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‘This policy shift is not economically sound’: Mikal Skuterud on the problems with Ottawa’s immigration increases

Commentary

As Canadian immigration policy and its economic effects receives new policy and political election, The Hub’s editor-at-large Sean Speer exchanged with University of Waterloo labour economist and leading immigration policy expert Mikal Skuterud about, among other things, the link between immigration and Canada’s disappointing GDP per capita growth.

SEAN SPEER: Do we have a sense how much the Trudeau government’s higher-than-historic immigration rates have influenced GDP growth? Is there a back of the envelope rule for the link between population growth and GDP growth?

MIKAL SKUTERUD: The historically high immigration levels Canada is experiencing in this post-COVID era are undoubtedly contributing to GDP growth. The biggest component of the increase are temporary foreign workers and international students whose labour market activity and tuition payments undoubtedly serve to boost the overall size of Canada’s economy. In the most recent quarterly data (2023 Q3) Canada’s GDP is growing at an annual rate (year-over-year) of 1 percent while the population is growing at 3 percent. How much slower GDP would be growing if the population were growing at the pre-Trudeau norm of 1 percent per year is impossible to know with any certainty. The effects of immigration on the economy are highly complex because newcomers are both consumers and producers affecting many sectors of the economy. Recessions are usually defined as two consecutive quarters of negative GDP growth. Whether exceptionally high immigration is keeping Canada out of a recession is impossible to know, but it is a possibility.

SEAN SPEER: Do we have a sense of how much population growth has contributed to falling GDP per capita? If so, should we care if it is a major factor?

MIKAL SKUTERUD: Since we don’t know how higher-than-usual population growth is contributing to GDP growth, there’s no way to know with certainty if and how much high immigration rates are the cause of falling of GDP per capita. Nonetheless, it is worth considering what current GDP growth would be under the “null hypothesis” that heightened immigration is having no effect on GDP per capita growth, either positive or negative. To do this, first note that the growth rate in GDP per capita is roughly the difference in the growth rates of GDP and the population. In the most recent data, GDP is growing at 1 percent and the population at 3 percent, so GDP per capita is falling at an annual rate of 2 percent.

If Canada had maintained its permanent and temporary immigration inflows at their 2000-2015 norms, its population would be growing at roughly 1 percent instead of 3 percent. With a population growth rate of 1 percent, GDP would have to be falling at an annual rate of 3 percent for GDP per capita to be falling at the rate of 2 percent that it is actually falling at in the most recent data. Do we believe that Canada’s GDP would be falling at a rate of 3 percent if it had maintained its immigration rates at the historical norm? The last time Canada’s economy contracted at a rate of 3 percent annually (before COVID) was in the depths of the 2008-2009 financial crisis, and before that in the depths of Canada’s exceptional recession in the early 1990s. Although these types of “counterfactual” questions are impossible to answer with certainty, I’m not seeing any economic developments inside or outside Canada that make me believe Canada would be sinking into a deep economic recession currently but for its exceptional population growth. To the contrary, the U.S. appears, if anything, in the midst of an exceptional economic boom. This suggests that heightened immigration is, at least in part, responsible for Canada’s declining per capita GDP.

There’s, of course, also good economic reason to believe that heightened immigration is contributing to falling GDP per capita. A first-order determinant of GDP per capita in any economy is average capital per worker. Capital is what allows workers to be productive, and includes everything from machinery and equipment, to factories, to highways and public transportation systems, to schools, hospitals, and housing. When the population grows at a faster rate than the capital stock, as we’re seeing now, there is less capital per worker which lowers labour productivity and average economic living standards. Second, the post-COVID era has seen the Trudeau government shift immigration policy from a longstanding prioritization of candidates with high levels of human capital and, in turn, high expected Canadian labour market earnings, to plugging holes in lower-skilled labour markets where the growth in job vacancies has been overwhelmingly concentrated. If the policy objective of immigration is to leverage immigrants to boost growth rates in GDP per capita, this policy shift is not economically sound.

