The relationship between immigration and the economy is a matter of supply and demand. For too long, attention has fallen on the supply side: How many are coming in? What are their immediate effects on prices, jobs and housing?
Lately, there’s been a needed shift in focus to the demand side – how many new people does the economy need to create growth, employment and new housing? – and a realization that the important answers are found here.
One small but dramatic example was seen this month in Britain, where arch-Brexiteer Nigel Farage, launching his election campaign as leader of the Reform Party (previously known as the Brexit Party and the UK Independence Party), felt it necessary to pledge to deliver 600,000 immigrants a year.
Though Mr. Farage remains the most anti-immigration of British politicians, he nevertheless felt it necessary to reassure his voters that the immigrant-shortage crises that took place after Brexit began in 2020 – when crucial goods weren’t being delivered to store shelves, factories had to reduce production, and crucial medical and eldercare services became dangerously scarce – wouldn’t be repeated. Even his party must meet the demands of a British electorate that has learned to appreciate immigration.
Canada and the United States have not had this problem. Their postpandemic immigration spikes – a current tripling of pre-2020 immigration rates in the United States, and Canada’s big increase in both permanent-immigration rates and, for a while, in temporary and student numbers – have focused attention on the numbers coming in.
U.S. President Joe Biden, facing a different sort of election, this week moved to ban asylum claims at the southern border – a small but politically loaded slice of America’s much larger immigration wave. Figures show that the overall U.S. wave is barely large enough to meet labour-market demands; the U.S. could probably use a couple million more people per year. Those “illegals” are a political and humanitarian problem, but if they’re shifted to regular, legal entries, they will be an economic solution.
In fact, we are now learning that almost all current immigration, including periodic spikes at the southern borders of the U.S. and Europe, is caused not by the “push” of people flocking out of poorer countries but almost entirely by the “pull” of labour shortages north of those borders.
The economist Dany Bahar of Brown University recently published a large-scale study that looks at labour-market and migration figures over 25 years in the U.S., and finds that the two are tightly correlated – that is, the number of people crossing the southern border in any year, legally or otherwise, depends mostly on how tight the job market is. This, he found, is independent of the president in power or the policies in effect: If the economy needs people, they materialize at the border. When the economy is weak, they just don’t show.
“This relationship represents a natural economic adjustment mechanism in which crossings increase or decrease as the labor market tightens or cools,” Dr. Bahar commented on X. “Thus, the US doesn’t have a border crisis, it has a labor market crisis.”
This has also been evident in Canada and Europe – it’s why Canada failed to meet its immigration targets in the 1990s, when the economy was weak, and why cross-Mediterranean migration basically died out between 2008 and 2015, when European labour markets were soft.
In a much-needed Canadian focus on the demand side, a report this week by BMO economists Douglas Porter and Scott Anderson concluded that Canada’s job markets are tight enough, and the domestic-born work force is aging and shrinking enough, to make Ottawa’s higher permanent-immigration numbers beneficial. (The million-person spike in students and temporary migrants was another matter, but that has ended.)
“In both countries,” they write, “higher immigration rates mean that employment growth doesn’t need to slow as significantly to bring the labour market into better balance.” Because of this demand, Canadian immigrants who have arrived in the past five years have achieved an impressive 70-per-cent work force participation rate – higher than the 65 per cent of the general population.
Canada, however, hasn’t seen the big U.S. immigration-driven boost in economic growth, and per-capita growth has especially lagged recently, leading some to conclude that immigrant demands on housing and consumption must have hurt.
In fact, the BMO economists conclude that the divergence in growth rates is almost entirely caused by higher consumer-debt levels in Canada, mostly produced by recent mortgage-rate spikes. And due to “strong population growth and earlier rate cuts,” they forecast a convergence with U.S. growth rates next year.
We should know this from experience: Whenever Canada’s had a surge in immigration, such as the even larger ones in the 1910s and 1950s, there’s been a lag period of slower per-capita growth and housing shortages before the longer-term economic benefits of population growth kick in. We’d realize this, if we looked more closely at the demand side.