Can Canada handle half a million new immigrants?

From: Hub Dialogues

Image credits:  News Canada

   Mikal Skuterud, a labour economist at the University of Waterloo and director of the Canadian Labour Economics Forum, discussed immigration’s diminishing economic returns in an episode of Hub Dialogue with host Sean Speer.

They discussed the federal government’s announcement of Canada’s immigration targets, how we ought to think about the labour market effects of Canadian immigration policy, as well as outcomes for immigrants themselves.

Excerpts below:

Sean Speer: The plan is to reach 500,000 annual newcomers by 2025. Before we get into some of the specifics, including the composition of Canada’s annual intake of immigrants, can you place the target in a broader context? How does it compare to the recent past or even peer jurisdictions?

Mikal Skuterud: With a lot of economics data, we tend to, in a popular discussion, be focused on the big numbers, the overall levels. Like in this case, we’re going to have 1.4 million immigrants over the next three years. I wouldn’t do that. The Canadian population is growing all the time. You would expect the number of immigrants coming in and the absorptive capacity of the economy to grow. I think the number that matters is what is the immigration intake as a percentage of the existing population.

When you measure that, we are going to reach rates of immigration that we have not seen in the past seven decades. Probably the number was higher in the late 1800s, but that was a very different type of economy. Not only historically in Canada, but also when we compare ourselves to other countries, this is really reaching levels that are unprecedented, and there just isn’t much experience to learn from.

SS: This target reflects Canada’s permanent immigration stream, but we also permit large numbers through temporary streams such as student visas, temporary foreign workers, and so on. How does the overall immigration picture look? 

MS: That’s a great question, Sean, that gets overlooked far too often – that there are these two distinct streams of workers, students coming into the country. 

The biggest difference between these two streams is that the temporary stream doesn’t have a target. There’s no fixed quota from year to year. It’s driven by whatever the demand for students are, and workers.

And they are not mutually exclusive groups. Increasingly, Canada has moved towards what we call two-step migration, where the source of the new permanent residents is the temporary residents that are already here on Canadian soil.

Counting these people as disjoint groups is really impossible.  In any given year if we count them, the inflow of temporary residents far exceeds the number of new permanent residents. But about a third of those temporary residents in the long run will become permanent residents.

SS: The demand for more immigration in general, and temporary workers in particular, comes from the argument that Canada is facing labour market shortages. Our domestic labour supply isn’t growing for demographic reasons, and so we need more workers to come from somewhere. Yet, you’ve argued that this isn’t quite the right way to think about our economic challenge. First, it distorts the bargaining power of workers, particularly low-skilled workers. Second, it distorts business decisions about capital and labour. Why are we wrong to see immigration as an economic silver bullet?

MS: I think it’s completely wrong to think about labour demand that is like the job vacancies and the slots that need to be filled as something that’s just determined outside the economic system as if it just gets handed to us from heaven and the job of policymakers is just to plug these holes.

Labour demand and what jobs are done in a country are determined in large part by what the labour supply is. If you want to get your car washed in Florida, you drive into a parking lot and you get five human beings that come out with rags and clean the car by hand. You get your car washed in Canada, it’s inevitably a machine that does it with no human labour. It’s not like a random coincidence. That reflects the availability of lower-skilled workers in Florida, of a porous border, really. Another example is the wine industry in California. When they harvest their grapes in California, it’s done overwhelmingly by humans picking grapes with their hands. In Australia, grapes are harvested by machines.

In Norway try to find a fast food restaurant. It’s pretty hard, because low-skilled labour isn’t there. Minimum wages are really high and it’s expensive to hire.

Only if you want to allow businesses to expand and be successful by providing them with low-skilled labour, then certainly you should target lower-skilled workers in your immigration program.

As Canada has done for many years, if you hope to have high productivity, high-wage economy, then the emphasis should be high-skilled workers. In my view, that reflects the success of selecting skilled immigrants and keeping wages up and not increasing the amount of inequality in the economy by increasing low-skilled workers.

SS: You frequently made the argument that we’re wrong to principally measure the country’s economic performance through GDP growth, and instead ought to be much more concerned about GDP per capita. Why does this distinction matter? How might it change Canadian immigration policy?

MS: There are some very significant shifts happening now, in particular toward prioritizing lower-skilled immigrants. I had some pushback about a year ago when I suggested that that was happening.

The changes to the Express Entry system that are coming down the pipeline make it very clear.  I talk to a lot of labour economists about these issues. We all share the same concerns.

You hear a lot of rhetoric around the economic benefits of immigration. You have to ask yourself what’s economic growth and what are we trying to achieve here?

