DeepDives is a bi-weekly essay series exploring key issues related to the economy. The goal of the series is to provide Hub readers with original analysis of the economic trends and ideas that are shaping this high-stakes moment for Canadian productivity, prosperity, and economic well-being. The series features the writing of leading academics, area experts, and policy practitioners. This DeepDives essay was commissioned by The Hub. Deep Sky is a Hub advertiser.

The world has never been warmer, and this heat is scorching our communities and burning our economies. The wildfire that ravaged the picturesque community of Jasper, Alberta, this summer is estimated to cost the insurance industry $700 million alone. Research published earlier this year showed that within 25 years, climate change will cause $38 trillion in damages annually to the global economy, a staggering amount equivalent to a third of today’s global gross domestic product. As the world continues to experience record-breaking temperatures that threaten lives and economies, innovative technologies are essential to limit the impacts of a changing climate while preserving our current standard of living.

This DeepDive examines one of those emerging technologies—direct air capture (DAC)—and assesses its opportunities and prospects for making meaningful progress in mitigating climate change.

The emergence of direct air capture technology

Imagine a future where we extract the carbon emissions that accelerate our warming atmosphere directly from the air. This isn’t science fiction; it’s the premise of DAC technology—an approach pioneered years ago by scientists such as Professor David Keith at the University of Calgary. At its core, DAC involves capturing carbon dioxide (CO2) directly from the air and permanently storing it underground, thereby reducing the overall concentration of carbon in the atmosphere. This makes intuitive sense—we got into this situation by taking carbon from underground and putting it into the air. To reverse the damage, we must take it out of the air and store it underground where we first found it.

DAC contrasts with traditional strategies that focus solely on reducing future emissions. While reducing emissions through approaches like industrial electrification, renewables, and sustainable aviation fuels remains the short-term priority to address climate change—as time goes on and we continue to miss our targets, the role of removing CO2 from the atmosphere becomes ever more important. While cutting emissions is essential, it is not enough to meet the net-zero targets set by global agreements like the Paris Accord. DAC bridges this gap by actively reducing the CO2 already present in our atmosphere. This dual approach—cutting emissions and removing existing CO2—is crucial for achieving net-zero emissions and stabilizing global temperatures. DAC is the “net” in net-zero.

The significance of DAC lies not only in its technical capabilities but also in its scalability and versatility. Unlike point-source carbon capture, which targets emissions from specific industrial processes, DAC addresses the cumulative emissions that have built up over decades, providing a solution that can be deployed virtually anywhere there is access to geologic storage and renewable power.

Beyond its environmental benefits, DAC represents a significant economic opportunity. A recent report by McKinsey & Company estimates that the market for durable carbon removals like DAC could be worth $1.2 trillion by 2050.  The development and deployment of DAC technology can drive job creation, stimulate economic growth, and foster innovation across various sectors—it is not just a climate solution but also a catalyst for economic growth.

How does DAC work? 

DAC works through a conceptually simple yet technologically sophisticated process. Large fans draw in ambient air, which is then passed through sorbents (either liquid or solid) that selectively bind to CO2 molecules. Think of a filter that is only selective to CO2 but lets the rest of the air (primarily nitrogen and oxygen) pass through. CO2 exists in the air at 421 parts per million in the atmosphere, or 0.042 percent, meaning you need to move one million molecules of air through a sorbent to capture 421 molecules of CO2. For context, in 2023, CO2 emissions reached a new record high of 37.4 billion tonnes. To remain below 1.5 degrees, we need to limit the amount of additional CO2 emissions to 250 billion tonnes—equivalent to approximately six years of our current emissions rate. Once captured, the CO2 is purified and can be stored underground in geological formations permanently, where it stays for hundreds to thousands of years.

There are over 100 different companies working to commercialize new approaches to direct air capture worldwide, with many startups being launched every day. Many of them were founded after the announcement of the $100M Carbon Removal XPRIZE competition in 2021. Each has its own approach to capturing CO2 from the air that differs in a few ways:

• The material sorbent that captures the CO2. Core to the DAC process is the “sorbent,” a liquid or solid material that selectively grabs onto CO2. You want a material that holds onto CO2, but not too strongly that it becomes difficult to remove—a Goldilocks zone of CO2 binding. The material also needs to be robust with a long lifetime, able to work in subzero freezing temperatures, and economical to mass manufacture.

