labour market testing is ineffective at pulling Australians into the labour market. This is the reason why seven in ten 457 visas are not subject to mandatory labour market testing.

The most effective way to promote Australians in the labour market is to create a greater price incentive. A 457 visa should cost the sponsoring business more money. This will make them consider alternatives, such as unemployed Australian workers. Any money raised can help support settlement services like English language and/or monitoring and compliance for the program.

The side agreement for projects over $150m is wholly distinct from the standard rules of the 457 visa program.

The Memorandum of Understanding concerns individual contracts signed between a company and the government. There is no legislation that outlines labour market testing must occur in these contracts. Any claim this assumes this already occurs is false. The ACTU claim cannot “check out” because it is based on a false assumption that a requirement has been removed. The only requirement that has been removed is mentioned above, in relation to the standard rules of the 457 visa program.

Further, the side agreement does not cover unskilled occupations, meaning these jobs must be filled by Australian workers.

At best, this FactCheck is ignorant of critical context. At worst, disingenuous.

“FactChecking” the “FactCheckers”: The Chinese-Australia Free Trade Agreement

I hate Fact Checking. I think it is a ridiculous way to undertake journalism. It implies a level of objectivity that often is not there. So-called “Fact checkers” routinely ignore context and knowingly wade into complex debates where there is no independent truth.

So it is with the Conversation’s series on the Chinese Australian Free Trade Agreement. The latest in this series is authored by Stuart Rosewarme, “Factcheck: Could Foreign Workers Be Paid Less Under the China Australia FTA?“.

At the heart of the public debate on the labour migration provisions in ChAFTA is the “Investor Facilitation Agreement” (IFA) Memorandum of Understanding (MoU). The IFA is a contractual agreement between a company and the government that outlines potential concessions to the 457 visa program.

Stuart Rosewarme is checking whether this agreement will allow for foreign workers on 457 visas be paid less than Australians doing the same job. He concludes:

Michael O’Connor is correct in that there is no black-and-white statement in the MOU that stipulates that foreign workers working side by side with an Australian worker shall unconditionally receive the same conditions and pay.

Clause 2(e) of the MOU does say that Chinese firms operating in Australia must agree to “comply with all Australian laws and regulations, including applicable Australian workplace law, work safety law and relevant Australian licensing, regulation and certification standards.”

However, Clause 5 opens the door to removing those protections through negotiated “concessions”.

Mr O’Connor’s concerns have considerable merit.

The problem with Stuart Rosewarme’s piece is that he doesn’t appear to know much about how the 457 visa works, either in practice or the regulations which govern the program.

“Michael O’Connor is correct in that there is no black-and-white statement in the MOU that stipulates that foreign workers working side by side with an Australian worker shall unconditionally receive the same conditions and pay.”

Buried in Regulation 2.72 at Section 10C of the Migration Regulations is the law governing how 457 visa holders must be paid the same as Australian citizens:

(10)  If the person is a standard business sponsor**–the Minister is satisfied that:

(c)  the terms and conditions of employment of the person identified in the nomination will be no less favourable than the terms and conditions that: (i) are provided; or (ii) would be provided; to an Australian citizen or an Australian permanent resident for performing equivalent work  at the same location;

“No less favourable than the terms and conditions” is commonly referred to as ‘Market Salary Rates”. While a minority of employers can and do pay 457 visa holders less than their Australian counterparts, this is against the law. This requires improved enforcement, not more legislation or statements of intent.

Because this is the law, the IFA would have to explicitly provide a concession for 457 visa holders to be paid less than Australian workers. Possible concessions are outlined in the IFA MoU in Clause 4:

(a) the occupations covered by the IFA project agreement;

(b) English language proficiency requirements;

(c) qualifications and experience requirements; and,

(d) calculation of the terms and conditions of the Temporary Skilled Migration Income Threshold (TSMIT).

‘Market salary rates’ are not listed in the MOU as a possible concession. This means any employer who signs an IFA has to comply with Section 10C of Regulation 2.72: providing ‘no less favourable terms and conditions’ to any 457 visa holder who is performing the equivalent work at the same location as Australian citizens or Australian permanent residents.

Calls for a “black and white statement” on whether 457 visa holders will be paid the same as Australian’s deliberately confuses the audience. The law requires this and there is nothing in the IFA to allow foreign workers to be paid less than Australians. Mr. Rosewarme should have mentioned this clearly in his ‘factcheck’ and showed that, no, it is not possible for the IFA to allow companies to pay 457 visa holders below Australian rates of pay.

