Tim Sargent’s recent Hub DeepDive into productivity is a great primer on how economists calculate productivity and how immigration affects it. But the article reminds us that by describing things with economic terms we can lose sight of what we really care about. Economic thinking that centres people over statistics might lead us to different conclusions.
Despite the piece’s title (“Who benefits from Canadian immigration? Hint: it’s not Canadian workers”), it’s not obvious that Canadian workers are hurt by higher immigration. Instead, immigration may have postponed a policy reckoning.
Sargent explains why temporary foreign workers might reduce labour productivity. Labour productivity is an average (value created per hour worked by all workers). Technically, overall productivity is brought down by all workers with fewer skills, experience, and connections (what economists call human capital). This is true for both temporary foreign workers and Canadian teenagers taking their first job.
We can get into trouble if we do what economists call “targeting an indicator.” Productivity is a valuable economic indicator because high productivity helps economies grow. Growing economies provide the things people need at prices they can afford. But it does not follow that forcing up average productivity automatically leads to growth.
Remember why productivity matters. Canada would not be better off if we boosted productivity by outlawing unskilled labour. The “productivity” measure would go up because the remaining workers would all have higher productivity—but we’d lose a tremendous amount of economic activity. We would all be poorer. We would get a temporary boost in the indicator at the cost of economic production.
No one is recommending that we eliminate unskilled labour. But worries about the effect of temporary foreign workers on labour productivity make similar assumptions.
Here’s one problem with those assumptions. With enough new workers, low productivity per worker can still add up to economic growth. The Globe and Mail’s Andrew Coyne has been shouting from the rooftops that Canada’s economy is barely growing. It is barely growing despite the added output from many more immigrant workers. Cutting new, low-productivity workers might technically boost productivity. But it would almost certainly do so at the expense of growth and maybe even make us poorer. Economic growth is needed not just to pay for social programs. Economic growth also produces the goods and services that we need from the private sector.
Productivity was already falling before immigration increased or the temporary foreign worker program expanded. Coyne points out that the productivity gap between Canada and the United States has been growing since the turn of the century. Increasing productivity by blocking low-skilled foreign workers isn’t going to fix this problem. Technical tinkering isn’t going to make up for the lost growth we can get from simply throwing workers at the problem.
Sargent also provides valuable context about immigrant productivity. He explains that new immigrants typically have lower productivity, but it rises as they become established. Once they have been in Canada for ten years, they are almost as productive as a native-born Canadian. This is important!
Every new worker increases Canada’s economic potential. It’s good to have and to steward natural resources, even if they’re not being used yet. And it’s good to have workers who can learn and produce more, even if they don’t produce as much as they ever will yet. This is what Adam Smith meant when he wrote in The Wealth of Nations that the division of labour is limited by the extent of the market.
Economic potential is separate from productivity. We might think of productivity as how much of our potential is being realized. It’s impossible to measure potential unless you have a crystal ball to tell you every worker’s future—that’s why we focus on the snapshot we have of productivity. However, we can understand that potential exists and is realized over time. The growing productivity of immigrants as they become established in Canada is evidence of that.
Raising our potential for economic growth is at least as important as how much of that potential we use with high productivity. Immigration increases the number of workers and, with them, Canada’s economic potential. Immigration is not the problem.
However, other policy choices have undermined our ability to grow and the ability of workers to meet their potential.
Sargent points out that Canada has relatively low capital available per worker. However, Canada still has a labour shortage, including unskilled and agricultural workers. The labour shortage is the policy problem temporary foreign workers are meant to help address. And employers typically need to fill out a Labour Market Impact Assessment to show the government that a labour shortage exists to argue that a foreign worker is needed.
Here is where the temporary foreign worker program fails more significantly than in its effects on productivity.
Temporary foreign workers come to Canada with a work permit tied to a specific job. They depend on their employer for status in the country. This makes workers vulnerable to abuse. It also almost guarantees they will not be free to take advantage of their own potential. They cannot easily take a new job they think would be a better fit. They won’t be rewarded as easily in our labour market for gaining skills, experience, and contacts.
Mike Moffatt points out that the program as it exists shields employers from having to raise wages for any worker. An employer whose employee’s legal status is tied to their job does not have to compete with other employers through higher wages. The wages of foreign workers are definitely pushed down. But they may also save employers from offering market wages to young workers and other new entrants to the job market.
An employee adjusts a television set at a store in Ottawa, on Tuesday, March 1, 2016. Justin Tang/The Canadian Press.
Employers like restrictions on workers because restrictions protect employers from the effects of competition for employees. The government should not give any employers such power. Especially not over workers earning the least.
What can we do? When lower-skilled workers are admitted to Canada, we can still require a job offer. We could even still require a labour market assessment. But admission should come with an open work permit and the chance to stay.
The ability to switch jobs would offer some protection from abuse. The ability to accumulate training and experience would encourage higher productivity. Employers who need these workers would have to compete for them, allowing wages to increase and alleviating downward pressure on domestic wages for similar work (beyond the pressure from free competition). We should reform the program in this way rather than scaling it back. Higher productivity gained by giving workers full access to the market would come without the potential harm of shrinking growth of the workforce.
Wages may be a more general problem, though. Policies meant to help workers, like minimum wages or employer contributions to an employee’s Canada Pension Plan and employment insurance, increase the cost of each employee. Higher costs of hiring discourage the hiring of workers who can’t produce as much. A business that could benefit from hiring someone at $10 an hour might make do with fewer workers instead if they have to pay $17, even if that makes the products and services they offer worse.
If foreign workers are pushing wages down because the right workers could be attracted at a higher price, it suggests that the minimum wage is not binding. In other words, it suggests that wages are not raised by the minimum wage, and a negligible number of workers would be paid less without it.
It seems unlikely to this author that the minimum wage has no real effect on wages, but until the temporary foreign worker program is reformed, we should admit that we don’t really know. On the other hand, if the problem is not being able to match employers with employees at the right price, simply telling businesses to raise wages to attract the labour they need won’t help. It might even make the problem worse by denying more workers a chance to gain the skills and experience to produce at $17 an hour.
Finally, Canada does not only have a labour shortage. Our economy has struggled with investment, capital stock, and innovation. These issues are separate from immigration numbers. Immigration makes these problems easier to bear.
None of the policies that shape our economic lives have been put in place without a reason. However, many are designed not to affect provincial budgets. A minimum wage is not a budget line item like an earned-income tax credit or wage subsidy. Policies that affect the budgets of provincial governments encourage policymakers to make trade-offs directly and at a high level. Policies that affect the budgets of businesses mean many smaller second-best choices that can add up to big problems. Take enough options off the table, and you can get an economy that isn’t coordinating its resources well enough to take care of itself. And then governments might turn to stop-gap solutions.
So, who do soaring immigration numbers help? All of us. But especially those who don’t want to make tough decisions about domestic economic policies. We should face the music. Canada should free the potential of not just temporary foreign workers but of everyone who works in Canada.
Janet Bufton is a founder of the Institute for Liberal Studies. She holds degrees in business, economics, and international affairs, which she…
