Beata Caranci thinks a lot about balance.
For years, the Chief Economist and SVP of TD Bank Group has been one of many economists warning that Canada's aging population runs the risk of upsetting the economy by straining economic growth, tax revenues, and the social system.
A number of government policies, including a ramp up in skilled-based immigration, delivered on solutions. However, Caranci points out that balance is key relative to what the economic and social infrastructure can absorb within a short timeframe.
A 1.2 million surge in population growth in the past year was more than two times the government’s immigration target, catching many economists off guard. Now the question is whether attempts to implement policies that will “catch up” to aging demographics have gone too far, too fast.
A new report from TD Economics, “Balancing Canada’s Pop in Population” explores this question. The TD Stories team sat down with Caranci to explore the issues that are creating both excitement and apprehension within Canada:
Thanks for taking the time to chat with us. It's clear from your report that you believe in the need and value of immigration for Canada, but that governments should consider a variety of factors in order to ensure that policies and systems are in place to support higher immigration targets. How can government policy help strike the right balance?
We've known for a long time that Canada's aging population would throw the economy off-kilter by straining economic growth, tax revenues, and the social system. We also knew we weren't going to be able to shore up the population without skills-based immigration. Canadian governments heard the message and developed a strong reputation for the successful recruitment of workers across the globe. The former Trump administration in the U.S. even looked into replicating its success.
Part of what makes Canada an international recruitment force to be reckoned with is its ability to quickly pivot on the policy front. But, the benefits erode if population growth occurs too fast relative to a country’s commitment to plan and absorb new entrants within the economic and social infrastructure. Canada was already on its back foot in meeting housing demand, and this was also true in hospital beds on a per capita basis. These chronic tensions can quickly become acute for provinces and cities that absorb a higher population share. As dislocations widen, it creates an even larger come-from-behind strategy in addressing housing affordability and quality of life issues.
In the report, you state that housing supply is unlikely to keep pace with the demands posed by Canada's expanding population. Given that housing affordability is already an issue for many Canadians, what do you think can be done to help fix this?
We're already seeing governments at all levels pivot to policies to facilitate a faster pace of building. In Ontario, a few examples include the City of Toronto approving changes that encourage density and the provincial government's decision to lower development charges for rental units. However, these announcements are occurring on a lag to population growth. Even if these changes help spur homebuilders into action, the typical construction timeline leaves years before the benefits from completions can be achieved.
To test this theory, we applied an aggressive assumption that homebuilders would be motivated to reach, and sustain, a record level of completions. Even in that scenario, a housing deficit would persist if Canada continued with annual population growth of one million or more. This returns to the earlier point that Canada is already in a "come from behind" position.
One of the factors you mention in the report that could help increase labour supply within the existing population – without the need to raise immigration levels – is reducing credential-recognition barriers. How could this help the overall labour situation?
In our opinion this has enormous potential. Reducing credential-recognition barriers can provide new employment opportunities to people who are already living in Canada, meaning they are already integrated within the existing housing and social system. This can become a win-win strategy of helping to improve their standard of living while filling much-needed workforce positions for employers.
As an example, when the Registered Nurses of Alberta streamlined its application process, it generated a flood of registrations from internationally trained nurses already living in the country. These individuals do not create a new source of demand for housing or the social infrastructure, and also benefit from applying their education, training and skill level appropriately within the economy.
The more Canadian employers, institutions and governments remove workplace barriers, the more pressure it can take off other areas of the social system. The solution to labour shortfalls exist both inside and outside Canada's borders. A lot can be done to better integrate both new and existing Canadians so that people can reach their full potential.
Can increased access to childcare spaces factor into helping to increase the labour supply?
Yes, we can extend this logic into the findings uncovered in a prior TD Economics report. We found that the shift towards more workplace flexibility during the pandemic combined with lower daycare costs in the past year have led to a surge in mothers with young children entering the workplace. Their participation rate jumped 4 percentage points since 2020. This was more than double the pace of the prior three years and a faster acceleration relative to the rest of the female population. Imagine how much tighter the job market would be without these additional 100,000+ women, whose jobs were largely concentrated in full-time employment.
So where do you think that leaves the Bank of Canada?
The central bank has a single mandate to provide a stable inflationary environment. This means that any demand shock that carries persistence would likely need to be addressed with a higher level of interest rates (in the absence of some offsetting productivity surge, which has not been Canada’s forte).
We calculated that the neutral level of interest rates would rise by an extra 50 basis points to counterbalance the population surge from the Federal government’s shifting immigration approach relative to prior assumptions on population growth. And there isn’t quite as easy a solution when it comes to home price inflation. The central bank doesn’t adjust interest rates to directly respond to home price pressures, but this segment of the market has a long reach in influencing prices directly within the economy, as well as expectations of future inflation.
Finally, what can the average Canadian take from this TD Economics report? What should the punchline be?
A lot can be done to better integrate both new and existing Canadians. It can't just be a matter of bringing in an unchecked amount of people to take the lower paying jobs on offer, particularly if it underutilizes the workforce and disincentivizes companies to invest. The economy already trails peers in productivity enhancing technology investment, and we already have examples where removing self-imposed barriers to employment create better outcomes for individuals and employers.
To set the country up for success, government policies also need to implement an appropriate infrastructure to help bring the best out of workers and families. We shouldn’t be too short-sighted on the immediate demands of employers. Population growth needs balance over the long-term. Following a surge in population, consideration should be given to lower levels in other years to allow social systems to catch up. This way, the economic pie won't just grow in size, but the quality will increase as well.