Immigration is not a cure-all for Canada’s economic woes

A useful and needed reminder that Canada has been relying too much on immigration for overall economic growth rather than addressing some of the fundamental challenges related to productivity:

Jock Finlayson is the executive vice-president and chief policy officer of the Business Council of British Columbia. David Williams, DPhil, is the council’s vice-president of policy.

Immigration inflows to Canada have fallen off a cliff since the COVID-19 pandemic. In the second quarter of 2020, permanent resident arrivals were down by two-thirds from a year ago. Temporary work permits issued to foreign workers were down by half. And permits for international students were about 80-per-cent lower.

By contrast, prior to the pandemic, net temporary immigration was a record 191,000 and permanent immigration reached 341,000 last year – the highest since 1911-13. As a result, Canada’s population increased by a record 550,000 people last year, with much of that growth concentrated in the gateway metropolitan areas of Toronto, Vancouver and Montreal.

The immigration slump has set off alarm bells in some quarters. The concern is that without a prompt return to turbocharged immigration levels, Canada’s economy is in jeopardy. In our view, these concerns are exaggerated and overlook the humble arithmetic of economic growth.

Growth in gross domestic product (GDP) comes from two sources: increases in “labour inputs” (more workers and/or more hours of work); and increases in “labour productivity” (more GDP per employee or per hour of work) because of investments in capital, skills, technologies and economies of scale. Canadian policy discussions overwhelmingly focus on boosting labour inputs, while paying scant attention to the drivers of productivity. This is a remarkably unbalanced approach.

Canada’s economy stumbled into 2020 with a national growth strategy that was yielding low unemployment – and flushed gateway city real estate markets – but little or no gains in GDP per capita, productivity and real wages. Canada could scarcely manage topline GDP growth of 2 per cent without overheating and prompting higher interest rates from the Bank of Canada. That’s hardly impressive for an economy operating near full employment.

In the five years to 2019, fully four-fifths of Canada’s GDP growth was because of increases in aggregate working hours as the labour force steadily expanded. During the same period, labour productivity – which largely determines average real wages and living standards in the long run – made its smallest contribution to GDP growth since the 1980s. On a per worker basis, business investment was weaker last year than in 2008. Putting all the pieces together, GDP per capita inched ahead by a paltry 0.3 per cent per annum over the five years to 2019.

In other words, Canada’s economy was growing mostly because it was adding more people (especially in the big cities). But owing to weak investment and feeble productivity growth, the economy wasn’t getting much “better” in terms of making the average Canadian more prosperous.

There are benefits from immigration – a larger pool of workers and skills, more domestic customers and densification of the big cities. But research from leading Canadian economists generally finds that immigration numbers have an overall neutral effect on real wages, employment rates, labour productivity and GDP per capita. In addition, immigration has only a small impact on the age structure of the population. That’s because annual immigration flows are dwarfed by the existing population, and also because newcomers age along with everyone else.

Canada is on a long road to recovery from the COVID-19 recession. In the coming years, policy makers should focus on spurring labour demand, restoring full employment and improving competitiveness. This will require creating better conditions for investment and technology adoption, for Canadian companies to scale up and innovate, and for the work force to upskill and reskill in the face of digital transformation and automation trends. These are the surest paths to economic growth and prosperity – on a per capita basis, for both urban and regional communities, and over the short and the long term.

Source: https://www.theglobeandmail.com/business/commentary/article-immigration-is-not-a-cure-all-for-canadas-economic-woes/

About Andrew
Andrew blogs and tweets public policy issues, particularly the relationship between the political and bureaucratic levels, citizenship and multiculturalism. His latest book, Policy Arrogance or Innocent Bias, recounts his experience as a senior public servant in this area.

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