I have seen others argue that Clause 4(d), in relation to the Temporary Skilled Migration Income Threshold, allows companies to pay 457 visa holders less. This clause in the MoU relates to Migration Regulation 2.72, Section 10CC, creating a salary level which must be met to use the 457 visa program. The standard threshold is $53,900.

However this salary level does not work as a ‘minimum salary’ and employers cannot pay 457 visa holders $53,900 regardless of their job. The threshold determines that positions with a salary below $53,900 are not eligible for the 457 visa program. Even if an IFA outlines a reduction in the salary threshold, companies will still be required to pay 457 visa holders “no less favourably” than Australian citizens or permanent residents.

Mr. Rosewarme bases most of his argument on this line in Clause 5:

“The project company may be asked to provide additional information by DIBP in respect of its requests for concessions in the above areas.”

Clause 5 of the MoU clearly references Clause 4 as the ‘above areas’. This limits any discussion or possibility of concessions to those identified in Clause 4. This means the only concessions possible under an IFA relate to; occupations, English language, qualifications and the salary threshold. Nothing about market salary rates or wages and conditions. Nothing about broader workplace laws.

I disagree entirely with Mr Rosewarme’s “verdict”. He has not provided “facts” to back up his assertions. He has simply cobbled together a mishmash of references and assumptions, many of which are not grounded in reality.

For the Conversation to run this piece, PLUS have another “reviewer” give it the stamp of approval, shows just how inept this style of journalism and policy engagement is.

**Update: It has been pointed out to me that Regulation 2.72 10C applies to “standard business sponsors” and not work agreements. This is correct. However since the ‘no less favourable’ status was introduced in Section 10C, I understand every single work agreement has contained this same status. Further, this does not change that a work agreement/IFA would have to explicitly outline a concession from the standard program, something which is not raised in the MoU under Clause 4.

Migration and youth unemployment

In any debate about migration, youth unemployment will be one of the first figures raised by opponents. How can you argue against a 19 year old kid out of work? The current youth unemployment rate is 13.4 per cent.

For sometime, I thought the introduction of mass temporary migration – international students, working holiday makers and 457 visa holders – since the mid-1990s might have exacerbated youth unemployment relative to general unemployment. Students in particular are highly concentrated in urban areas and are assumed to work in entry level jobs. We haven’t had a recession since 1991 but temporary migration is a new feature of the labour market since then.

So this from Jeff Borland in May 2015 was interesting:

“It has been suggested that the current episode of higher unemployment involves some ‘new’ features – high youth unemployment, high long-term unemployment and large regional disparities in unemployment. Analysis of previous downturns, however, reveals that these features were all present. Hence the current high rates of youth unemployment, for example, seem to be best regarded as a manifestation of the cyclical downturn rather than a long-term worsening of the labour market outlook for the young.

This is positive for supporters of migration. Youth unemployment was high in the past without temporary migration. It will be high in the future with hundreds of thousands of temporary migrants. The “manifestation of the cyclical downturn” reduces the likelihood migrants are substituting youth out of jobs and points toward the natural ups and downs of the economy. However I figure this type of evidence is not going to persuade. Blaming migrants for unemployed young Australians hits a particular emotional nerve for many and is difficult to respond to.

How to understand 457 visa statistics: Don’t read the Australian


In August last year, I wrote about some poor reporting on 457 visa statistics. Natasha Bita in the Australian wrote:

RISING  unemployment has dampened demand for migrant workers, with 40 per cent fewer foreigners seeking visas to work here last financial year.”

This was nearly completely incorrect. The “demand” didn’t really do anything. Instead, a giant price increase on 1 July brought forward thousands of visa applications into June 2013:

This price increase did not create demand. Instead many visa holders already in Australia applied for a renewal a bit earlier than they would’ve otherwise and a number of businesses brought forward overseas hires. All of this masked what was a very standard year in 2013-14.

Ten months later. Same journalist, same paper… same mistakes:

Indian, British and Chinese workers are queuing for jobs in Australia, with applications for 457 work visas jumping by 15 per cent in a year.”

