The Economics and Strategy department of the National Bank of Canada recently released a report titled “Canada is caught in a population trap.” A population trap is a situation where no increase in living standards is possible because the population has grown so fast that all available savings are needed to maintain the existing capital-labour ratio. The report argues that Canada is caught in such a trap, suggesting that we can no longer afford to keep bringing in new immigrants at our current rate, but we can also no longer afford to stop.
Because immigration can be a complex and sometimes sensitive topic, I am going to break down this analysis into a three-part series. Part one focuses on why Canada’s has economy become so reliant on immigration. Part two will explore the potential impacts of too much immigration on the economy, and part three will discuss Canada’s immigration strategy going forward.
Why has Canada’s economy become so reliant on immigration?
For years, Canada has had a demographics problem, due to an aging population and a declining natural increase (births minus deaths). This demographics problem created two other major problems:
1. How do we fill an influx of vacant positions and skills gaps with a population that will eventually decline?
2. How do we provide care for an aging population?
These two issues presented distinct challenges for policymakers in recent years. First, that upskilling our workforce is costly and time consuming, and second, you cannot force people to procreate. The solution they landed on was immigration.
The thinking was that encouraging immigration would increase our population and lower the country’s median age, since newcomers tend to move with their families. It would also allow the government to target particular skillsets within that pool of immigrants, a practice they coined as “targeted immigration.”
Targeted immigration works to fill labour gaps with workers who have the specific skillsets our economy needs. By bringing in new workers with targeted skills, for example, we could address critical infrastructure gaps in housing and healthcare across the country. This solution was much faster and cheaper than trying to upskill our existing population.
Immigration can also act as an economic stimulus for the country, since, generally, skilled immigrants arrive with some money they use to buy goods and services like new accommodations, motor vehicles, and other basic necessities. The increased spending, output, and labour force participation from more immigrants also significantly benefits Federal and Provincial tax revenues. Simply put, more people means more taxes, from a government point of view.
Despite the significant economic benefits that immigration brings, too much of a good thing can have unintended consequences. In part two of this series (see the next issue of Business Voice), we will investigate the potential impacts of too much immigration on the economy and Canada’s “population trap,” as described by the National Bank.
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