Striking the Balance Between Population Gains and Economic Growth

Immigration has historically been a strength for the Canadian economy. Canada has attracted some of the world’s best and brightest to work and study here, while avoiding the worst demographic destinies currently playing out in Europe and Japan. The points system, as it has applied to skilled workers, has generally worked well and been emulated elsewhere in the world. Economic immigrants have been particularly successful, while other permanent and non-permanent resident (NPR) groups had been steadily closing the earnings gap with their Canadian-born counterparts. Immigrants have historically been more likely to start and own businesses than their Canadian-born peers, and these businesses were more likely to invest in new technologies, engage in international trade and be led by someone with a post-secondary education and background in a STEM field.

But a lot has changed over the past couple of years. The share of NPRs in the population has more than doubled, up from about 3.5% three years ago to 7.3% in the second quarter of 2024. It’s not difficult to understand how Canada started down this road. In mid‑2022, the job vacancy rate hit its highest level on record, while the unemployment rate hit an unprecedented low. Businesses were desperate to find workers at a time when Canadians were desperate to get out of their homes to socialize and spend the savings they amassed while stuck indoors. And the sectors hardest hit by the pandemic and experiencing the most job vacancies in its aftermath were also those that stood to gain the most from this surging demand. At the same time, post-secondary institutions (PSIs), also hard hit by the pandemic due to slumping enrollment, were desperate to open their doors to international students to collect the higher tuition that would help meet their revenue shortfalls.

In response, the federal government lifted many of the constraints on allowing NPRs into Canada. Business groups and PSIs applauded the moves, and it was evident from the rapid increase in temporary workers and international students that these weren’t just hollow platitudes. As a result, the job vacancy rate began to fall from its historic high and the unemployment rate arrested its decline before gradually grinding higher.

There is no reason to think the federal government had anything other than good intentions when it developed its current immigration policies. But with many businesses and PSIs behaving rationally in their own self-interest, and some bad actors taking advantage of the system, NPR admissions have skyrocketed to the point that they have become unsustainable. Rents are soaring across the country, particularly in those provinces without rent controls, and existing home sale prices remain elevated despite interest rates having ratcheted up. And while rapidly accelerating labour force growth has helped to keep wage pressures and inflation more subdued than they would be otherwise, that’s cold comfort to Canadians who are facing the higher cost of feeding their families and keeping a roof over their heads.

So, what should policymakers be mindful of as they seek to bring newcomer admissions down from their currently unsustainable levels? Our research External link. has shown that there are trade-offs to a change in immigration policy. If the federal government reaches its intended target of reducing the number of NPRs to 5% of Canada’s population over three years, there is a risk that the Canadian economy could tip into recession and that growth in government revenues could slow considerably. That’s because the number of NPRs would need to decline by nearly one million people, which would cause Canada’s population gains to hit pandemic lows (graph). But this would come with the benefit of slowing the growth in shelter costs and overall inflation while boosting real wage gains, productivity growth and advances in real GDP per capita. Weighing these benefits against the potential costs of reduced economic momentum will be a delicate balancing act.

What concerns us most is the seeming reactionary nature of immigration policy changes in Canada, first by opening the floodgates and now by potentially slamming them shut. There needs to be more intentionality in designing immigration policy to not only meet short-term labour market demands, but also steer the labour market where the country needs it to go in the long term. These requirements aren’t necessarily one and the same. Over the long term, the current immigration system, which is tilted toward a points-based approach to determine who should enter the country, has a lot of merits, provided it is subject to regular evaluation and improvement. At the same time, some type of temporary foreign worker program should be available to address acute labour market needs on a time-limited and industry-specific basis, but it shouldn’t come at the expense of local hiring or discourage firms from making productivity-enhancing investments. It’s a difficult balance to strike, but it’s one the federal government must get better at managing.