If I were invited to a Golden State Warriors’ party and I were the only non-player invited, as soon as I entered the room the average height of people in the room would fall. But no player would lose height.
Why do I mention this? Because in an otherwise excellent analysis of the causes of Canada’s decline in real GDP per capita since 2022, author Philip Smith decries the result but doesn’t consider Canada’s equivalent of the Warriors in the room.
Smith points to a number of factors explaining Canada’s recent fall in GDP per capita. One of the main factors is the huge number of non-permanent residents (NPR) who have entered Canada in the last few years. Many of them are students who are not working; many of them are working part-time; and many of them are working in low-productivity jobs. Put all those factors together, as Smith does, and you can see why per capita GDP might decline.
But Canadian citizens and permanent residents (PR) who have been in Canada for quite a while are higher productivity. So while the low productivity of the NPR segment brings down the Canadian average, it’s quite conceivable that the citizens and the PR segment have higher GDP per capita than they had. I don’t know that they do because the data are not broken down enough.
But here’s a back-of-the-envelope attempt. The number of NPRs in Canada rose from 3.5% of the population in 2022 to 6.5% by January 2024. That’s a 3.0 percentage point increase. Because these NPRs were disproportionately students and because the ones employed were disproportionately in low-productivity jobs, a generous assumption, I believe, is that they raised GDP by 1.0% over those 2 years. So if, all else equal, the numerator, GDP, rises by 1.0% and the denominator, the number of people, rises by 3.0%, GDP per capita will fall by 2.0%. In short, these non-permanent residents bring down GDP per capita. But the rest of Canada could be experiencing an increase in GDP per person.
I’m not dismissing other causes. I think Canada’s economy is in bad shape. But it’s hard to see how more NPRs are making it worse. Go back to my analogy with my entering the Warriors party: the average fell but none of them lost height. One could argue that the NPR students, a large portion of the NPRs, are getting subsidized by going to school; Canada has very few private universities and tuitions at the government universities are still relatively low. But that’s a different problem and an easier one to solve, at least conceptually: have a higher non-resident rate, as many state schools do in the United States.
Towards the end of his analysis, Smith writes:
Real GDP growth remains positive and unemployment is still low, although rising. The drop in GDP per capita is, rather, accounted for by:
• the diminishing share of the most experienced labour force cohort due to ongoing baby-boomer retirements;
• decreasing labour productivity, a complex and high-priority longer-term problem with no simple or immediate solution in sight, although in the short term it is re- lated to the next driver; and
• a burgeoning NPR population, a factor for which relatively quick fixes are fortunately available, but which require difficult political decisions and imply a short-term dampening effect on GDP growth.
Why does Smith think this needs a “fix?”
