Optimizing Immigration for Economic Growth

July 11, 2024
  • While Canada’s skilled immigration system has been the envy of the world for decades, the post-pandemic years have seen policy prioritize plugging “holes” in lower-skilled labour markets, which is consistent with popular notions that some types of labour are “essential” to production. Instead, Canada’s economic-class immigration system should return to its successful roots by prioritizing highly skilled newcomers based on expected earnings levels.
  • The goal should be to maximize GDP per capita in the full population, including newcomers. Standard models of economic growth teach us much about the potential for heightened immigration to boost Canada’s GDP per capita. A key insight of the theory is that an economic immigration program that is designed to simply expand the labour force without raising the average human capital, or skill level, of the population is unlikely to increase GDP per capita in the long run.
  • In addition, physical capital accumulation and productivity growth are critical variables mediating the impact of immigration on per capita income. However, weak capital investments and productivity growth suggest that Canada is not well-positioned to leverage heightened immigration to raise either the level or the growth rate of per capita GDP. We argue that these data caution against large-scale increases in economic immigration rates in the near term due to absorptive capacity issues.
  • The preferred approach is to gradually increase immigration rates by starting with a high threshold level for expected immigrant earnings and gradually lowering it towards the overall population average. This would prioritize the applicants with the highest human capital levels and expected earnings, whose contributions to the Canadian economy are likely to have the largest positive impact.