When you increase the amount of labour into an economy, more gets produced. I refer to GDP as the economic pie. The total economic pie gets bigger. Countries that are bigger, and have bigger labour forces, have bigger economic pies than Canada, but they’re not what we’re aiming for. India, Brazil, these are bigger economies. But when you divide the economic pie by the population and you look at the average size of the average slice, then Canada has a much higher GDP per capita than India.

 SS: What’s the rationale then, for these different calls from different organizations to have a national population of 100 million or to see our immigration levels go up even further? What’s the inherent economic rationale – setting aside the benefits of cultural diversity and viewpoint diversity and all the rest that comes with immigration?

MS: There are really good reasons for immigration. I’m an immigrant. I moved to Canada as a child, eight years old. My family settled in Mississauga. I grew up in what I think at the time was probably the most diverse city in Canada.  When we used to talk about immigration and why we love immigration in Canada, it was overwhelmingly about multiculturalism.

Now, expanding immigration has what economists call distributional effects. There are distributional welfare effects, there are, to put it crudely, winners and losers. The winners are the people who are shouting the loudest to increase immigration rates. Businesses are clearly better off if there are long lines of workers outside their doors competing with each other to get those scarce jobs. Immigration lawyers is another sector of the economy that benefits. Immigrant settlement service providers that teach immigrants new language skills.

But what immigration potentially does to wages in certain markets, what it does to productivity, there are tradeoffs. It’s not a win-win. That is really the challenge that nobody wants to talk about. Now, the question is, “Well, if you’re trying to sell immigration to the Canadian public, how do you do it?” Certainly, one way you could do it is to argue that it increases the cultural richness of the country.

One, I think it reflects the fact that a more successful way to sell the public on immigration is to say that you guys are winners in this proposition. That the gains are going to flow to all of us. Everybody’s going to be better off. It’s not an accurate narrative in my view, but that is one way to do it.

I think the other piece, though, that may have contributed to this shift in the narrative in Canada is that the economics of immigration research is relatively new. It started to come out in the late ’80s, and the ’90s saw a huge burgeoning of this literature, especially in Canada and the U.S. as well. In the U.S., in particular, the results in the empirical research on the effects of immigration have been quite different than Canada.

When you do comparative studies and you look at the earnings of immigrants, the evidence looks much more favourable for increases in immigration in the U.S.  which is really exceptional at attracting top talent. If the goal is to leverage immigration to raise GDP per capita, you need to attract these high human capital people. Even innovators, people with new ideas that come out with new technologies, that’s the margin. 

The U.S. is phenomenally successful. Part of that is that they have the most reputable universities in the world, the crème of the world goes to these universities, and then they have an H-1B system that’s very tightly rationed that allows companies to cream skim these university programs. 

It sounds like I’m so negative on Canada and immigration. I wish I could be more positive, but that’s just my honest reading of the evidence.

SS: In a 2022 memo for the C.D. Howe Institute, you and a co-author wrote that notwithstanding efforts to improve the labour market integration of newcomers, they still face serious challenges. You cite, for instance, Statistics Canada on the earnings of international students versus domestic ones. What are some of the impediments here?

MS: I talked about who the winners and losers of immigration are. If there are any results in the empirical literature that point to who experiences adverse effects of increased immigration levels, the group that’s most likely to be affected are workers who are competing for jobs in the same labour markets as the new immigrants, and that is, overwhelmingly in Canada, other recent immigrants. I think part of what attracted me to the literature and the economics research in immigration is that I’m an immigrant myself.  Overwhelmingly, my friend groups and their parents were immigrants.

You see these challenges that new immigrants have, and you wonder, “How is this changing over time?” The reality is, when I started getting into this literature in the early 2000s, we wrote a paper that was published in the Canadian Journal of Economics. That paper is still my most cited paper. 

What you see is when you go back to immigrants who arrived in the late ’60s and early ’70s, there was a very little gap or difference in the earnings there. You go into the late ’70s and in the ’80s and into the ’90s, it was like this massive deterioration in the relative earnings of immigrants.

It was all about poverty in immigrant communities and about people with high credentials driving taxis and that was in the ’90s we were talking about that. 

In the most recent data what we’re seeing is that new immigrants’ relative earnings are improving. That’s a very positive thing if you care about immigrants. If you care about their economic well-being, then that’s a good news story and so we should learn from that experience. I worry that we’re not and we’re moving away from that lesson.

SS: One issue that I observe is the intergovernmental asymmetry here. The federal government gets to announce a big sticker number and get support from business groups and those who see high levels of immigration as evidence of Ottawa’s commitment to inclusion and so on. Then the provinces and cities are left to effectively operationalize the announcement through infrastructure and service demands. Should we change how the annual intake target is set and how can we better align the inflow of newcomers with local capacity including, for instance, housing?

