Letting the Market Determined the Number of Immigrants

This article appeared in the Globe & Mail newspaper on May 11, 2012 as part of a week-long series of articles discussing Canada's immigration policies and the merit of substantial increases in the annual numbers admitted into Canada.

Since the early 1980s, Canada’s immigration selection policies have focussed on the principal applicant’s highest educational achievements and language skills, explicitly to ensure that immigrants would be suitable for employment and economically successful once they arrived.

But data based on the 2005 census and published by Statistics Canada show these policies have not been successful.  Immigrants who arrived between 1987 and 2004 earned incomes that were on average equal to only 70 percent of the incomes of Canadians.  These recent immigrants have higher than average levels of unemployment and lower labour force participation rates.  They also disproportionately have incomes below the official poverty line.

Significantly, these recent immigrants pay income taxes that are only 54 percent of the national average.  Because of their low incomes, they also pay less than the average in other taxes.  At the same time, these immigrants are entitled to all of Canada’s generous social programs and enjoy at no costs the benefits of the country’s spending on infrastructure and security.

In Fiscal Transfers to Immigrants in Canada: Responding to Critics and a Revised Estimate, my co-author Patrick Grady and I estimated the average new recent immigrant is imposing a fiscal burden on Canadians of about $6,000 annually as they use that much more in government services than they pay in taxes.  The total fiscal burden in 2012 was around $20 billion for immigrants who arrived between 1987 and 2011.

This fiscal burden will never be repaid.  The 2005 employment income of the sons of second generation visible-minority immigrants (where one or both parents were born abroad), was only two thirds of non-immigrant Canadians.  Third and later generations will most likely have the same average incomes as other Canadians and thus will never pay enough taxes to compensate for the fiscal shortfall recorded by their parents.

Reforms of the present immigrant selection policies are needed to prevent a growing future fiscal burden. Immigration Minister Jason Kenney has begun this process. 

One of the most important changes is giving preference to applicants who have a pre-arranged employment contract for work in Canada.  Grady and I recommended this change because it would relieve civil servants of the responsibility of selecting immigrants on the basis of information that by its very nature is imperfect and would allow employers to make the initial decision as to which applicants have the needed occupational and language skills to earn their pay and become economically successful Canadians.

Limited experience with this pre-arranged job-offer criterion, which provincial governments have also embraced enthusiastically, shows much promise.  It is time to use job-offers as the main criterion for the admission of all skilled immigrants, who may be accompanied by their immediate family members.   

The successful operation of this system will require a quick approval process and continued government involvement in its administration and the screening of immigrants to protect public security and health.  Adequate resources must be devoted to monitor the income tax returns of immigrants to make sure they are indeed paid the amount promised in the employment contract and that they have not become unemployed for prolonged periods.

The avoidance of the fiscal burden also requires that the immigrants’ pre-arranged contract offers pay equal to at least the average income of Canadians.  This condition is needed to prevent a flood of low skilled immigrants with little earnings capacity who would not pay enough taxes to cover the cost of the public social programs they are entitled to.

The proposed policy would not only stop the growth of the fiscal burden but would solve two problems associated with the present system.  It would make the number of immigrants responsive to business cycle conditions and would determine how many immigrants were allowed to enter Canada annually. 

This number would no longer be the outcome of arbitrary decisions driven by politicians, bureaucrats and special interest groups but would be determined by labour market conditions and thus better serve the needs of the economy and all Canadians.

Bad News from the Immigration Front

Immigration Minister Jason Kenney announced recently that Canada will allow the entry of 240,000 permanent residents to enter the country next year. This is bad news for Canada struggling with a large fiscal deficit, unemployment, income inequalities and environmental problems.

A recent study, which I co-authored with Patrick Grady, showed that recent immigrants who arrived between 1987 and 2004 cost taxpayers an average of $6,000 every year. Applying this figure to the projected number of immigrants, by the end of next year, the tax payer burden will have increased by $1.4 billion and will continue to do so for many years.

This burden does not appear in any government budgets. It arises from a fact, found in data published by Statistics Canada: Recent immigrants on average earn about 70 percent of what other Canadians earn. Because of the progressive income tax system, they pay only half of what other Canadians do. Their low incomes also cause them to pay lower amounts of other taxes.

At the same time, the immigrants are entitled to and use all of the benefits provided by Canada’s welfare state. The result is the annual net fiscal burden of $6,000 per immigrant.

This cost does not account for the other negative effect the immigrants have on unemployment, congestion, pollution and the number living in poverty. Protests about income inequality should be directed at immigration and other government policies, not the free market system.

The Minister should be praised for a shift of emphasis on the selection of immigrants in the Canadian Experience Class program, which fast tracks skilled foreign workers and graduate students who have spent time in Canada on temporary permits or student visas, but the effect on the fiscal deficit is minimal. The number in the Canadian Experience Class in the first full year of the program in 2009 was 2,545. Assuming that on average they have a spouse and one child, under the existing classification system, the program will affect 7,635 immigrants, which comes to 3.2 percent of the 240,000 total to be admitted next year. Nor will the numbers grow much in the future. Only small numbers of temporary workers and students qualify.

According to the Minister, immigrants are needed to meet labour shortages. This argument involves circular reasoning. These immigrants create demand for labour through their needs for housing, schools, hospitals, universities, roads, bridges, sewers, water supply, consumer goods and services. In fact, most of the current and projected labour shortages are the result of recent mass immigration.

The demand for housing from immigrants is especially notable. Assuming an average family size of three and the same settlement pattern as in recent years, new immigrants next year in Toronto will require 27,272 dwelling units, 2,273 every month or 568 every week of the year. The corresponding weekly figures are 235 for Vancouver and 233 for Montreal. To build these accommodations requires much labour and scarce land. It will also lead to higher housing costs and the number of homeless.

Worth noting also is the effect of these immigrants on health care. Given that the average physician in Canada has 240 patients, by the end of next year one thousand additional doctors will be needed. Canada already has a growing shortage of physicians, so waiting lists will lengthen even more, as will crowding in the emergency departments of hospitals.

If the past is guide to the future, there will not be enough doctors in next year’s cohort to meet the new demand. The granting of medical licenses to all immigrants who claim to be a doctor is not a solution either. Canadians will not stand for the deterioration in the quality of services they receive from their doctors.

Canada’s immigration policy needs to be reformed. The influence of politicians, civil servants and the immigration industry on its formulation should be minimized. The heralded points system has failed and needs to be scrapped.

In its place should be market forces used in the selection of economic immigrants (refugees raise a different set of issues and are a small proportion of the total anyway). The basic concept is that landed immigrant visas will be issued only to applicants who have a verified, pre-arranged employment contract at a pay equal to at least that of the average of Canadian. They may be accompanied by spouses and under-age children.

With this minimum income, immigrants will no longer impose a fiscal burden on taxpayers and have a positive effect on average per capita incomes of all Canadians. In addition, the annual inflows will vary according to cyclical labour market conditions, reducing unemployment when economic growth is slow.

The adoption of the proposed policy will make immigrants serve Canada, not Canada serve immigrants. Voters, including past immigrants, are bound to reward politicians who make this change.

Herbert Grubel
Professor of Economics (Emeritus), Simon Fraser University
Senior Fellow, The Fraser Institute