Can Canada handle half a million new immigrants? Labour economist Mikal Skuterud on immigration’s diminishing economic returns

This episode of Hub Dialogues features host Sean Speer in conversation with Mikal Skuterud, a labour economist at the University of Waterloo and director of the Canadian Labour Economics Forum. They discuss the federal government’s recent 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.

You can 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.

SEAN SPEER: Welcome to Hub Dialogues. I’m your host, Sean Speer, editor-at-large at The Hub. I’m honoured to be joined today by Mikal Skuterud, a labour economist at the University of Waterloo, and Director of the Canadian Labour Economics Forum. He’s a leading thinker and scholar on, among other things, the labour market dynamics of immigration. I’m grateful to speak with him about growing calls on the federal government to increase immigration levels and how we ought to think about the labour market effects of Canada’s immigration policy as well as outcomes for immigrants themselves. Mikal, thanks for joining us at Hub Dialogues.

MIKAL SKUTERUD: Thank you very much for having me, Sean.

SEAN SPEER: We’re having this conversation on November 11th, which is less than two weeks after the federal government announced its immigration intake targets for the next three years. The plan is to reach 500,000 annual newcomers by 2025. Mikal, 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 that 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, and at least as far back as I have been able to collect data on. I think 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.

SEAN SPEER: It’s important to note that 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? What share, for instance, Mikal, enters the country through the permanent stream versus temporary programs?

MIKAL SKUTERUD: 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 to contribute to the economy. It’s complicated. The biggest difference between these two streams really is that the temporary stream doesn’t have a target. There’s no fixed quota from year to year.

There’s no cap or limit. It’s driven by whatever the demand for students are, and workers. The other thing that complicates the answer to your question is that 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, but it is true what you said that in any given year if we count them, the inflow of temporary residents, that that far exceeds the number of new permanent residents. But many of them—actually we know what percentage that in the long run, about a third of those temporary residents—now will become permanent residents.

SEAN SPEER: The demand for more immigration in general, and temporary workers in particular comes from the argument that Canada faced is labour market shortages. The basic idea is intuitive: 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 for two reasons. First, it distorts the bargaining power of workers, particularly low-skilled workers. Second, it distorts business decisions about capital and labour. Mikal, do you want to elaborate on why we’re wrong to see immigration as an economic silver bullet?

MIKAL SKUTERUD: Sean, I’m not sure I can do any better than the way you just described, to be honest with you. I think the way I teach this, I teach a lot of labour economics, and in recent years I’ve been teaching ECON 101. 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.

Labor demand and what jobs are done in a country is determined by a lot of things, but in large part, it’s determined by what the labour supply is. You don’t have to look around countries that long to see that the types of jobs and the way jobs are done is very different. If you go to Florida, where my in-laws live and I reluctantly spend more time than I wish I did, you want to get your car washed in Florida, what happens is 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. If you go to Australia, there are very few human beings harvesting grapes. They’re done by machines.

You go to Norway where my dad’s family’s from, try to find a fast food restaurant. It’s pretty hard, and that reflects that low-skilled labour isn’t there. Minimum wages really high and so expensive to hire. Lots of examples, but the point is only if you want a lower-skilled economy with low wages, if that’s where you want to allow businesses to expand and be successful is by providing them with this 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, and you should be targeting high-skilled workers. I think Canada’s huge public support for—we saw some recent numbers for Canadian immigration in the public—it overwhelmingly reflects the success of the system. 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.

SEAN SPEER: A related point is that 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. Mikal, let me ask a two-part question. First, why does this distinction matter? Two, how might it change Canadian immigration policy?

MIKAL SKUTERUD: I’m almost tempted to answer the second part first. I don’t think it would change current immigration policy, but not where we’ve been over the past two decades. 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.

There is no question that has happened. The changes to what’s called the express entry system that are coming down the pipeline, we’re going to see this in the next few months, make it very clear that’s what’s happening. Why is that a concern for a labour economist? I’m not unique. I’m the Director of the Canadian Labor Economics Forum. I talk to a lot of labour economists about these issues. We all share the same concerns.

If we think about the issue, you hear a lot of rhetoric around the economic benefits of immigration, especially from this government. I would say this rhetoric has gotten really quite out of control. It’s becoming absurd. You hear these claims that immigration will increase economic growth. Then you have to ask yourself, okay, well, what’s economic growth and what are we trying to achieve here?

There’s no question that when you increase the amount of labour into an economy, more gets produced. As long as some of those workers are doing something more gets produced. GDP goes up. I refer to GDP as the economic pie. The total economic pie gets bigger but of course, that’s not what matters. You can look around the world and find 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.

That presumably is more important for economic living standards, and it’s presumably what we should be targeting. The reality is that when you increase immigration from 1 percent of the population to 1.2 percent of the population like we’re doing, you’re increasing the size of the economic pie, but also the number of people you’re dividing in between.

It’s far from obvious to any economist I’ve ever spoken to in Canada that understands Canadian immigration that the average slice gets bigger. In fact, even pro-immigration outfits like Scotiabank and the Conference Board of Canada, they have taken stabs at trying to estimate this. Both of them find that increasing immigration rates are going to lower GDP per capita. They don’t like to say that out loud, but that’s what their data shows. I think their methodologies you could criticize, but that’s what it shows. That I think is the concern for economists.