• The way CO2 is removed from the sorbent. Once the sorbent is saturated, you need to find a way to remove the CO2, like squeezing a sponge. Some approaches heat up the sorbent to high temperatures, others expose it to steam, and some use electricity. Finding the most energy-efficient way of regenerating the sorbent material is critical to reducing the operating costs of the process. After the sorbent is empty, it can be used again to capture CO2 from the air.

• The process design and reactor engineering to make it all work. Every startup technology has a different reactor design, but the ideal reactor will be scalable, mass-manufacturable, modular, and also simple with few moving parts. The more steps and moving parts mean more potential failure points. Approaches that piggyback on existing industrial components in other industries like oil and gas or mining will typically have a better chance at scaling cost-effectively because precedents exist in other industries.

To make all this work, DAC needs to be 100 percent powered by low-carbon electricity including renewable energy, solar, wind, hydro-electricity, geothermal, and nuclear. It makes little sense to burn fossil fuels to produce energy just to capture CO2 from the atmosphere at far more dilute concentrations. Thankfully, Canadian electricity generation is currently 80 percent non-GHG emitting sources and has significant potential for low-carbon electricity across the nation with abundant hydro-electric power in Quebec, Manitoba, and British Columbia, solar and wind potential across Western Canada, and the potential emergence of small modular nuclear reactors—another technology area where Canada has an innovation advantage.

Once CO2 is captured from the atmosphere, it needs to be stored permanently and safely underground. Underground CO2 storage is an industrially mature process and has been done since the 1970s. In Canada, the Shell Quest Carbon Capture and Storage facility has been storing CO2 underground since 2015. Canada has some of the largest geologic formations to store CO2 in the world. Across Canada, there exist 389 billion tonnes of CO2 storage capacity alone, almost 600 times Canada’s total 2021 emissions.

The state of DAC projects worldwide

DAC projects are increasingly being implemented worldwide as part of the effort to mitigate climate change. Today there are 93 projects according to CDR.fyi, a public benefit corporation that monitors the carbon removal market and tracks announced and operational DAC projects worldwide. The majority of these projects are small-scale pilot projects that have barely made it out of a laboratory setting, but a few standout projects have emerged on a path to rapidly scale.

Notable among these is Occidental Petroleum’s plant in Texas, which represents one of the largest planned DAC facilities in the world. This project aims to capture up to 1 million tons of CO2 annually, which will then be utilized in enhanced oil recovery and ultimately sequestered underground. Occidental acquired Canadian direct air capture company Carbon Engineering for $1.1B last year, the startup that spun out of the University of Calgary over a decade ago. Construction for the first phase of this facility to remove 500,000 tons of CO2 annually is set currently underway and set to finish by 2025. This project has attracted significant private capital investment with a $550M investment from private equity firm Blackrock.

Another significant project is Climeworks’ Mammoth plant in Iceland, which is currently the world’s largest operational DAC facility. Mammoth is designed to capture 36,000 tons of CO2 per year, which is then mineralized and stored permanently in basalt rock formations underground. The unique volcanic rock in Iceland helps to more easily trap the CO2 underground where it turns into rock within a couple of years. In 2022, Climeworks raised $650M in an equity fundraising round to expand its operations and build more direct air capture facilities.

A few other DAC projects have recently been announced or started operations, including Heirloom which opened the first commercial DAC facility in the U.S. last year which removes up to 1,000 tons annually. In Canada, Deep Sky announced construction of its 3,000-ton-per-year DAC pilot and innovation centre, Deep Sky Labs in Innisfail Alberta, which is set to begin operations this winter.

How does DAC compare to point source carbon capture?

While DAC shares a common goal with other carbon management technologies—managing CO2 to mitigate climate change—it differs fundamentally in its approach and application.

Both DAC and carbon capture and storage (CCS) technologies aim to reduce atmospheric CO2 levels, but how they do this differs. DAC targets ambient CO2, focusing on the cumulative emissions that have built up over decades. In contrast, CCS aims to capture CO2 emissions at their source, such as power plants or industrial facilities, preventing them from entering the atmosphere in the first place.

