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Finding the Optimal Immigration Level for Canada

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As Canada’s immigration levels continue to rise, with an estimated 1.45 million people expected to arrive between 2023 and 2025, the question of the right amount of immigration for the country emerges.

Addressing this pressing concern, a recent Desjardins study comprehensively examines various factors. It looks at Canada’s demographic and economic goals, which the government aims to achieve through immigration policies. Additionally, the study scrutinizes the infrastructure of Canada’s public services and federal support to ensure effective integration and support for newcomers.

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The Demographic Picture

At the heart of the discourse on the economic advantages of immigration lies Canada’s aging population. With the presence of Canada’s national healthcare system, the elderly population beyond the working age (above 64) can significantly impact the country’s economy. This stems from the reality that medical expenses tend to escalate with age, and Canada’s healthcare system aims to alleviate the individual burden of most of these costs.

Provinces with smaller economies and a higher ratio of aging to working-age populations feel this impact more acutely, as they receive less immigration to fulfill their labor market needs. Canada’s Parliamentary Report projects that provincial government healthcare spending per capita will double between 2020-2040, reaching CAD 10,000 per year.

Desjardin’s Report

The Desjardins report takes this concern further by investigating the immigration level that would help balance the expenses of Canada’s aging population with economic growth. The aim is to maintain a rising standard of living while ensuring the sustainability of public finances. According to Desjardins, to keep the current ratio of working-age people to the aging population until 2040, Canada would need to increase its working-age population by an average of 2.2% annually. Canada’s working-age population grew by just 1.6% in 2022, with 256,000 new economic permanent residents and 756,000 work permit holders.

If Canada aimed to target the historical ratio between aging and working-class populations from now to 2040, the Canadian government would need to increase its working-age population by 4.5% annually. Both scenarios would require a substantial increase in working-age immigration from 2022 levels. Which represents the highest rate of working-age population growth since 1989.

Economic immigration emerges as a vital solution to Canada’s demographic challenges and the financial toll they may entail. Including the Provincial Nominee Program (PNP) as Canada’s primary path of economic immigration is of particular significance. PNPs help distribute the benefits of economic immigration across Canada’s provinces. It addresses key labor shortages and significantly alleviates strain on provincial economies. 

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The Economic Picture

One of Canada’s primary objectives through its immigration system is to address labor market shortages, which the aging population cannot sustain. Historically, there was a positive correlation between Canada’s economic potential, measured by the economic output gap, and the admission of economic temporary (work permit holders) and permanent residents (the largest category of newcomers each year).

However, a recent Desjardins report indicates a shift in this relationship, with the number of newcomers exceeding what the economic output gap justifies. This suggests that there might be an excess of newcomers compared to what economic growth can support. 

Despite Canada’s increased efforts in immigration, the national unemployment rate has remained relatively stable at around 5%, while job vacancies have stayed above the national unemployment level. This indicates that although Canada is approaching its economic potential through immigration, numerous job opportunities are still available. Many temporary foreign workers arrive in Canada to address specific labor market needs, which helps explain the situation. Given the elevated job vacancies and the country’s inability to fill these positions with its own population, it can be reasonably argued that the current level of immigration is economically justified.

Furthermore, in the long term, economic immigration significantly effects Canada’s economy. Attracting newcomers to the country contributes to potential GDP growth and potential GDP per capita. Recent immigrants are more likely to be employed than native-born Canadians. The fact that immigrants tend to be younger provides more potential work hours and years of productivity. Notably, in 2022, permanent and non-permanent immigrants entirely drove the growth of Canada’s working-age population (aged 15-64). This emphasizes that immigration can help meet Canada’s economic needs and goals in the short and long term.

Is it as straightforward as it seems?

While the mentioned factors present a compelling case for increasing immigration to Canada, there are inherent costs associated with welcoming such a large number of people to a new country, particularly within a short timeframe.

One critical area where these costs have surfaced is Canada’s housing market. The rising demand from the growing working-age population has led to declining housing affordability across the country. Additionally, the lack of new housing projects, influenced by higher interest rates, and increasing production costs, exacerbates the issue. Initially estimated to require at least 100,000 new housing starts annually to offset growing housing costs, Desjardins now believes this figure needs revising due to the substantial number of temporary residents (e.g., work and study permit holders) being welcomed each year. Without sufficient housing starts, we expect home buying and rental costs to rise.

This situation poses a potentially significant problem for Canada, as the lack of affordable housing may discourage talented workers from selecting Canada as their destination of choice for settling, consequently reducing the country’s overall openness to immigration.

Final Thoughts

Immigration is crucial to Canada’s long-term economic success by addressing short-term labor market needs and contributing to potential GDP growth. Moreover, it supports the country’s demography, especially amid an aging population. However, the rapid population growth is exerting strains, notably in the housing market. The government faces the challenge of potentially tightening requirements for non-permanent residents to ease housing affordability issues. Still such measures may also limit the growth of the working-age population and raise concerns about fiscal sustainability, particularly in less populated provinces. A balanced approach, focusing on achieving results, is vital for the federal government to ensure increased housing affordability and improved quality of life for all Canadians.

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