If I were invited to a Golden State Warriors party and I was the only player not invited, as soon as I walked into the room the average height of the people in the room would decrease. But no player can lose height.
Why am I saying this? Because in an excellent analysis of the causes of the decline in Canada’s real GDP per capita from 2022, the author Philip Smith dismisses the result but does not look for the equivalent of Canada and the Warriors in the room.
Smith points to several factors that explain Canada’s recent decline in GDP per capita. One of the key factors is the large number of non-permanent residents (NPR) entering Canada in the past few years. Many of them are unemployed students; many of them work part-time; and many of them work in less productive jobs. Put all those factors together, as Smith does, and you can see why GDP per capita may be declining.
But Canadian citizens and permanent residents (PR) who have lived in Canada for a long time are more productive. So although the lower productivity of the NPR segment lowers Canada’s average, it can be believed that the citizens and the PR segment have a higher GDP per capita than they had. I don’t know if they do because the data is not sufficiently distributed.
But here is an attempt to go back. The number of NPRs in Canada increased from 3.5% of the population in 2022 to 6.5% in January 2024. That’s an increase of 3.0 percentage points. Because these NPRs were disproportionately educated and because the employed were not disproportionately working in low productivity jobs, I think they increased GDP by 1.0% in those 2 years. So if, all things being equal, the number, GDP, increases by 1.0% and the number, population, increases by 3.0%, GDP per capita will decrease by 2.0%. In short, these non-permanent residents reduce GDP per capita. But all of Canada is likely experiencing an increase in GDP per capita.
I do not rule out other causes. I think the Canadian economy is in bad shape. But it’s hard to see how many NPRs make it worse. Back to my analogy with my entry into the Warriors party: the average has fallen but none of them have lost height. One could argue that NPR students, for the most part NPRs, are subsidized by going to school; Canada has very few private universities and tuition at public universities is still very low. But that’s a different problem and one that’s easier to solve, at least in theory: have a high rate of nonresidents, as most public schools in the United States do.
Towards the end of his analysis, Smith writes:
Real GDP growth remains positive and unemployment remains low, although rising. The decline in GDP per capita, instead, is calculated as:
• a shrinking share of the highly experienced workforce due to baby boomers;
• the decline of labor productivity, a complex and very important long-term problem that does not have an easy or quick solution, although in the short term it is related to the following driver; again
• the population of the NPR is increasing, which is a factor where a quick fix is fortunately available, but which requires difficult political decisions and suggests a short-term impact of reducing GDP growth.
Why does Smith think this needs “fixing?”
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