Patrick Grady
The Poor Labour Market Performance of Recent Cohorts of Immigrants Has Lowered Productivity Growth
February 9, 2006

The growing gap between productivity in Canada and the United States has broad implications for Canada’s ability to compete in increasingly competitive international markets and for Canadian living standards (Chart 1). This has been a source of concern among policy makers in Canada. The previous government even published a discussion paper last fall entitled A Plan for Growth and Productivity, which focused on ways to improve Canada’s productivity and living standards. However, in spite of all the recent attention on Canada’s relatively slow productivity growth, the important issue of the implications of the poor labour market performance of recent cohorts of immigrants for productivity growth has yet to be raised. This paper not only raises the issue, but presents a preliminary estimate of the magnitude of the impact, which, while not yet alarming, is certainly cause for concern and should be closely monitored.1

Chart 1

The theoretical framework appropriate for analyzing this the impact of immigration on productivity is the standard growth accounting model popularized by Edward Denison2 and used by the Macdonald Royal Commission on the Economy in Canada.3 Using the Swan–Solow theory of economic growth, growth accounting decomposes the sources of output growth amongst the various factors of production using a standard Cobb-Douglas production function.4 This approach can be adapted to incorporate any number of factor inputs including capital, energy, and labour. Productivity is measured as a residual after the contributions of all other inputs are accounted for. The contribution of different kinds of labour can be estimated using relative wage weights reflecting the productivity of different types of labour.5

The methodology of growth accounting is used in Table 1 to estimate the decline in labour productivity that can be attributed to the poor labour market performance of the post 1990 immigrant cohorts. An understanding of the basis of the estimate can best be understood by going through the table line by line. The first line (1) shows the total number of new immigrants who have come to Canada over the 1990-94, 1995-99 and 2000-04 periods as reported by Citizenship and Immigration Canada in its annual report. The second line (2) shows the number of these new immigrants who were less than 15 years old and hence not in the labour force population. Subtracting this number from the total number of immigrants gives the number of new immigrants who were in the labour force population (line 3), which is most relevant number from the point of view of productivity.

The next three lines (5,6 and 7) show the percentage of these new immigrants who have employment income as reported in the 2001 Census. This is used as a proxy for employment. It is worth noting that this proxy is higher than employment from the labour force survey as it incorporates everyone who had employment income any time during the year even if they did experience unemployment over the course of the year.

That new immigrants are less likely to be employed than the non-immigrant population can be seen by comparing the data in these three lines with the next line (8). This lower level of employment is significant for income and output, but not crudely measuredlabour productivity, which is the focus of this paper.

The three lines (10, 11 and 12) apply the percentage of the new immigrants with employment income from the census to the CIC administrative data for new immigrants to yield an estimate of the number of new immigrants with employment income. The four lines (14, 15, 16 and 17) show the three cohorts of new immigrants with employment income as a percentage of the total population with employment income as well as the total for new immigrants. The three lines (19, 20 and 21) presents the average employment income of the three cohorts of new immigrants with the average employment income of the non-immigrant population. It is worth noting that the employment income of the new immigrants ranges from 40 per cent to 24 per cent lower than that of the non-immigrant population.

The gaps between the employment income of new immigrants and the non-immigrant population are applied to the product of labour’s share (estimated to be 67 per cent) and the number of new immigrants with employment income as a percentage of the non-immigrant population with employment income to yield the final four lines (23, 24, 25 and 26) of the table, which are the estimates of the reduction in productivity resulting from the poor labour market performance of recent cohorts of immigrants.

It is worth noting that over the 1990-94 period, when the labour market performance of the new immigrants was at its worst, the reduction in the growth of labour productivity was almost 0.2 per cent per year, which is a significant amount. It is also worth mentioning that the decline in productivity over the whole 15-year period from the post 1990 cohorts of new immigrants was around 1.5 per cent. This accounts for a significant proportion of the 4.5-per-cent increase in the Canada-U.S. gap in GDP per capita over the 1990 to 2004 period. This is, of course, not to deny that the deterioration could have been even greater if there had not been a similar deterioration over the same period in the labour market performance of new immigrants to the United States, many of whom were illegal and had not completed secondary school.

