Canadian Immigration: a Labour Market and Productivity Perspective

1. Canadian Immigration: a Labour Market and Productivity Perspective Patrick Grady global-economics.ca Presentation to the Fraser Institute Canadian Immigration Policy Conference June 4-5, 2008

2. Immigration continues at a High Level

3. Economic Growth • Immigration increases population and thus GDP. • But in the simple world described by the Cobb-Douglas production function without economies of scale and with two factors of production and a homogeneous labour force, it does not necessarily increase per capita income unless it raises productivity. • With the FTA/NAFTA and globalization, there is no reason to expect economies of scale. • In fact, there is more likely to be diseconomies of scale caused by urban congestion and pollution like in Toronto. • And immigrants must find productive employment if they are able to contribute to economic growth.

4. Productivity • Productivity has become a Canadian obsession. • Immigration is said to be necessary to raise Canadian productivity and to enable us to compete internationally. • The exact mechanism is usually not stated other than opening Canada to new ideas and markets. • There are some very prominent entrepreneurs who came to Canada as immigrants and who made major contributions to the development of the economy. • On the other hand, Robert Putnam has recently suggested that immigration reduces social solidarity and social capital, which could undermine productivity.

5. Growth Accounting suggests Immigration has lowered Productivity • Growth accounting is a commonly used approach for estimating the impact of various factors on productivity such as education and the age and sex composition of the labour force. • It involves using earnings weights to decompose the effects of the various factors. • When applied over the 1990-2004 period, it suggests that immigration lowered productivity by around 1.5% or 0.15% per year.

6. More on Productivity • One of the sources of the gap between productivity in Canada and the U.S. is less capital per capita in Canada. • In the International Productivity Monitor (autumn 2003) Monitor, Rao, Tang and Wang attributed 12% of the productivity gap to the lower intensity of capital. • Immigration decreases capital intensity at least in the short run.

7. Competitiveness • Productivity and competitiveness are not the same thing. • Low-wage labour can increase competitiveness even if it lowers aggregate productivity by complementing higher skilled labour and lowering costs. • But any such benefit in Canada would be largely accidental as the Government doesn’t seek to attract low-wage labour. • And any potential competitiveness benefits from the existence of potential low-wage labour can be offset by social welfare programs that discourage work and that must be financed through taxation.

8. Labour Market Needs • Employers are always griping about shortages of labour. • But you’ll never hear them say anything about the need to raise wages to attract more workers. • The production process can always make use of more labour if there is a surplus of people willing to work for low wages. • Also if large numbers of immigrants are admitted to Canada with certain education and skills, it can discourage Canadians from acquiring the same credentials unless, of course, those of the immigrants are not recognized .

9. The Impact of Immigration on the Labour Market • Has many dimensions. • Labour force participation rates and employment rates, and unemployment rates of immigrants. • Earnings of immigrants. • Indirect Effects on Canadian-born.

11. Growing Realization that Immigration has not been Working as in the Past • Up until around 1980, the pattern was that immigrants came started out earning about 80% of Canadian-born, but then moved up to and even beyond the average over a 10 to 20 year period. • Afterwards, at the same time as the source countries of immigrants and other characteristics of immigrants such as language and job experience changed, there was a deterioration in the labour market performance of immigrants. • In 1993 point system was modified to put more emphasis on education (human capital approach). • Skilled Class was increased and Family Class reduced. • In 2002, this was reinforced with more points for trade certificate or second degree, less for experience.

14. Employment rates of Recent Immigrants and Canadian born, 25- to 54-year-olds

15. Recent Immigrants and Canadian born, 25- to 54-year-olds

17. Median earnings, in 2005 constant dollars, of male and female recent immigrant earners aged 25 to 54

18. Recent Immigrant to Canadian-born Earnings Ratio

20. CIC has attributed continuing deterioration to IT Bust • Maybe a third of the skilled were computer professionals and engineers. • And sure there was a bust. • But in early 2000. • Why is there still a problem in 2005 after the market has improved and salaries have risen? And IT Professionals should be flexible. • This episode reveals the dangers of having CIC/HRSDC pick professions in demand given the long lags in process. • What will be their next big mistake?

