Can immigration fix Canada’s economy?

This article is about the economic effects of immigration, so as a Canadian citizen, let me begin with the customary acknowledgement that I am totally pro-immigrant! Yes I was born in Canada, but my parents were immigrants. My wife is an immigrant. Even one of my daughters was born outside the country and technically immigrated. And immigration is a difficult subject anywhere because politicians often deflect problems by blaming them on migrants.

Anyway, now that is out of the way, and purely from the point of economics – why is Canada trying to ramp up its population growth through immigration? In 2023 the rate was 3.2 percent, which was the highest in the OECD.

The usual argument put forward by economists in favour of boosting immigration is that we need young workers to support all the Boomers who are collectively easing into what looks like being a very expensive retirement. There is huge demand for workers in sectors such as agriculture, construction, healthcare, and so on – jobs which are often eschewed by locals because the pay is low.

However, the availability of cheap immigrant labour means that firms have less incentive to invest in productivity-enhancing machinery – which helps explain why Canadian productivity has slid in recent decades to about 72 percent of that of the US.

And of course immigrants age and retire and bring in older family relatives themselves, so immigration might give a temporary boost to the work force but is not a viable long-term solution. Finally, immigration may be contributing to the problem it is supposed to solve.

According to Statistics Canada, 32 percent of Canadians in their 20s “did not believe they could afford to have a child in the next three years” due to lack of “suitable housing.” This might explain why Canada’s birth rate has plummeted to 1.33 births per woman, which is nowhere near the replacement number of 2.1. But excessive levels of immigration boost inflation and competition for scarce housing, which will make finding rooms for babies even less affordable.

Another reason put forward for the low birth rate is anxiety about things like climate change. Some young couples are reluctant to bring children into a world they see as being on the edge of environmental catastrophe. Since Canada is one of the highest per capita greenhouse gas emitters on the planet, growing its size also directly damages the environment. So what is going on?

Buy my house
There is also another economic reason why some governments want to maximise immigration, which is that in theory it supports house prices. After all, as they say, immigrants don’t carry houses on their backs when they come in. And house prices are very important to debt-addled Canadians (ratio of household debt to GDP highest among the G7 countries).

As Finance Minister Chrystia Freeland previously explained, “The core problem with housing in Canada is we just don’t have enough housing. It is just a mathematical thing – Canada has the fastest-growing population in the G7.”

To homeowners, that decodes to: house prices will go up! Our investments (and retirements) are safe! This is especially useful given that much of Canada’s economy is based on real estate – from realtor fees to financing to insurance to construction.

But (speaking as a quantum economist) Freeland was using the wrong kind of math. The housing boom which underpinned the economy over the last few decades had less to do with population growth than with declining interest rates; and just as immigrants don’t come in bearing houses, most of them don’t also come in bearing massive downpayments. So the fact that we have a housing shortage doesn’t necessarily translate to higher prices – it might just mean that people have to pack themselves into smaller spaces (ask an international student in one of our overcrowded university towns).

From a purely economic standpoint, immigration does boost the total size of the economy – if you double the population then the economy is twice as large – but what is the point? A better measure is quality of life, which is a separate thing – and according to metrics such as per capita GDP is in decline. The whole approach seems outdated in a world where what matters (or should matter) from an economic perspective isn’t headcount or house prices but things like technology, innovation, resources, and environmental protection.
These problems are of course not limited to Canada, which is why housing, immigration and climate change are huge political issues in countries such as the UK, Australia, New Zealand, France, and so on. And why economics Nobel winner Angus Deaton wrote in March 2024 that he no longer subscribes to what he calls the “near consensus among economists that immigration to the US was a good thing.”

The reality is that immigration is great in moderation, and enriches us in many ways (not just economic), but it is not an all-or-nothing binary choice.
If a country like Canada wants a better economy in the future, as opposed to just a larger one, then maybe it is time to focus a little more on growing its own.