SEAN SPEER: Is there a trade-off between higher GDP per capita and egalitarian concerns about distribution?

MIKAL SKUTERUD: The hypothesized relationship between GDP per capita and inequality is the known as the “Kuznets Curve.” The curve hypotheses an inverse U-shaped relationship in which countries who are in the early stages of economic development tend to see increasing levels of economic inequality up to some maximum, beyond which further advances in development tend to reduce economic inequality. It seems entirely reasonable to believe that Canada is on the downward sloping part of the Kuznets Curve where further gains in average living standards tend to benefit the most disadvantaged in society. The success of the Canada Child Benefit in reducing child poverty rates is a noteworthy example pushing us along the downward sloping part of the Kuznets Curve.

GDP per capita can be thought of as the size of the average slice of the national economic pie. When the size of the average slice is growing over time, citizens are more willing to support bigger slices for those with the smallest slices because doing so doesn’t require anyone to have less. But in an economy where the size of the average slice is decreasing, support for progressive policies can quickly turn as citizens become more focused on maintaining what they already have. In the words of a song from my youth: “the grabbing hands grab all they can.” More troubling, if heightened immigration is seen as contributing to falling GDP per capita, Canada’s historical and exceptional public support for high immigration rates risks being undermined. This, in my view, is the ultimate risk of Canada’s current immigration policy experiment.

SEAN SPEER: What if any consequences are there for a growing GDP per capita gap with the U.S.?

MIKAL SKUTERUD: As noted earlier, a key mechanism through which immigration has the potential to boost GDP per capita is through its potential to increase the average human capital of the population by attracting and retaining top international talent. One obvious risk of a growing GDP per capita gap with the U.S. is that it exacerbates Canada’s ability to attract and retain skilled workers, and not only immigrants, but also Canadian-born workers who might increasingly look to the U.S. to realize their career and economic ambitions. This is one mechanism through which declining per capita GDP can be self-perpetuating.

Sean Speer: Trudeau’s empty-calories economic agenda is failing Canada

Commentary

Last week marked a major development in Canadian politics. Conservative leader Pierre Poilievre’s commitment to tie annual immigration levels to housing construction is the first time in more than a decade that we’ve heard a mainstream politician speak openly about limits on immigration.

Trudeau-era immigration policy has been marked by two intellectual commitments: first, cultural diversity is inherently good and involves no trade-offs, and second, a bigger population represents a key driver of economic growth and similarly involves no real trade-offs.

The first assumption remains a mainstream position among Canadian opinion and political leaders. There are few voices who are prepared to question the cultural consequences of large-scale immigration, including the risk that Canada becomes a locus for old-world political prejudices to manifest themselves. Anti-Israel protests over the past few months haven’t yet been a catalyst for that difficult yet important conversation.  

The second assumption, however, has become the source of growing criticism including from a lot of mainstream voices. Economists and other experts have begun to challenge the Trudeau government’s massive increases in Canada’s immigration levels and its downward shift in the share entering the country through the points-based system. They highlight its distortionary effects on the housing market, wage growth, and business investment. Poilievre’s comments signal the diffusion of this new thinking about immigration limits into our mainstream politics.

The Trudeau government has put rising immigration levels at the centerpiece of its economic agenda. The prime minister and others around him have clearly bought into the idea of a “bigger, bolder Canada” in search of economic advantage in a world of aging demographics and slow population growth.

The numbers are quite staggering. Its annual targets for 485,000 new permanent residents in 2024 and 500,000 for the two subsequent years amount to a near doubling of its predecessor’s record. It has also overseen a nearly 50-percent year-over-year increase in the number of non-permanent residents (including student visas and temporary foreign workers) that brings the total intake to more than 1 million per year. The upshot: Canada’s population growth of 3.2 percent in 2023 was five times the OECD average—and 96 percent was due to immigration.

Although the government has seemed somewhat surprised by these numbers, they shouldn’t be understood as inadvertent. They represent a purposeful yet misguided policy agenda that conflates different types of economic growth.  