Imagine our atmosphere is a bathtub, and CO2 is overflowing water. When your bathtub is overflowing you can do two things—first, you can turn off the tap, and second, you can bail water out of the tub. CCS and point source carbon capture is turning off the tap, reducing emissions before they can entire the atmosphere. DAC is bailing water out of the tub, removing emissions that are already wreaking havoc. Unfortunately, the rate of flow is too great and we are failing at turning off the top— – as time goes on, we have more and more water we need to bail out of the tub.

Furthermore, the scale and scope of implementation vary. DAC often involves large-scale projects requiring substantial infrastructure, such as expansive DAC plants that can be deployed in diverse locations. CCS, however, is typically integrated into existing industrial processes, focusing on capturing emissions at specific points within these systems.

While both DAC and CCS are essential tools in the climate mitigation toolbox, their differences underscore the need for a multifaceted approach to tackling climate change. By leveraging the strengths of both technologies, we can develop a more comprehensive strategy to stabilize global temperatures.

Who is buying carbon removal credits and why? 

DAC companies make money by selling carbon removal credits, where large companies pay a price per tonne of CO2 to the DAC company to remove CO2 from the air. According to CDR.fyi, nearly 5 million tons of carbon removal credits were purchased over the past year. Microsoft alone accounted for more than 3.3 million tons of these purchases as part of its ambitious goal to become a carbon-negative company by 2030, which includes removing its historical emissions from the atmosphere.

Although the carbon removal industry is still in its infancy, early adopters are willing to take on significant risks to accelerate the development of these emerging technologies. Frontier, a $1 billion advanced market commitment fund, was established to purchase carbon removal credits from early-stage companies. Spearheaded by Stripe, Frontier has attracted notable backers, including Alphabet, Shopify, Meta, McKinsey, Autodesk, H&M, JP Morgan Chase, and Workday.

So, what drives these pioneering companies to invest so heavily in carbon removal credits?

Today’s leading purchasers of carbon removal credits are typically large multinational corporations from three key sectors: technology, business (such as banks and consulting firms), and heavy industry (including airlines and manufacturers). These companies share several common factors: growing pressure from stakeholders and customers to adopt sustainable practices, a need to stay competitive in talent acquisition and retention, particularly in tight labour markets, higher profit margins that enable action, and a substantial amount of emissions that are beyond their direct control.

For technology companies, operating data centres and servers demands enormous energy consumption, with the bulk of their emissions tied to electricity production. Building renewable energy infrastructure can be costly, and if their power grids rely on fossil fuels, these companies have limited options to meet their sustainability targets. In the banking sector, most emissions are tied to portfolio investments, leaving banks with little control over direct emissions reductions. Management consulting firms face similar challenges, as the majority of their emissions stem from travel, particularly air travel, which is still heavily dependent on fossil-based jet fuel. The airline industry is exploring a shift to sustainable aviation fuel made from biomass instead of fossil fuels, but this alternative remains expensive and its supply is not yet sufficient.

With limited options available to achieve their net-zero goals, many of these companies are turning to carbon removal credits, driving demand to unprecedented levels. Here are four key reasons why these companies are investing in this nascent market:

1. Meeting net-zero targets: As pressure from governments, customers, and the public to decarbonize continues to grow, more companies are setting ambitious net-zero goals. Adopting green practices has become essential for maintaining competitiveness in the modern economy.
2. Fostering industry growth: Early adopters are supporting carbon removal companies by purchasing credits to help stimulate the industry. Expanding the supply of these projects requires investment, and securing contracts provides the necessary confidence for investors.
3. Ensuring future supply: Despite the surging demand for carbon removal credits, supply has yet to catch up, with many projects still in the early stages. Although over 5 million tons of credits have been sold, only 300,000 have been delivered to date. Companies are pre-purchasing credits now to secure future supply from projects that are not yet operational.
4. Leveraging a market opportunity: As the carbon removal credit market evolves from business-to-business transactions to transparent market exchanges, the trading volume is expected to increase. This presents an opportunity to capitalize on the anticipated gap between supply and demand as climate change pressures intensify, driving companies and countries to accelerate emissions reductions.