SEAN SPEER: What’s the rationale then, Mikal, 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 behind some of those calls—setting aside the benefits of cultural diversity and viewpoint diversity and all the rest that comes with immigration? As you say, a lot of these organizations tend to park those other types of arguments, and, in fact, principally make economic arguments. Yet you’re saying those arguments aren’t as strong as they think they are.

MIKAL SKUTERUD: As you say, 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. This is what I love about Canada, the cultural diversity. 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. It’s pretty clear who the winners are. The winners are easy to identify. They’re the people who are shouting the loudest to increase immigration rates. This is, undoubtedly, organizations like the Century Initiative that is backed by corporate money. 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.

Again, these are clearly winners, but there are tradeoffs. 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. 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.

I think there was some point in our history where that narrative changed, and that narrative became much more about these economic benefits. I haven’t really talked about this before, but my gut feeling of what happened there, it’s twofold. One, I think it reflects the fact it’s 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. We’re all going to be better off. Everybody’s going to be better off. It’s not an accurate narrative in my view, but that is one way to do it.

SEAN SPEER: Let me just jump in there, Mikal, because I think there’s a ton of insight. It has some parallels to the free trade debates. We’ve seen some places around the world where there’s been a tendency to de-emphasize tradeoffs. But when people start to feel those tradeoffs, there’s a tremendous amount of pushback. In a way, it speaks to the importance of being forthright and transparent with the public about those tradeoffs, in effect to protect the long-term integrity of the system.

MIKAL SKUTERUD: I think that’s right. 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.

Even 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. The U.S. is really exceptional at attracting top talent. If the goal is to leverage immigration to raise GDP per capita, there’s no question that that’s the margin on which it needs to happen. 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. I think we all understand that’s where you do it.

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. Any data I’ve seen, whether you look at patenting or earnings of immigrants, the U.S. does phenomenally well.

If you think about increasing on the margin and immigration in the U.S., there’s absolutely no doubt in my mind that the U.S. does not have high enough immigration levels, that they could be doing better, they could be boosting GDP per capita more. Mind you, the immigration rate in the U.S. is about 0.4 percent. As I said, we’re going up to about 1.2 percent. It’s a huge difference if you think about the law of diminishing returns.

Part of the narrative in Canada that switched towards these huge economic benefits of immigration is that, once again, we’re looking to the U.S. literature, we’re adopting it as our own, and forgetting that these marginal effects and benefits are very specific to a time and place, and losing sight of that. 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.

SEAN SPEER: We’ve been talking mostly so far about the outcomes stemming from immigration. I want to ask a couple of questions about the outcomes for immigrants themselves. 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’s going on? What are some of the impediments here?

MIKAL SKUTERUD: Sean, going back a bit, I talked about who the winners and losers of immigration are. If there are any results in the empirical literature that points 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. I grew up in Mississauga. 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. It was a pretty straightforward paper to do. All we did was we took census data going back two decades into the early ’80s and we just said “let’s take a look at how the earnings of new immigrants to Canada compared to Canadian-born workers that are at a similar point in their life cycle and look at what that difference is.”

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. What ended up happening is 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. In the 1990s, if you go back to that period in time and you read the headlines and the whole narrative, it was all about not being in the top talent and best and brightest.

It wasn’t about that at all. 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. What ended up happening is there was a slew of research papers including some that I did that led to a lot of policy changes. It wasn’t just the Liberal government, the Harper government made a lot of changes.

I think the most significant one that I think is due to the Harper government was what’s called the express entry system, which has a lot going for it. I’m speaking in the past tense because as I said, there are some changes coming down the road but it really was very clear about what is the objective and then it tied the government’s hands.

What you saw was that deterioration level off and 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.

SEAN SPEER: 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?

Mikal: 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. The sense of which I don’t get it is that first of all, we have incredibly poorr 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.

Now 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 if the nominated immigrants who say they’re going to stay in Halifax or somewhere in the Maritimes that they’ll 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.

It’s not obvious that our efforts to allocate immigrants spatially across cities or provinces through these Provincial Nominee Programs or anything else really are that effective. Immigrants will go where they want to go. That’s how we do it in Canada. Not all countries do it that way. 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. Markets are not good at everything, but they’re good at something. 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. The way that works is through prices. 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.

SEAN SPEER: 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?

MIKAL SKUTERUD: 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 percent? Or is it something higher or something lower? How would we ever evaluate that?

The way we think about this as economists is 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. What we tend to think is that if you increase the population or the labour input by 1 percent, and you can also increase simultaneously the capital input by 1 percent, then probably not much happens to GDP per capita because output just increases by 1  percent too. GDP per capita doesn’t change at all.

The problem, of course, is why the tendency for GDP per capita fall is that the capital input doesn’t adjust equivalently, commensurately, or proportionally. You get a 1 percent increase in the population through immigration, but the capital, whether it’s housing—if you want to get depressed about all of this, take a look at what’s happening to investment in capital in Canada over the last 10 years. It’s completely flat at the level, not per capita.

The amount of capital per worker is falling. That’s what tends to lower productivity. If every worker has fewer tools, machinery, and technology to use, that’s not a good thing. 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 creams 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. We’re trying to pick those high human capital people, high earnings, and we’re doing this in a way that we’re ranking them and picking the ones at the top.

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 percent like the U.S. than if you’re at 1 percent 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 percent to 1.2 percent, 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.

SEAN SPEER: Well, we’ll have to have you back on the podcast at that time. Mikal Skuterud, this has been a fascinating conversation. Thank you so much for joining us at Hub Dialogues.

MIKAL SKUTERUD: I appreciate the invitation, Sean, anytime.