MS: These are tough questions but it’s one of those areas that I get asked about and I scratch my head because I don’t really get it. First of all, we have incredibly poor data understanding where immigrants live. Let me give you an idea of how this works: so when an immigrant fills out their landings form, they say what their intended occupation is, but also where they intend to live. Now, there’s nothing keeping them from living somewhere else, this is just saying where they intend to live.

The local communities get a lot of funding for settlement services. Most importantly language training from the federal government. That funding is entirely determined, as I understand it, from these numbers where immigrants say where they intend to live. A lot of immigrants say they intend to live in Kitchener-Waterloo in what’s called the LIPs, the local immigrant partnership system, they will be getting a lot of this funding.

We don’t really know how many stay. We’ve also created programs like these Provincial Nominee Programs that allow provinces to nominate immigrants in the hope that the nominated immigrants who say they’re going to stay in Halifax or somewhere in the Maritimes will stay there. Trying to look in the data to see whether or not they actually do is really hard, what data do you look at? The most compelling evidence I’ve seen actually looks at health insurance, like whether or not they’ve signed up for OHIP or some other provincial health insurance plan.

Some countries, they tie the immigrant settlement services like language training to a particular community and if they leave that community, they don’t get their social assistance or anything else.

We don’t do it that way in Canada, I would say for good reason. But it means it’s really hard to know where these immigrants are going or to influence that through policy levers. Now as an economist, I would also make an argument that it’s not clear to me that we should. Labour markets and housing markets, they’re good at allocating workers to where they’re most needed, where, as we say, their marginal product is highest in. I would say trying too hard to use policy levers to influence where immigrants live can backfire and can create misallocation. I would let wages and house prices play a bigger role in sorting out that allocation.

SS: Is there a way to think about optimal immigration levels? Or is it ultimately some combination of normative considerations and judgment about the absorption capacity of a society or communities?

MS: Yes, I’ve been writing a paper that we’re struggling with with two other economists on this issue. We’ve even pulled in a macroeconomist who doesn’t specialize in immigration but understands economic growth. The question is precisely this one: can we say something about what a country’s optimal immigration rate is? By immigration rate I mean this immigrant inflow as a percentage of the population. Is it 1.2 per cent? Or is it something higher or something lower? How would we ever evaluate that?

A country’s output, their GDP, is driven by some inputs in the aggregate. The most important inputs are the capital input and the labour input. We tend to think is that if you increase the population or the labour input by 1 per cent, and you can also increase simultaneously the capital input by 1 per cent, then probably not much happens to GDP per capita because output just increases by 1  per cent too. GDP per capita doesn’t change at all. The problem, of course, is that the capital input doesn’t adjust equivalently, commensurately, or proportionally. 

The amount of capital per worker is falling. That’s what leads to lower productivity. If every worker has fewer tools, machinery, and technology to use, that’s not good for GDP per capita. If there’s a margin in which we can raise GDP per capita through immigration, it is through the human capital stock, the human capital of immigrants.

The best way to evaluate this is to look at the earnings of immigrants. Two-thirds of GDP are workers’ earnings. The best way to do is you look what are the immigrants’ earnings when they arrive? Really, the game becomes, looking at the immigration rate and relating that to what immigrants’ earnings are. Here’s where things get difficult and more depressing. We have this Express Entry system that ranks immigrants using this score that’s called a comprehensive ranking system or CRS. That’s how immigrants are selected.

Every two weeks, the government, at least used to, go in and just cream skim that applicant pool and get the folks with the highest CRS. Those people at the higher CRS are those with the highest expected earnings. 

Now what ends up happening, of course, is if you increase the immigration rate, you are forced to make a quality-quantity trade-off. You have to go further down the ranking. On the margin, the marginal contribution of that last worker admitted is going to have lower earnings. That’s one important dimension in which you get this law of diminishing returns that the potential to boost GDP per capita through immigration is a lot higher if you’re at 0.4 per cent like the U.S. than if you’re at 1 per cent of the population. It’s a lot.

The answer to are we already too high? Well, if you look at immigrants’ earnings in Canada, there are big earnings gaps there, which tells me that it may be too high. That does not mean that it’s too high on other dimensions. As we said, there are other reasons for immigration, there are humanitarian objectives, there are lots of good reasons for immigration. But on the objective of increasing GDP per capita, I find it hard to believe that increasing the immigration rate from 1.1 per cent to 1.2 per cent, as this government plans to do, is going to raise GDP per capita. The proof will be in the pudding, we’ll see how it goes.

• Listen to this episode of Hub Dialogues on Acast, Amazon, Apple, Google, Spotify, or YouTube. The episodes are generously supported by The Ira Gluskin And Maxine Granovsky Gluskin Charitable Foundation.