Integrating DAC into a comprehensive climate strategy

To truly grasp the potential of DAC, we must consider its role within a broader, multifaceted climate strategy. It’s not a silver bullet but rather a crucial piece of a complex puzzle, one of many tools to address climate change.

One of the most compelling aspects of DAC technology is its synergy with renewable energy sources. While renewables are vital for reducing emissions, they can’t address all sources, particularly those that are difficult to eliminate. DAC can provide a complementary solution by removing CO2 from the atmosphere, creating a balanced and sustainable approach to climate mitigation.

Effective policy frameworks are essential to scaling up DAC efforts. Governments play a pivotal role in supporting research, development, and deployment through incentives, subsidies, and regulations. Public-private partnerships can also drive progress, combining public funding for early-stage research with private investment for commercialization and large-scale deployment.

The integration of DAC technology into a comprehensive climate strategy also requires a shift in our mindset. We must move beyond viewing DAC as a last resort or a backup plan and recognize it as an essential component of our efforts to combat climate change. This shift in perspective is crucial for driving the investments, innovations, and policies needed to support the development and deployment of these technologies on a global scale.

Key takeaways: challenges and opportunities ahead

Despite its promise, DAC technology faces significant challenges that must be addressed to unlock its full potential. Scalability remains a major hurdle. Deploying DAC technologies at the scale needed to make a meaningful impact requires substantial investment in infrastructure and technology. McKinsey estimates that to reach net-zero, the DAC industry requires $6 trillion to $16 trillion of cumulative investment by 2050. We are the dawn of a new industry, one that will be larger than today’s oil and gas industry.

Cost is another critical factor. The high cost of deploying DAC technologies can be a barrier to widespread adoption. However, as with many emerging technologies, costs are likely to decrease over time with advancements and economies of scale. Policy incentives, subsidies, and carbon pricing mechanisms can also play a crucial role in making DAC economically viable.

Energy intensity is a concern, particularly for DAC methods that require significant energy inputs. Ensuring that this energy comes from renewable sources is crucial to maintaining the overall environmental benefits of DAC. Integrating DAC with low-carbon energy sources, such as solar, wind, hydro, and nuclear can enhance the sustainability of these technologies and reduce their carbon footprint.

In the global effort to develop and scale carbon removal solutions, Canada has emerged as a standout player. Central to the success of engineered carbon removal technologies, such as direct air and direct ocean capture, is the need for vast amounts of clean electricity. Canada’s abundant hydroelectric resources, particularly in Quebec, are the envy of many nations. Additionally, the country boasts significant wind power potential and a rich geological landscape, making it ideally suited for CCS.

Canada’s highly skilled workforce, many of whom have backgrounds in the oil and gas industry, possess the expertise needed to manage the movement of fluids and gases—this time, reversing the traditional process by putting carbon back into the ground where it belongs. In response to the United States’ Inflation Reduction Act, which offers substantial incentives, Canada’s Budget 2021 introduced its own investment tax credit, the Carbon Capture Utilization, and Storage (CCUS) Investment Tax Credit, which came into effect this year retroactive to 2022, aimed at encouraging investment in carbon removal technologies.

Canada’s unique combination of abundant clean energy, skilled workforce, and favourable geological conditions positions it as a leader in the global race to develop and scale carbon removal technologies. With strategic investments, supportive technology, and market-based policies, Canada is not only advancing its own environmental goals but also setting an example for other nations. As the world increasingly turns to engineered technological solutions to combat climate change, Canada’s strengths in this area could position it to be a carbon removal superpower—but only if we act now.

This DeepDive was commissioned by The Hub. Deep Sky is a Hub advertiser.

DeepDives is a bi-weekly essay series exploring key issues related to the economy. The goal of the series is to provide Hub readers with original analysis of the economic trends and ideas that are shaping this high-stakes moment for Canadian productivity, prosperity, and economic well-being. The series features the writing of leading academics, area experts, and policy practitioners. The DeepDives series is made possible thanks to the ongoing support of Centre for Civic Engagement.

Anyone who pays any attention to economic policy debates in Canada knows that our productivity performance in recent years has been disappointing—and that’s putting it politely. Carolyn Rogers, the senior deputy governor of the Bank of Canada, put it more bluntly in a speech in March when she said that Canada faces a productivity “emergency” and it is “time to break the glass.”

