Migration, labour demand, housing markets and the drought in regional Australia

Research Paper No. 49 – September 2011


The most recent drought has been one of the most severe on record, with large parts of southern and eastern Australia experiencing dry conditions since 1996. While the weakening of the El Niño event in late 2007 provided some relief in the form of rainfall, "for the agriculturally important Murray-Darling Basin, October 2007 marks the sixth anniversary of lower than average rainfall totals - with the November 2001 to October 2007 period being its equal driest such six-year period on record" (Bureau of Meteorology [BOM], 2007, p. 1).

Many Australian farmers and rural communities are still experiencing hardship as a result of severe and prolonged drought and variable rainfall events. "While this is not new to dryland farming areas, 'irrigation drought' is uncharted territory" (Productivity Commission, 2009, p. xx) in which the cumulative effect of a series of recent droughts means that insufficient water is being stored in dams to permit irrigation farming in many areas.

Droughts are likely to have a direct effect on the productivity of agricultural areas. The tendency in the long run for the relative price of primary produce (and resources) to decrease as incomes increase (i.e., following Engel's law) is one factor driving decline in regional Australia. The decline in productivity for farms reduces farmers' profitability and this affects their ability to pay farm workers' wages. This decline in wages creates less pressure in the local labour market, which in turn reduces other wages and may increase unemployment rates, especially if farm workers lose their jobs. Migration out of the area may be magnified by these less buoyant labour market conditions if other areas have higher wages and lower unemployment.

It should be noted though that outward migration can create conditions for some self-correction, as the resulting fall in the number of available workers may increase wage pressures, with firms competing for a reduced number of potential employees. This correction should be considered as (literally) a second-order effect.

Another mechanism by which an area might adjust to the prolonged experience of drought is through its effect on the housing market and asset prices. The price of farms is likely to fall directly in line with the decline in agricultural productivity, and the price of local housing will also tend to fall with any decline in regional wage levels. If this were the only dynamic then it might be sufficient to control for local labour market conditions when studying migration. However, given that a substantial amount of individual wealth is likely to be tied up in these assets, migration decisions will also be heavily dependent on expectations about what may happen to asset prices. Therefore, if drought is seen as a temporary phenomenon, then residents may be tempted to stay longer than other economic incentives would indicate, as asset prices would be expected to eventually recover.

Households may adjust to adverse circumstances in drought-affected areas, with some members of households moving (temporarily or otherwise) towards areas with greater economic opportunity. Such movements are particularly associated with relatively high exit rates by young people (e.g., Clawson, 1963).

Another implication of drought is that it can fundamentally change the long-term economic viability of regional areas, as demographic decline may feed back into a deterioration of regional infrastructure and local amenities (Barr, 2004).

Along with births and deaths, internal migration patterns are important factors influencing the demographic and economic futures of geographic areas and the people who live in them. The study of migration is important because policy-makers need to understand how many people live in an area and what sort of people move into and out of an area. Areas with net inward migration may experience greater pressure on the supply of goods and services, whereas those with net outward migration may experience labour shortages and lower levels of consumption of goods and services. Migration is an intrinsically geographic phenomenon - as it is a coalescence of several demographic forces with a spatial dimension - but it also reflects all the individual decisions of people in various areas. Droughts are the result of broader climatic events and global systems - which on the balance of probabilities are exacerbated by human activity - but they also have a clear geographic (local) manifestation.

This report exploits the geographically uneven nature of drought to explore the interactions between local labour demand, the regional housing market, and short- and long-term mobility.

The next section introduces the basic theoretical model of migration underlying the empirical analyses. After briefly introducing the relevant background literature on population dynamics in rural and regional Australia, the following two sections address the question of what constitutes a drought before documenting the broad patterns of Australian drought since the early 1990s. The report then introduces some data issues before a Census-based analysis of recent migration patterns is presented. The penultimate section revisits an analysis of migration and mobility that was presented to the 2008 Productivity Commission Inquiry into Government Drought Support (Edwards, Gray, & Hunter, 2008), and the final section draws together some relevant conclusions.