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.

Reducing Canada's Deficits by Reducing Immigration

There are no ways to eliminate fiscal deficits that are easy on Canadians and good for politicians. The availability of social program benefits is considered to be a right and woe politicians who favour cutting them. Spending that serves special interests cannot be cut without incurring the wrath of its beneficiaries. Canadians hate tax increases and politicians know it.

However, there is a simple way to balance budgets and avoid all of these problems: reduce significantly the level of immigration. Foreigners do not vote in Canadian elections.

Reduced immigration reduces fiscal imbalances because Canada’s welfare state provides social benefits to immigrants worth much more than what they pay in taxes. The costs do not show up in any official budgets, but they are large and will grow as more immigrants are admitted.

The costs stem from the fact that immigrants and their families receive on average the same government benefits as other Canadians – education for their children, health-care, employment insurance and welfare benefits. In addition, immigrant families are provided with special services to help them integrate into Canadian society and the economy – language instruction, settlement and legal advice and housing subsidies.

These costs are offset to some extent by the taxes paid by immigrants. The problem is that they pay considerably less than Canadians for two main reasons. First, Canada’s personal income tax system is very progressive. The top ten percent of all income tax filers pay about one half of all taxes while the bottom half of filers pay only about 5 percent. Second, recent immigrants after arrival have much lower earnings than Canadians: On average their earnings are 65 percent in the first year, rise gradually over the next 9 years to a maximum of 80 percent of the earnings of Canadian workers with similar demographic characteristics.

These two facts imply that few of the recent immigrants are in the top decile, many are in the bottom half of income tax payers and that their asset holdings are relatively small. Using these basic facts, I have estimated that on average immigrants pay 21 percent of the income taxes, only 80 percent of sales and other taxes and even smaller percentages of corporate income and property taxes than do Canadians.

Attaching dollar figures to these percentages implies that immigrants who arrived in 1990, on average in 2000 consumed government services worth $6,300 more than they paid in taxes; the 216,000 immigrants who arrived in 1990 generated a net transfer of $1.36 billion in 2000 while all of the immigrants who arrived during the last decade of the century, in the year 2000 generated transfers to themselves worth about $18.3 billion and will do so for in coming years.

The preceding calculations are rough and based on many assumptions, but they are the only ones available. More studies may show that the net costs are higher or lower, but it is clear they exist, are likely to be substantial and will continue to persist and grow if present immigration policies are continued.

But will immigrants not bring benefits to Canadians that match or even exceed these fiscal costs? Consider the following types of alleged benefits.

First, the economy benefits as immigrants fill jobs that other Canadians do not want or are not trained for. The problem is that these immigrants lower the wages of other Canadians competing with them and cause poverty levels to be higher than they would be otherwise and requiring more spending on anti-poverty programs.

Most fundamentally, in the absence of immigrants, there would be no long-lasting labour or skills shortages because wages on presently undesirable jobs would rise until they are filled by Canadians; higher wages for skilled workers would encourage more Canadians to get the needed education and training; and employers would invest more capital to raise labour productivity, which would allow them to maintain profits while paying workers the higher wages.

Second, many people believe that immigrants provide an easy solution to the looming crisis of unfunded liabilities for public health care and pension programs. Simulations using official estimates of population dynamics show that to maintain the present ratio of retired to working people in Canada in the year 2050 alone would require 7 million immigrants and a population level of 165 million. Canada could not absorb immigrants in such large numbers and might well not be able to recruit them. There are much less costly methods for defusing the pending crisis of unfunded liabilities, such as increasing the age of retirement.

Third, immigrants are believed to generate economies of scale that lower the average cost of infrastructure like roads and municipal services for all Canadians. This benefit from immigration existed in the past. In recent years and in the future, immigrants add significantly to congestion, pollution and the prices of scarce land and housing.

The magnitude of these problems is not widely recognized but may be gleaned from the fact that currently immigrant families arriving in the BC Lower Mainland every week of the year need 200 new housing units that require electricity, water and sewers. These families send children to school, put cars on the road and use public transit. It is ironic that meeting these needs of immigrants results in labour shortages that in turn are used to justify further immigration.

Finally, some Canadians believe immigration should continue in the spirit of the country’s proud tradition of helping poor and oppressed people find a land of opportunity. This feel-good benefit of immigration cannot be measured, but should rationally be compared to the costs it brings. The estimate above suggests that this benefit is very expensive indeed.

The possible reduction of immigration levels to balance the budget in the future is not discussed publicly by politicians, who fear the resultant loss of immigrant votes. But these politicians should consider whether the loss is as great as is commonly assumed since recent immigrants in surveys often express the view that immigration should be reduced. They should also ponder whether the loss of immigrant votes really is greater than the loss of votes due to spending cuts and tax increases that are mandated by the present fiscal imbalances.