Not only is productivity—how much output each worker produces in an hour—not growing, but it is actually falling. As Figure 1 shows, Canadian productivity is lower now than it was in mid-2022 when the economy was coming out of COVID. Compare that to the United States, which has seen robust productivity growth since COVID and is now back to its pre-pandemic trend.

Canada’s poor productivity record comes with real costs for ordinary Canadians in the form of lower wages and living standards than in the U.S. The growing Canada-U.S. labour productivity gap is now 30 percent and that manifests itself in $20,000 less in GDP per capita for Canadians relative to Americans.

However, one area where Canada leads not just the U.S. but the developed world is population growth. As StatsCan reported in March, the Canadian population grew by 3.2 percent in 2023, blasting through the 40 million barrier to 40.8 million. This increase was the largest in percentage terms since 1957 when there was an influx of Hungarian refugees following the 1956 uprising. As Figure 2 shows, Canada’s population growth in 2023 was much higher than any other G7 country, much higher than the U.K. with 0.8 percent growth and the U.S. with 0.5 percent growth. Indeed, Canada’s population growth is more on a par with West African countries like Mali or Chad where women typically have five or six children.

This surge in population did not come from women having more babies. As I have noted in an earlier Hub piece, Canada’s fertility rate reached a record low in 2023. Instead, 98 percent of Canada’s population growth came from immigration.

In this DeepDive we ask whether these two phenomena of falling productivity and rising immigration are connected. More specifically, has the surge in immigration had anything to do with Canada’s disappointing productivity performance?

What has driven the surge in immigration in Canada?

Let’s dive into the numbers. Figure 3 below shows the overall percentage increase in Canada’s population from immigration since 2015, the last year of the Harper government, divided up into two categories.

The first is new permanent residents, who have been granted the right to live and work permanently in Canada. Often these immigrants will have been living abroad before obtaining permanent residence status, although in some cases they might have already been in Canada as temporary residents. About 40 percent of new permanent residents are selected on economic criteria; however, most are not: they are either family members of economic applicants (20 percent), family members of those who have already immigrated to Canada (20 percent), or refugees (15 percent).

As the chart shows, the number of new permanent residents has been growing. In 2015 they contributed 0.7 percentage points to Canada’s overall population growth of 0.8 percent; by 2023 they contributed 1.2 percentage points to overall population growth of 3.2 percent.

However, permanent residents have been surpassed as a contributor to population growth by the other category of immigrants: non-permanent residents (NPRs). There were very few in this category in 2015, but their numbers have grown rapidly: by 2023 they contributed 2.0 percentage points to population growth, so that almost two-thirds of Canada’s overall population growth was accounted for by NPRs.

Who is included in the NPR category? Figure 4 breaks down the overall total of 2.8 million NPRs in Canada into its different components. Some are asylum claimants. This includes refugees from war-torn countries such as Ukraine, but also many people from countries like Nigeria, Mexico, and India who may be more motivated by economic circumstances. As Chart 4 shows, asylum claimants account for 360,000 of the NPRs in Canada. About two-thirds of asylum claimants have a work permit.

A second category is temporary foreign workers—those with just a work permit. This includes not only low-skilled workers, such as people brought into the agricultural sector on a seasonal basis, but skilled workers in fields such as IT. This is by far the largest category of NPRs: 1.3 million people—about half the total.

A third category is students: Chart 4 shows that there are about a million foreign students in Canada. This is about half of the total, and of these about a third also have a work permit. Finally, there are about 100,000 family members of those NPRs who have work or study permits but who are not asylum claimants.

In total, therefore, 1.9 million (68 percent) of the 2.8 million NPRs in Canada are entitled to work. While not all NPRs with a work permit—particularly students—would actually be employed, the vast majority will be, as their residence in Canada is tied to having a job. Furthermore, it may well be that some NPRs who are not entitled to work are nonetheless doing so given that companies that hire migrants who are not entitled to work are rarely prosecuted.

Having documented the surge in Canada’s immigrant population, it is now time to look at its potential effect on productivity growth.

What drives productivity growth?

To understand the potential link between immigration and productivity, we need to have a framework for thinking about how productivity growth happens. Although there are certainly different ways to think about this question, the standard approach—reflected for example in Statistics Canada’s productivity statistics—is to ascribe growth to one of three sources: innovation; more capital goods; and/or a higher quality labour force.