By definition, if you have artificially low numbers for 2013-14, you are going to see increases the following year even with the status quo. The same price hike on 1 July 2013 is “causing” the current rise in visa applications. This is because the 15 per cent “jump” is occurring in 2014-15, referenced against 2013-14, the year with artificially low numbers.

This isn’t rocket science. The current movements in visa application trends are probably about 10 per cent related to the labour market and 90 per cent related to the decision in the 2013-14 Budget to jack the fees of 457 visas by 200-800 per cent (depending on family size). This should wash out of the system over the next 6-12 months.

The public are told a nice narrative that correlates succinctly with the numbers. What a shame the narrative is completely unfounded.

There are many culprits here.

Let’s start with the Department of Immigration and Border Protection. They could have mentioned even a little bit of this background in their quarterly reports (March 2015). Instead, they are making the reports harder to understand by taking away some important contextual graphs on page 1. Of particular note was the graph that showed the actual number of 457 visa holders in the labour market, “Number of primary subclass 457 visa holders in Australia at the end of each month”:

Screen Shot 2015-07-06 at 8.56.38 pm

Looking at the graph, you see the number of 457 visa holders in the labour market moves slowly over time and never erratically (noting, of course, the dip in December as people holiday outside of Australia).

Unfortunately, you cannot see this graph in the latest report. For some reason, it has been removed. You instead need to dig into a pivot table that currently has a broken link. Yet even the text report says “The number of primary visa holders in Australia on 31 March 2015 was 106,750.” An extra couple of clicks and you can find out that the number at 30 June 2014 was 108,870. Doesn’t sound like a rollercoaster ride of 15 per cent increases and 40 per cent slumps to me.

I’d be very surprised if Natasha Bita read my previously blog post. Reading obscure migration blogs is not recommended for reporting in national newspapers. However I would’ve happily taken her phone call in my day job at the Migration Council Australia. I’ve spoken to numerous journalists – including three from the Australian – about migration trends and what my interpretation is of the latest statistics. I know a handful of other people who provide similar opinions. Instead, her article is a complete grab-bag of seemingly random statistics with a misleading central point (noting it is not deliberately misleading).

Lastly, I’ll take some of the blame. I got really hot under the collar when I read Ms. Bita’s article from last August. I made a commitment to myself that I would work harder to try and explain migration and the labour market – as I see it – to more people in the media, whether this be by random emails or actively following up what I regarded as mistakes. I started strong but a disappointing experience in March this year dissuaded me from keeping it up. My resolve has firmed once again.

There are really interesting, difficult policy questions regarding migration policy and the labour market in Australia. Yet the tosh that gets served up in the media makes it all but impossible for even interested readers to understand what is occurring. More damagingly, poor reporting prevents policy settings from being more closely examined. The hospitality industry continues to run rampant with the 457 visa program, with little regard for policy goals, the people they exploit or wages they seek to undercut.

This is horrible for policy outcomes and underpins ignorance in the community on how migration effects the labour market. The rising public debate about the migration provisions in the Chinese-Australia Free Trade Agreement will demonstrate how this ignorance can harm social cohesion and attitudes to migrants in the community.

Would you rather be rich in a poor country or poor in a rich country?

“Would you rather be rich in a poor country, or poor in a rich country?”

Dani Rodrik asks this provocative question to set up his thesis on whether nation-states are the enemy of global equality.

By taking a top 10 GDP per capita country (Norway) and bottom 10 GDP per capita country (Niger), he demonstrates this isn’t really a question at all: In Niger, the richest five percent of the population have a representative income of $2,918 compared to a representative income of $13,049 for the poorest five percent of Norwegians.

Rodrik argues that the nation-state is central to growth and is not the enemy of global equality. However at the same time, there are good arguments for both “expanding labour mobility, at the margin” and “placing limits that would leave us far short of full mobility”. You’ve got to love economists. Yet even if you advocate for completely open borders, it strikes me you could get behind this as an incremental measure towards a more open global environment.

The point that struck me the most was: “It would be a pyrrhic victory to remove restrictions on labor mobility to the point where it weakens the capacity of nation states to provide the public goods needed for high productivity.”

If you take this as true, then perhaps the most important question in development economics and political economy is where that point is, closely followed by how we can get there. The events of 2015 appear to show that we are a long way from answering this and the risk of going backwards is firmer today than the same time last year.

H/t Chris Blattman (and read the full slide-show, it is excellent).