When More People Doesn’t Mean Greater Prosperity, By Paul Walker

One of the most persistent claims in Australia's economic debate is that high immigration automatically improves productivity and living standards. According to this narrative, bringing more workers into the country supposedly makes the economy more dynamic, innovative, and prosperous. Yet the empirical record suggests the relationship is far more complicated.

Recent analysis highlighted by the Australian economics site Macrobusiness.com.au, argues that Australia's surge in immigration since the mid-2000s has coincided with a marked slowdown in labour productivity growth and stagnation in per-capita income.

This observation does not mean immigration is inherently harmful. Migration can contribute positively to an economy when it increases the skill base, stimulates innovation, or fills genuine labour shortages. But the assumption that more immigration automatically equals higher productivity rests on a misunderstanding of how productivity actually works.

Productivity is not determined simply by the number of workers in an economy. It depends on how much output each worker can produce. That in turn depends heavily on skills, technology, infrastructure, and the amount of capital available to each worker.

When population grows rapidly without corresponding increases in investment, the opposite effect can occur.

Economists call this phenomenon capital shallowing. Instead of each worker having access to more machines, better equipment, and more efficient infrastructure, the available capital must be spread across a larger population. The result is lower productivity per worker.

The logic is straightforward. If a country adds millions of additional workers but fails to build enough infrastructure, housing, transport networks, schools, hospitals, and productive capital to match them, the overall system becomes overloaded. Congestion increases, housing becomes scarce, public services struggle to cope, and each worker effectively has fewer productive resources available.

Under those conditions, economic growth becomes population-driven rather than productivity-driven.

Gross domestic product may increase simply because there are more people producing and consuming goods. But GDP per person — the measure that reflects living standards — can stagnate or decline.

Australia's experience over the past two decades increasingly resembles this pattern.

The country has experienced one of the fastest population growth rates in the developed world, largely due to immigration. At the same time, productivity growth has slowed and infrastructure pressures have intensified. Housing costs have surged, cities have become more congested, and per-capita economic growth has weakened.

Another mechanism through which large migration flows can influence productivity involves the structure of the labour market.

When labour becomes abundant and relatively inexpensive, businesses face weaker incentives to invest in productivity-enhancing technologies. Instead of investing in automation, advanced machinery, or new production methods, firms may simply hire additional workers.

From the perspective of individual businesses this strategy can make sense. Labour is flexible and often cheaper than large capital investments. But from the perspective of the national economy, the effect can be stagnation in technological progress.

Economies that rely heavily on labour expansion rather than productivity improvements can drift toward lower-value economic activity — service industries, labour-intensive sectors, and population-servicing industries such as retail, hospitality, and property development.

These sectors are not unimportant, but they tend to produce lower productivity gains than advanced manufacturing, high-technology industries, or capital-intensive production.

The composition of migration also matters. If a large share of incoming migrants are relatively low-skilled or are employed in low-productivity sectors, the average skill level of the workforce may not increase significantly without substantial investment in education and training.

Simply adding workers does not automatically create a more skilled economy.

Another dimension often overlooked in economic models is the impact of rapid population growth on social cohesion and what sociologists call social capital — the networks of trust, cooperation, and shared norms that make institutions function effectively.

When population expands very rapidly, communities may struggle to absorb newcomers, infrastructure systems become strained, and social institutions must adapt at speed. This does not mean immigration inevitably reduces social cohesion, but rapid and poorly managed population growth can place significant pressure on it.

Housing shortages, infrastructure congestion, and competition for public services can intensify perceptions of scarcity. When people begin to feel that essential resources are limited, social trust tends to weaken.

Economists frequently treat populations as interchangeable units of labour. In reality societies are more complex systems where economic, cultural, and institutional factors interact.

The deeper issue, therefore, is not immigration itself but the economic model built around it.

If migration levels are aligned with infrastructure investment, housing supply, training systems, and productive capital formation, immigration can complement economic growth. But when migration becomes the primary driver of economic expansion — used to boost headline GDP growth while investment lags behind—the result may be declining productivity and falling living standards per person.

In that scenario population growth functions less as an engine of prosperity and more as a substitute for difficult economic reforms.

The temptation for governments is obvious. Increasing population is one of the easiest ways to make an economy appear to grow. A larger population produces higher aggregate GDP, stronger retail demand, and rising property markets.

But prosperity is not measured by the size of the economy alone. It is measured by how well the average citizen lives.

And when economic growth depends more on adding people than on improving productivity, the result can be a paradoxical form of expansion — an economy that grows larger while its citizens grow poorer.

https://www.macrobusiness.com.au/2026/03/why-high-immigration-harms-productivity-and-living-standards/