21. Some Political Explanations • Canadian are racists. • Then why do they welcome so many immigrants? • It’s the Government’s fault for not spending enough money on training, subsidized internships and mentoring, language education, and credentials assessment and validation. • And, of course, the presumption is that whenever the Government spends money on anything, the desired results are always produced.

22. More Analytical Studies • Garnet Picot and his colleagues at Statistics Canada have found that Canadian employers don’t value foreign experience and heavily discount education. • Lack of fluency in English and/or French is also a problem. • Bonikowska, Green et Riddell attributed a large part of the earnings gap of male immigrants to the difference in cognitive abilities as measured by the IALS. • The ranking published by Jia Tong University in Shanghai contains only a handful of Third World Universities in the top 500.

23. The 2007 Rankings of Jiao Tong University of Shanghai • Only one university outside the developed world on the list of the top 100 universities – The State University of Moscow. Canada has four. • Only 23 on the list of the top 500 universities, while Canada has 22. • Few Third World universities in elite (mostly China ex Hong Kong [12], India [2], Chile [2] Brazil [4], Mexico, Egypt, Turkey), and none in the Philippines, Pakistan or Iran the number 3, 4 and 6 source countries in 2006. • But virtually all major Canadian universities.

24. The Result has been Increasing Poverty among Immigrants • The increased poverty in the main immigrant-receiving centres of Toronto , Montreal and Vancouver is concentrated in immigrant communities that are becoming increasingly ghettoized. • At the same time, poverty is falling among the Canadian-born. • A growing disparity between rich and poor along ethnic and racial lines.

27. Growing Immigrant Poverty Undermines the Economic Rationale for Immigration • Poor immigrants will take advantage of existing social and welfare programs and demand more. • In 2005, recent immigrant families already received a higher proportion of their income from government transfer payments. • Taxes will eventually have to be raised to pay for the increased spending, creating disincentives for growth. • For immigrants not to be a fiscal drain, they need to earn as much as everyone else and certainly not be poor. • Milton Friedman said you can’t have both free immigration and the Welfare State.

28. Total backlog mushrooms if no action is taken

29. Is C-50 the Solution? in theory, but in practice. • Immigration system is out of control. • IRPA and point system has produced a deterioration in immigrant earnings and growing immigrant poverty. • Backlog threatens to produce even an greater deterioration. • At least, C-50 will stop growth of backlog and moderately improve the matching between immigrants and jobs.

30. 250,000 immigrants is too many • The selection system is incapable of choosing so many immigrants that will do well in the Canadian labour market even after the longest prolonged expansion of the post-war period. • The situation can only worsen if the economy slows and unemployment climbs. • The only way to ensure that the immigrants chosen will do better is to be more selective and to cut down on the number admitted. • The selection system will have to be revamped and immigrant performance more carefully monitored.

31. Why not 100,000?

32. Potential Benefits of Lower Immigration • Promote integration of immigrants in labour market. • Increase the immigrant earnings. • Stop increases in poverty. • Reverse the net fiscal drain. • Tighter labour market. • Upward pressure on wages and incomes of Canadians.

33. Improvements in the Selection System • Much can be learned from the Australian model that could be applied in Canada. • Recognize that education isn’t homogeneous. • Focus on international students and foreign workers is a move in right direction.

34. The Tools Exists to Make Sure Immigration is Working • The IMDB and the LAD-IMDB and the LFS could be used to monitor annually the performance of immigrants in the labour market. • The number admitted could be adjusted until the immigrants admitted are able to earn around 80% of comparable Canadian-born. • This was the ratio in the past when the immigration program was working and immigrants were able to catch up. • Attention could also be paid to make sure existing Canadian residents were not displaced.

35. To end on an up-note, it’s encouraging that the Government has finally recognized the existence of a problem and is trying to do something about it. Thank you!