The relationship between immigration and the economy is a question of supply and demand. For a long time, the focus has been on the supply side: how many people are coming in? What direct effects does that have on prices, jobs, housing?
Recently, there has been a shift in focus to the demand side: how many new workers does the economy need to grow, create jobs, and create new housing? And there is a growing recognition that key answers lie here.
A smaller but dramatic example was seen in the UK this month, when Nigel Farage, the Brexit campaigner who began his election campaign as leader of the Reform Party (formerly known as the Brexit Party or UK Independence Party), felt the need to commit to accepting 600,000 immigrants a year.
Farage remains one of the most anti-immigration British politicians, but he still felt the need to reassure voters that there would be no repeat of the post-Brexit immigration crisis of 2020, when vital goods did not reach stores, factories were forced to cut production, and vital health and elderly care services were left dangerously short. Even his party must cater to a British electorate that has come to appreciate immigration.
Canada and the United States have not had this problem, where post-pandemic immigration surges (three times the pre-2020 immigration rate in the United States, and a large increase in the rate of permanent immigration and the number of temporary and international students in Canada) have focused attention on immigration numbers.
US President Joe Biden, facing a different kind of election, took steps this week to ban asylum applications at the southern border, a small but politically significant part of a much larger wave of US immigration. The numbers show that the entire wave of US immigration is barely enough to meet the demands of the labor market. The US probably needs more than 2 million people per year. These “illegal immigrants” are a political and humanitarian problem, but turning them into regular legal immigrants would be an economic solution.
In fact, we now know that nearly all current migration, including the periodic surges at the U.S.'s southern border with Europe, is caused almost entirely by a “pull” due to labor shortages north of those borders, rather than a “push” of people from poorer countries.
Brown University economist Dany Bahar recently published a major study that looked at 25 years of U.S. labor market and immigration numbers, and found that the two are closely correlated. That means the number of people crossing the southern border, legal or not, depends heavily on how tight the job market is. This has nothing to do with the power of the president or the policies being put in place: when the economy needs people, people show up at the border. When the economy is weak, people just don't show up, he found.
“This relationship represents a natural economic adjustment mechanism where border crossings increase or decrease as labor markets tighten or cool,” Dr. Bahar said, commenting on X. “So the U.S. has a labor market crisis, not a border crisis.”
This is evident in Canada and Europe: it's why Canada missed its immigration targets during the weak 1990s, and why trans-Mediterranean migration almost disappeared between 2008 and 2015 when European labour markets were weak.
The focus on the demand side is much-needed for Canada, but a report published this week by BMO economists Douglas Porter and Scott Anderson concludes that Canada's job market is tight enough that the home-born workforce is aging and shrinking, so Ottawa would benefit from increased permanent immigration. (The one-million-person surge in students and temporary immigrants is a separate issue, but that's over.)
“In both countries, high immigration rates mean that job growth does not need to slow as much to improve labour market balance,” they write. Thanks to this demand, immigrants who came to Canada in the past five years have a staggering labour force participation rate of 70%, higher than the general population's 65%.
But Canada hasn't seen the big boost to economic growth that U.S. immigration provided, and per capita growth has been particularly sluggish recently, leading some to conclude that immigrant demand for housing and consumption must have taken a hit.
Indeed, BMO economists conclude that the growth divergence is almost entirely driven by rising levels of consumer debt in Canada, driven in large part by a recent spike in mortgage rates. And because of “strong population growth and earlier interest rate cuts,” they project a convergence with U.S. growth rates next year.
We should know this from experience. Whenever there has been a surge in immigration in Canada – the even larger surges in the 1910s and 1950s, for example – there has been a lag period in which per capita growth slowed and housing shortages emerged before the long-term economic benefits of population growth began to emerge. If we look more closely at the demand side, we will notice this.