The first source of productivity growth, innovation, includes new scientific discoveries (such as electricity), new ways to organize production (such as the assembly line), and new products (such as the automobile). The factors that lead to innovation and that influence the rate of adoption of new ideas, processes, and products throughout the economy are still a bit mysterious to economists, and the contribution of innovation to growth is generally measured as a residual, i.e. what can not be explained by other factors.

How might immigration affect innovation? It is certainly true that in the U.S., for example, the immigration of skilled scientists and engineers has contributed significantly to innovation. This does not seem to be as much the case for Canada or other countries, perhaps the U.S., as the world’s largest economy and strongest research universities is able to attract top talent in a way that other countries can not. It should also be borne in mind that countries like Japan and South Korea that have very little immigration have nonetheless managed to construct very innovative economies.

Immigration and the capital stock

The second source of productivity growth is the capital stock, which is essentially all the things, both tangible and intangible, that are used by workers to produce goods and services. Figure 5 below shows the different components of Canada’s capital stock for 2023. On the left-hand side, in blue, are produced assets, or capital goods that have been manufactured in some way. Produced assets comprise buildings (such as factories, shopping malls, and office buildings), structures (such as highways, mines, and pipelines), machinery and equipment (such as computers and robots, but also trucks and machine tools), and intellectual property products (such as software and R&D). In total, these had a market value of $3.3 trillion dollars in 2023.

On the right-hand side of the chart, in orange, are non-produced assets. These comprise the land upon which buildings and structures sit, agricultural land used for farming, and natural resources. The latter includes not just proven energy and mineral reserves, but also timber and even radio spectra. In total, these had a market value of $3.0 trillion in 2023.

Adding together both produced and non-produced assets gives a total of $6.3 trillion dollars, slightly more than double Canada’s GDP. This means that each Canadian worker has on average $312,000 worth of capital to help him or her produce goods and services. This average, which economists call the capital-labour ratio, is a key determinant of productivity. The more machines, factories, land, and natural resources a worker has, the more productive that worker will be.

High-income countries such as Canada or the U.S. typically have much higher capital-labour ratios than low-income countries such as India or Nigeria (the exceptions are countries like Saudi Arabia with huge oil reserves). China went from being a low-income country to an upper-middle income in large part by investing heavily in its capital stock.

What happens when there is a sudden increase in the workforce? The initial impact will be a decline in the capital-labour ratio. On average, each worker will have less capital to work with and will therefore be less productive. Output will go up—there are more workers in the economy—but output per worker will go down, putting downward pressure on wages across the economy.

As Figure 6 shows, this is exactly what has happened. The produced capital stock has risen by more than 1 percent since the third quarter of 2002, but employment, driven by the surge in immigration, has risen by more than 3 percent, so that the capital-labour ratio has fallen by two percent, helping cause the slide in productivity that we saw in Figure 1.

Not everyone is worse off though. For the owners of capital, an influx of workers is beneficial. Workers are cheaper, and with more workers per unit of capital, they get more output. This is why business is often a strong supporter of higher levels of immigration.

In the short run, then, more immigration means lower productivity. However, what happens over time? After all, countries with bigger populations aren’t necessarily less productive. Tthe U.S. has nearly ten times Canada’s population and has higher productivity than Canada.

The answer is that over time the capital stock, at least the produced part of it, adjusts. With a bigger economy, businesses have an incentive to invest more, and productivity will start to recover. Even the stock of non-produced assets can grow if there is more investment in mining exploration or if more land is cleared for agriculture or zoned for commercial or industrial use.

That’s the good news. The bad news is that this adjustment can take a very long time. The reason for this is that much of the capital stock is very slow to adjust. Developing more land for buildings or factories is a notoriously long process in Canada, and the time it takes to get permission for a major resource project is even longer. Even without these external constraints, it takes time to plan, get internal approvals, arrange financing, and actually complete construction. According to the head of the Mining Association of Canada, a new mine can take up to 15 years to become operational.

Thus, at least in the near term, we would expect an increase in immigration to reduce productivity, as the existing stock of capital, both produced and non-produced, now has to support a greater number of workers. Just as in the housing market, the supply of physical assets cannot adjust quickly to a surge in population.