Table 1
Estimate of the Decline in Overall Productivity Resulting from the Poor Labour Market Performance of Recent Immigrant Cohorts
1990-94 1995-99 2000-04
1) Total Number of New Immigrants from CIC 1,193,530 1,019,146 1,164,322
2) Number less than 15 Years Old 267,351 232,586 256,957
3) Number of New Immigrants 15 Years and Older 926,179 786,560 907,365
4) Per cent with Employment Income from Census
5) Cohort of 1990-94 59.84 69.79 69.79
6) Cohort of 1995-99 67.49 67.49
7) Cohort of 2000-04 67.49
8) Non Immigrant Population 68.04 70.53 70.53
9) Estimate of Number of New Immigrants with Employment Income
10) Cohort of 1990-94 554,206 646,359 646,359
11) Cohort of 1995-99 530,822 530,822
12) Cohort of 2000-04 612,381
13) Number of New Immigrants with Employment Income as per cent of Total Population
14) Cohort of 1990-94 3.70 3.94 3.54
15) Cohort of 1995-99 3.23 2.91
16) Cohort of 2000-04 3.35
17) Total for Cohorts from 1990-2004 3.70 7.17 9.80
18) Employment Income of Immigrant Cohorts as per cent of Non-immigrant Population in First Year of Period
19) Cohort of 1990-94 67.32 81.23 81.23
20) Cohort of 1995-99 75.92 75.92
21) Cohort of 2000-04 75.92
22) Estimate of Reduction in Productivity
23) Cohort of 1990-94 0.81 0.50 0.45
24) Cohort of 1995-99 0.52 0.47
25) Cohort of 2000-04 0.54
26) Total for Cohorts from 1990-2004 0.81 1.02 1.46

Notes: Ratios from Census Data are assumed to stay at 1995 to 1999 levels in 2000-04. The total population with employment income for 2000-04 is estimated assuming that it grows at same rate as employment from the labour force survey from 2000 level. Immigrants less than 15 years old from 1990-94 assumed to be same proportion of total (22.4 per cent) as over 1995 to 2004 period.

The 2001 census data revealing the poor labour market performance of recent cohorts of immigrants are cause for concern, especially when combined with the continued high level of immigration after 2000. While growth accounting suggests that so far the deleterious impact on labour productivity has been modest, a continuation of recent trends could easily have a much larger negative impact on productivity, which might only be discovered with a several year lag given the time delays in processing economic data from the 2006 census. The data from the 2001 census is definitely providing an advance warning that from an economic point of view something is going badly awry with Canada’s immigration program both with respect to the number of immigrants being admitted and their selection.

A final word. Don't believe anyone when they tell you that immigration is raising productivity. A careful analysis of the data clearly demonstrates that this just isn't true.

1.  This paper seeks to measure the direct impact of immigration on aggregate productivity as a result of the lower productivity of recent cohorts of immigrants as reflected in their poor labour market performance. There are also other indirect effects which also need to be considered. Martin Collacott in "Canada's Immigration Policy: the Need for Major Reform," Public Policy Sources No.64, A Fraser Institute Ocasional Paper, February 2003, pp.25 noted that U.S. studies have shown the availability of cheap labour has made industry less willing to invest in labour-saving technologies and that the same thing could be happening in Canada. Don DeVoretz in "The Brain Drain is Real and It Costs Us," Policy Options, September, 1999, pp.18-24 asked whether the influx of highly skilled immigrants to Canada has accelerated the outflow of Canadian workers who were even more highly skilled by keeping wages low.

2.   Edward Denison, The Sources of Economic Growth in the United States and the Alternatives Before Us (New York: Committee for Economic Development, 1962) and Accounting for Slower Economic Growth: The United States in the 1970s (Washington, D.C.: Brookings Institution, 1979).

3.   Royal Commission on the Economic Union and Development Prospects for Canada, Report (Ottawa: Minister of Supply and Services Canada, 1985), Volume Two, pp.28-32.

4.  Y=AKαLβ where Y is output, K is capital, L is labour and α and β are capital and labour’s share respectively. This production function has the convenient property of being linear in the logarithms of output, capital and labour, which can be interpreted in terms of percentage changes.

5.   The Macdonald Commission (loc. cit.) used this technique to estimate the impact on economic growth of changes in the composition of labour. Specifically, it focused on the age-sex mix of the labour force, education and inter-industry employment shifts.