In part one of this series, we unpacked the reasons why Canada has become so reliant on immigration. Part two of this series will assess the effects of higher immigration on the Canadian economy, looking at the macro-economic implications that immigration is having on Canadian productivity, output, infrastructure, and labour.
In March of 2024, the Senior Deputy Governor of the Bank of Canada in Halifax warned that Canada’s waning productivity growth in the country is an “emergency” that can force higher interest rates and limit rising wages for Canadians. The OECD projects that Canada will be the worst performing economy out of 38 advanced countries over the next forty years, achieving the lowest growth in real GDP per capita. This problem is further exacerbated by the fact that our neighbour to the south is the most productive country in the world. Our low levels of productivity in Canada hurts our ability to attract foreign business investments and labour as the US can offer higher wages and is the most business-friendly country in the world.
So, how does this tie into immigration? Increasing the number of workers in an economy (all things being equal) will increase the total output of that economy, because there are more people making stuff (higher GDP). But, if our resources (capital) are spread thinly across the economy, then it is possible that the per capita output remains flat or declines (see Chart 2).
This is the issue that the National Bank of Canada highlights in their special report titled “Canada is caught in a population trap.” In this report, they show that Canada’s capital stock per capita collapsed in 2023. This means that our population is growing so fast that we do not have enough savings to stabilize our capital-labour ratio and achieve an increase in GDP per capita (a standard of living metric).
So, how do we increase our capital? Investment adds to the stock of capital, and the quantity of capital available to an economy is a crucial determinant of its productivity. However, with additional capital, we need skilled workers to be able to turn that capital into goods and services. This is where the Canadian demographic and labour shortage issues mentioned in part one of this series ties in. Because we have aging population and are having more deaths than births, we need to bring in workers from other countries.
Why then isn’t increased immigration helping to raise our GDP per capita? One of the obvious consequences of the rapid increase in the level of Canadian immigration (see Chart 1 in part one of this series) is the increase demand for a limited supply of housing. This puts obvious upward pressures on housing and rental prices. And while it is possible that the supply of housing can be increased over time, the increase in the number of newcomers was immediate.
That’s not to say that unaffordable home prices are the fault of newcomers. It is the failure of our policy makers. Rather than create incentives for developers and help municipalities fund new infrastructure investments ahead of time—so that our metropolitan areas could properly absorb this rapid population increase—our governments are instead playing catch-up.
A recent Angus Reid poll found that immigrants who have been in Canada less than ten years were the most likely cohort to say they were seriously thinking about leaving Nova Scotia because of high housing prices. This is how Canada’s waning productivity levels become an emergency.
Because the U.S. can attract more investments and offer higher wages, Canada is left struggling to retain the skilled labour we need to build the new infrastructure necessary to attract the capital needed to improve our productivity. However, if we continue to bring in more workers without an adequate level of capital, we will continue to erode our standard of living. Therein lies the population trap for Canada as described in the National Bank’s special report.
This leaves Canada in a tough spot economically, and some serious questions need to be answered regarding the optimal level of immigration going forward. In our third and final part of this series on Canada’s immigration strategy, we will discuss what the future of Canada’s immigration strategy could look like and potential pathways forward to address these issues. ν
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