REAL ECONOMY BLOG | August 24, 2023

While many developed economies grapple with the challenges of their aging populations, Canada has turned to a bold strategy—using immigration to foster growth.

Immigration is widely regarded as central to Canada’s economic development. Last year, Canada welcomed 405,000 permanent residents, the most ever. This number is set to reach 500,000 in 2025, according to Immigration, Refugees and Citizenship Canada. That is nearly two million immigrants in four years, a stunning number for a country with a population of 40 million.

So far, the bets are paying off. The economy has skirted a recession as immigrants add to the labour supply, while also boosting consumer demand. Gross domestic product is expected to grow by 1.7% in 2023 and 1.4% in 2024, according to the International Monetary Fund.

But while Canada is great at attracting immigrants, it struggles to make use of their skills, leaving much unrealized potential on the table.

So-called skill underutilization occurs when employers are not getting the most benefits from workers, and talent is not being efficiently leveraged.

Many immigrants are employed in jobs that require few skills or are underemployed. Over a quarter of immigrants with foreign advanced degrees are working in jobs that do not require them, compared to just 10% of Canadian-born workers, according to data from Statistics Canada.

Underutilization undermines households’ earnings and consumer spending, amplifies talent shortages, and stunts productivity growth, costing the economy billions of dollars annually.

To achieve sustained economic growth and productivity, Canada needs to address the underutilization challenge.

Immigration: Lifeline of labour supply

An ambitious immigration policy has turned Canada from a country with an aging workforce to a country with one of the highest population growth rates among the Organisation for Economic Co-operation and Development. Immigration also contributes to Canada’s having the most educated workforce among the G7 countries.

Around 60% of immigrants come to Canada under economic programs such as Express Entry (EE) or Canadian Experience Class (CEC), according to Immigration, Refugees and Citizenship Canada. New entrants to the country are evaluated on education, work experience, age and language proficiency. As a result, the immigration population is predominantly young and educated, with professional work experience.

These demographic characteristics are, in theory, great for the economy. Education and experience lead to higher income, which translates to higher purchasing power.

In addition, educated and experienced workers also tend to be more productive and innovative when employed in their appropriate capacities. For instance, a senior software engineer with five years of experience would not only be more productive, but would also have more capabilities to innovate than an entry-level engineer.

Immigrants, in particular, have been found to contribute to innovation disproportionately, compared to native-born workers when given the opportunity.

The problem with underutilization

But many highly educated and skilled immigrants are not contributing to the economy at the level they could. Many immigrants find they have to start over in low-paid, entry-level positions, despite having international work experience.

When workers are underutilized, they earn lower wages, which limits their spending power. The economy misses out on productivity.

Underutilization also means that a talent shortage prevails in certain industries, even as immigrants with relevant work backgrounds occupy positions in those sectors, just not in vacant positions that may align with their expertise. This is true in industries ranging from health care to education and professional services.

What’s more, underutilized immigrants might feel resentment, leading to low morale and high turnover, both of which are expensive for employers.

On a macro scale, some overlooked workers even decide to take their talent elsewhere and leave Canada altogether. The proportion of permanent residents choosing to become citizens has fallen 40% in the past 20 years to 45.7% in 2021 from 75.1% in 2001, according to the Institute for Canadian Citizenship. Nearly a third of young immigrants plan on leaving Canada in the next few years. Talent retention has become an issue on a national scale.

Canada risks losing a sizeable portion of the talent it works hard to attract, which is counterproductive if the goal is to grow and rejuvenate the workforce.

Addressing underutilization

Several avenues could help address underutilization. Streamlining the accreditation process could deploy immigrants where needed faster without them wasting their talent for years while awaiting accreditation.

Alberta, for instance, has accelerated the process to license out-of-provinces nurses faster; this has resulted in the College of Registered Nurses of Alberta issuing three times the number of permits to internationally educated nurses in three months than the total issued in the past four years.

Employers are currently least likely to consider newcomers when looking to fill vacancies. This is happening even though new immigrants represent an important human resource in a time when the talent shortage costs the economy billions per year and will continue to be a long-term issue.

Investment in research and development would create more opportunities for high-skilled workers in general, enabling productivity growth.

The takeaway

While there are challenges that come with high immigration numbers such as the housing shortage and the strain on social services and public infrastructure, it would be hard to deny the economic benefits immigration brings to Canada.

But underutilization of immigrants is preventing the country from realizing its potential long-term economic and productivity growth.

If Canada wants to continue attracting and retaining the best and the brightest, it will need to make sure the skills and education of new immigrants are fully used.

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