Immigration and labour quality

The third driver of productivity growth is the quality of the labour force, or how much human capital—skills, education, experience—that a worker possesses.

If immigrant workers had the same characteristics as Canadian-born workers, we would expect immigration to have no impact on labour quality. However, immigrants do not have the same characteristics as Canadian-born workers. On the one hand, the countries that Canada draws the bulk of its immigrants from (India and China) have much lower levels of human capital than Canada. On the other hand, those who choose to emigrate are often better educated, and our immigration system is designed, in part, to select for the “best and the brightest”—immigrants with more human capital.

In practice, what we see is that immigrants do have fairly high levels of educational attainment. In Figure 7 below we can see that 60 percent of very recent immigrants, and 55 percent of non-permanent residents, have a bachelor’s degree or above. In comparison, less than 30 percent of the Canadian-born population has a bachelor’s degree or above. (Of course, it may well be that the Labour Force Survey does not capture many lower-skilled immigrants who may not be as willing or indeed able to participate in surveys.)

However, this superiority in educational credentials does not necessarily translate into higher earnings. In Figure 8 below, we show the wages of immigrants relative to Canadian-born workers. Established immigrants—those who have been permanent residents of Canada more than ten years—have earnings slightly above that of the Canadian-born. However, recent immigrants—permanent residents between five to 10 years—and very recent immigrants—permanent residents for less than five years, have earnings that are around 90 percent of Canadian-born workers. Non-permanent residents have even lower relative earnings—slightly above 80 percent of Canadian-born workers.

This suggests that recent immigrants’ credentials are less valued, or that they have less relevant work experience or skills. Lack of familiarity with Canada’s official languages and culture may also play a role. Occupational licensing barriers are also likely to impede educated immigrants from entering many professions given that it is not always easy for professionals to be licenced if they come from another province of Canada, let alone another country.

Could outright discrimination against visible minorities play a role, with employers offering wages to recent immigrants that are lower than their level of productivity? The fact that established immigrants have caught up with their Canadian counterparts would seem to suggest not. Time in Canada, rather than ethnic origin, seems to be what is driving lower wages for immigrants. (Note that even among established immigrants, only 23 percent were born in Europe and the U.S.)

However, while the wage gap between immigrants and the Canadian-born does dissipate, it takes a significant amount of time: as Chart 7 shows, those immigrants who have been in Canada for five to 10 years still earn only 91 percent of the Canadian-born. This suggests that a surge in immigration such as the one that we have just experienced is likely to reduce labour quality for a long period of time until the new arrivals catch up.

Key takeaways: do the negative impacts on productivity mean that immigration is negative for the Canadian economy?

It does seem likely then that the surge in immigration over the last few years, particularly amongst NPRs, has contributed to the recent decline in Canada’s productivity. Because the capital stock moves slowly, faster population growth reduces the available stock of machinery, buildings, and natural resources per worker, making them less productive. And because new immigrants and NPRs are less productive than immigrants who have been in the country for a long period of time, a surge in immigration lowers the average quality of the workforce. The other key driver of growth, innovation, is unlikely to respond significantly to immigration, given that ideas tend to flow easily over national borders.

None of this means that no one in the economy benefits from immigration. Owners of capital certainly benefit when labour is cheaper and more abundant. However, the principal beneficiaries of immigration are immigrants themselves. Given the huge wage disparities between Canada and the developing countries from which the vast majority of immigrants come from, the potential economic gain to immigrants is very large. The costs of relocating and adapting to a new country are small in comparison.

Furthermore, there are things governments can do to improve the economy’s adjustment to the higher immigration. Policies to improve the investment climate would help increase the capital stock, and better credential recognition would reduce the wage gap for new immigrants.

However, policy action on these fronts can only go so far. Ultimately, it is always going to take some time for the capital stock to catch up with a bigger workforce, and new immigrants are likely to be less productive for a significant period (unless Canada is willing to become much more selective in its immigration policy, cutting back on family class immigrants, and making selection criteria much more stringent). This means that if immigration remains at its current level, it is likely to remain a drag on productivity and therefore our standard of living for some time to come. Whether that proves politically sustainable remains to be seen.