Rapid immigration isn’t the only way to grow

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Canadian and U.S. economic growth is diverging in a surprising away. As BMO chief economist Doug Porter pointed out in a memo last week, Canada’s overall growth is super-charged by immigration. But we have trailed U.S. per capita growth miserably in the past three years. Even though a bigger population will create a larger market here, the growing divergence in per capita incomes is bad news for Canada. Workers, savers and businesses will look elsewhere for better economic opportunities, and we won’t be growing fast enough to adequately serve a larger population demanding more in terms of housing, health care and pensions.

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As Porter calculates, Canadian and U.S. annual GDP growth rates for the 12 years before 2020 were almost identical (at 1.72 and 1.66 per cent, respectively). Since the fourth quarter of 2019, however, Canada’s annual growth rate has fallen by a third, to 1.12 per cent, while the U.S. growth rate has stayed virtually the same — at 1.67 per cent — despite the pandemic.

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Where the countries diverge is in the sources of their GDP growth. Canada’s comes entirely from population growth, which averaged 1.6 per cent per year over the past three years, including this year’s whopping 3.1 per cent. But GDP per working hour actually fell by 0.2 per cent per year over the last three years.

Despite large-scale illegal immigration at the U.S.-Mexico border, which is reported in U.S. population figures, American population growth was only 0.5 per cent per year since 2020, the lowest it has been in a century. Most U.S. GDP growth came from labour productivity, which grew by 1.4 per cent a year. U.S. GDP per capita, at US$76,400 is already two-fifths greater than Canada’s US$55,300 — with both expressed in “purchasing-power parity” dollars. The current gap in per capita growth rates implies American per capita income will be twice ours in 2050.

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That raises two key questions. Will our policy to supercharge immigration lead to better productivity so Canada won’t lag so badly? And do we need other policies to increase the economic gains from immigration?

As leading U.S. immigration expert George Borjas concluded in a 2019 paper, the effect of immigration on productivity is actually uncertain. Continued large-scale immigration will result in lower wages and falling average labour productivity as firms take on workers rather than invest in capital to improve productivity. On the other hand, a larger pool of skilled labour, successful assimilation into the workforce and beneficial long-term fiscal impacts could lead to productivity improvements over time.

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Canada has done a remarkable job integrating immigrants, who are now 23 per cent of the population. Sixty per cent of Canada’s immigrants are “economic,” with a focus on skilled-based immigration. Almost 95 per cent are under the age of 65, are likely to work and do help create a larger pool of workers. Within 10 years, landed immigrants have similar incomes and unemployment rates as the rest of the population — even if in their first five years they have double the unemployment rate of the general population.

Immigration is therefore like an investment, with good economic returns in the long run but potential upfront costs providing housing, health care, education and other services to new Canadians. Most immigrants gravitate to big cities where housing prices are highest: 44 per cent settle in Ontario and roughly 15 per cent each in British Columbia and Alberta. With Quebec’s restrictions on immigration, its share has fallen to 15 per cent even though it still has more than a fifth of Canada’s population.

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My second question is whether other policies could help us exploit the potential productivity gains from a larger population.

In theory, a larger Canadian market does provide opportunities for businesses to achieve economies of scale in production. In practice, however, barriers to inter-provincial trade and capital and labour mobility make realizing these gains difficult. By relaxing accreditation standards, some provinces are having success bringing in the extra health professionals our ailing Medicare system so badly needs. But far more needs to be done to attract both white-collar and blue-collar workers.

Dumping refugees on Toronto streets is not much help. In cases I know of, Customs and Immigration have been terribly slow to process landed immigrant applications — sometimes to the point of forcing immigrants to reapply. The federal government, whose workforce has swollen by an unbelievable 40 per cent since 2015, needs to improve its own labour productivity and provide better, hassle-free service to more Canadians.

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And then there is Canada’s pathetic investment performance. Without an expanding business sector, labour productivity stalls and unit costs rise, hurting competitiveness. As we are unlikely to build homes fast enough to meet the high demand for them in our cities, housing prices seem bound to continue to rise. With recent interest rate hikes and no reform of regulation, it’s not surprising that Statistics Canada reports real residential investment dropped nine per cent May over May, seasonally adjusted, while real non-residential investment in structures has barely changed this past year.

To make a bigger-population growth strategy work, we need to do more than just welcome immigrants at airports. We need to get our act together and speed up workforce integration, reduce barriers to mobility and encourage business investment.

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