The Fallacy of Using Immigration as a Source of Perpetual Economic Growth

In the global economy, many developed nations have turned to immigration as a key driver of economic growth. Canada, in particular, has embraced high levels of immigration as a means to bolster its economy, offset demographic challenges, and sustain its labor force. The prevailing assumption is that an influx of immigrants will spur demand for goods and services, thereby stimulating economic activity. However, this perspective often overlooks the complex and sometimes contradictory economic mechanisms that can lead to unintended consequences, such as rising prices, wage suppression, and ultimately, stagflation.

The Economic Appeal of Immigration

The logic behind using immigration as an economic lever is rooted in basic economic principles. New immigrants, upon arrival, require housing, food, transportation, healthcare, and other services. This immediate demand is expected to boost various sectors of the economy, creating jobs and expanding the economic pie. Moreover, in countries like Canada, where the population is aging and birth rates are low, immigrants are seen as essential for maintaining the workforce and supporting the tax base needed for social welfare programs.

For instance, in 2022, Canada set a target to welcome over 400,000 new permanent residents annually as part of its immigration strategy . This policy is part of a broader strategy to drive economic growth by addressing labor shortages and increasing the consumer base. However, while these objectives are clear, the long-term economic impacts of this approach are far more complex and nuanced.

Conflicting Economic Mechanisms

While immigration can increase demand and initially boost economic activity, the long-term consequences of this strategy are shaped by two conflicting economic mechanisms: rising prices and falling wages.

1. Higher Prices:

The influx of immigrants creates immediate demand for housing, goods, and services. However, when supply does not keep pace with this growing demand, prices rise. In Canada, this has been most evident in the housing market. For example, between 2015 and 2023, house prices in major cities like Toronto and Vancouver surged by over 50%, driven in part by high levels of immigration . This price inflation has made homeownership increasingly unaffordable for many, leading to a cost-of-living crisis that disproportionately affects lower-income and younger Canadians.

As prices rise, especially in essential markets like housing and food, the purchasing power of both immigrants and native-born citizens diminishes. This can lead to reduced consumption and savings, which in turn dampens overall economic growth.

2. Lower Wages:

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Immigration increases the supply of labor, which can suppress wages, particularly in low- and medium-skilled occupations. A study by the Bank of Canada found that high levels of immigration can exert downward pressure on wages, especially in sectors where immigrants are highly concentrated . While this benefits employers by reducing labor costs, it has the adverse effect of lowering the overall wage growth, reducing the purchasing power of workers.

For instance, from 2010 to 2020, wage growth in Canada was modest, with average hourly wages increasing by just 1.4% annually after adjusting for inflation . This slow wage growth, coupled with rising living costs, has contributed to financial strain for many Canadian households.

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The Vicious Cycle: Immigration, Wages, and Stagflation

These conflicting mechanisms of rising prices and falling wages can set the stage for a vicious economic cycle that undermines the very growth that immigration is intended to support. As wages stagnate and prices rise, the standard of living for both immigrants and long-term residents can deteriorate. This reduction in purchasing power leads to lower consumption, which in turn slows economic growth.

When this cycle persists, it can lead to stagflation—a situation where economic stagnation is coupled with persistent inflation. Stagflation is particularly challenging for policymakers because traditional tools for combating inflation, such as raising interest rates, can further slow economic growth, exacerbating the stagnation.

Canada’s recent economic trends offer some evidence of this emerging risk. In 2023, inflation rates in Canada reached a peak of 6.8%, while economic growth slowed to a mere 1.3% . This combination of high inflation and sluggish growth has raised concerns about the sustainability of the current economic model, particularly in the context of continued high levels of immigration.

The Canadian Context: A Case Study

Canada’s reliance on immigration as a primary driver of economic growth is deeply rooted in its policy framework. The country has consistently increased its immigration targets, with a goal of welcoming 500,000 new permanent residents annually by 2025 . While this policy aims to address labor shortages and support economic expansion, it has also contributed to significant challenges, particularly in the housing market and labor force dynamics.

The housing crisis in Canada serves as a stark example of the unintended consequences of high immigration. As more people compete for a limited supply of homes, prices have skyrocketed, pushing affordability out of reach for many. This has led to a growing wealth gap, as those who own property see their wealth increase, while those who do not are increasingly marginalized.

Moreover, the labor market impacts are becoming more pronounced. While high immigration has helped fill gaps in the labor market, particularly in low-skilled jobs, it has also contributed to wage stagnation. This has sparked debates about the broader economic benefits of such policies, with critics arguing that the focus on quantity over quality of jobs is leading to an economy that is increasingly reliant on low-wage, precarious employment.

Beyond Immigration: Toward Sustainable Economic Growth

The reliance on immigration as a perpetual source of economic growth is a short-sighted strategy that fails to address the underlying challenges facing advanced economies like Canada. Sustainable economic growth requires a multifaceted approach that goes beyond simply increasing the population.

1. Investing in Productivity:

Long-term economic growth is best supported by investments in productivity-enhancing measures, such as technology, education, and infrastructure. These investments can help boost the efficiency of the economy, leading to higher output without the need for constant population growth.

For example, increasing investments in technology and innovation can lead to the development of new industries and the revitalization of existing ones, creating high-quality jobs that offer better wages and working conditions.

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2. Addressing Housing Supply:

Tackling the housing crisis requires a focus on increasing the supply of affordable housing, rather than simply managing demand. Policies that encourage the construction of new homes, particularly in urban centers, can help alleviate price pressures and make housing more accessible.

This might involve reforming zoning laws, offering incentives for affordable housing development, and ensuring that infrastructure supports new housing projects.

3. Rethinking Immigration Policy:

Immigration policy should be more closely aligned with the needs of the economy and the capacity of the country to integrate new arrivals. This could mean prioritizing skilled immigrants who can contribute to high-demand sectors, while also ensuring that the infrastructure and social services are in place to support growing populations.

Additionally, a more balanced approach that considers the long-term impacts on wages and living costs is essential to avoid creating the conditions for stagflation.

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Immigration can be a valuable tool for economic growth, but relying on it as a perpetual engine of expansion is a fallacy that overlooks the complex and often contradictory economic dynamics it introduces. The Canadian experience highlights the risks of such an approach, with rising prices, wage stagnation, and the potential for stagflation emerging as significant concerns.

For sustained economic prosperity, countries like Canada must adopt a more balanced and nuanced approach, focusing on productivity, housing affordability, and the strategic management of immigration. Without these adjustments, the promise of immigration-driven growth may remain unfulfilled, leading to economic challenges that could have been avoided.

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