As Lakehead University economist and regular Hub contributor Livio Di Matteo outlined earlier this week, there are two types of economic growth: extensive growth and intensive growth. The former reflects an increase in the total size of the economy. The latter is concerned with an increase in GDP per person which ultimately depends on whether inflation-adjusted GDP grows faster than the population.

These distinctions may seem technocratic but they’re actually key to understanding the current political moment and the ideas and impulses that underpin it. The Trudeau government has pursued a policy of extensive growth driven by high immigration rates, loose fiscal policy, and rising cash transfers. This economic model has artificially stimulated economic activity by bolstering consumer demand but it represents the policymaking equivalent of empty calories: it has failed to make the economy structurally stronger or Canadian households any richer.

Quite the opposite. There’s reason to believe that the government’s immigration policy—both its magnitude and shift to lower-skilled newcomers—is distorting business investment and undermining productivity. The Trudeau government has clearly put its thumb on the scale when it comes to the classic capital-labour tradeoff. It’s one of the key contributing factors behind Canada’s poor performance on business investment. Capital per worker is now below its 2015 levels.

The combination of rapid population growth and stagnant business investment is responsible for the economy’s lack of intensive growth. It shows up most conspicuously in the weak recovery of GDP per capita lost during the pandemic. Canada’s GDP per capita actually declined last year and remains roughly $1,000 per person and $2,500 per household below pre-pandemic levels. It’s now not expected to recover until 2027. This “lost decade” of stagnant or declining living standards will have lasting effects on the material well-being of Canadian households.

The future isn’t expected to be much brighter either. Canada’s GDP per capita growth is projected to be the lowest in the OECD for the next three or four decades. One of the biggest risks is that the rising gap between Canada and the U.S. leads to an out-migration of high-skilled Canadians in search of higher wages.

Notwithstanding these disappointing outcomes, the Trudeau government and its supporters have been dismissive of the growing concerns about Canada’s stagnant GDP per capita. Their chief argument is that it’s a flawed metric because it is neutral on distributional considerations. The risk, according to this line of thinking, is that rising national wealth disconnected from its distribution may lead to higher inequality. This progressive impulse reflects the government’s core tendency to favour equity concerns over economic efficiency.

Yet there’s a good possibility that the government is actually misreading the trade-offs. As University of Waterloo labour economist Mikal Skuterud set out in a recent email exchange, there’s a strong likelihood that higher GDP per capita growth would translate into broad-based gains, including among low-income households, rooted in something known as the “Kuznets Curve.” He explained it as follows:

The curve hypotheses an inverse U-shaped relationship in which countries who are in the early stages of economic development tend to see increasing levels of economic inequality up to some maximum, beyond which further advances in development tend to reduce economic inequality. It seems entirely reasonable to believe that Canada is on the downward sloping part of the Kuznets Curve where further gains in average living standards tend to benefit the most disadvantaged in society.

The key point here is that even if one is motivated by normative commitments to reducing inequality in our society, the answer isn’t to neglect the imperative of intensive growth. A policy agenda that sought to boost business investment and innovation in the name of increasing overall wealth wouldn’t necessarily involve a major equity trade-off. Higher GDP per capita growth is ultimately key to boosting living standards for all Canadian households.

The bigger point though is that the Trudeau government’s experiment with an extensive growth agenda rooted in high immigration and high public spending has manifestly failed to produce positive results. It may have staved off a technical recession, but it has contributed to deep recessionary conditions for Canadian living standards that are having far-reaching socio-political consequences including heightened pessimism about the future among ordinary citizens.

This growing realization has led to renewed debate about Canadian immigration policy. That’s a healthy development. We need to restore a more responsible policy that sets reasonable targets and reprioritizes high-skilled immigrants. Pierre Poilievre deserves political credit for taking a big step in this direction.

But that’s a necessary yet insufficient response to what ails Canada’s economic life. What we ultimately need is to replace the Trudeau government’s empty-calories economic agenda with a healthier mix of pro-growth policies to boost investment, productivity, and living standards.