11_vancouver_airport_totems_flickr_swbmarshallWithout reform, immigration imposes a heavy fiscal burden on Canadians

Canada’s immigrant selection policies are admired around the world as an example of how to select immigrants who benefit the host country economically while meeting its international humanitarian obligations. The successful use of this selection process is of special importance for Canada because as a proportion of the country’s population, the politically determined annual number of immigrants of about 250,000 is the highest among all Western democracies: about 0.75 per cent of the population.

These selection policies have now been in effect for about three decades and data are available to assess their success. As it turns out, the average economic success of immigrants in recent years has been below expectations and has resulted in the imposition of a large fiscal burden on Canadian taxpayers. This burden will continue to grow unless the existing selection policies are reformed to reduce the number of immigrants who do not meet economic criteria and tie immigration more closely to Canada’s economic needs.

The selection process: Basic facts and rationale

In 2011 the largest class of immigrants, 49 per cent of the total, were “economic immigrants.” “Family class” immigrants represented 34.6 per cent and “refugees” 11.2 per cent (5.1 per cent were “others”).

Economic immigrants: Skilled workers, selected on the basis of an objective points system, are counted as economic immigrants and in 2011 represented 28.0 per cent of all immigrants. Workers with Canadian experience, entrepreneurs, self-employed people and investors, also part of the economic immigrant total, made up 5.5 per cent. The remaining skilled workers were live-in caregivers (3.8 per cent) and workers nominated by provincial governments (11.7 per cent).

The relatively small numbers of entrepreneurs, self-employed people and investors in the class of economic immigrants are admitted on the basis of evidence that their personal skills, experience and financial resources will make them economically successful in Canada. Those who fit into the somewhat larger class of workers with Canadian experience have provided direct evidence that they can succeed in the labour market and therefore their applications are exempt from the evaluation process applied to all other potential immigrants.

The points system used to select skilled workers is designed to ensure their economic success in Canada and gives weights to important personal characteristics. A maximum of 25 points out of 100 is given for educational attainment, 24 points for language proficiency in English or French and 21 points for work experience. Ten points maximum are given each for age, arranged employment and the rather subjective characteristic called adaptability assessed by embassy officials. Successful applicants require a minimum of 67 out of 100 points.

Family class immigrants: Spouses and partners of economic immigrants are counted in the family class. In 2011 they were 26.1 per cent of all immigrants. Other relations of economic immigrants were their sons and daughters, constituting 2.8 per cent of all immigrants. Parents and grandparents made up 5.7 per cent.

Members of the immediate families of economic immigrants are admitted because it is believed that the pool of economic immigrants willing to come to Canada without being able to bring along their immediate families would be too small to find enough candidates with skills and other attributes needed for economic success in Canada. Parents and grandparents are admitted after they have been “sponsored” by their offspring, who have to certify that they have a certain level of income and pledge that they will provide for the parents’ and grandparents’ needs by using their own financial resources. This program exists for much the same reason: it is believed that in its absence the pool of potential economic immigrants would become too small for the proper selection of immigrants with the desired skills.

Refugees: As a proportion of all immigrants in 2011, 5.9 per cent were refugees who had landed in Canada and subsequently obtained refugee status, 2.1 per cent were government-assisted refugees and 2.0 per cent were privately sponsored refugees. The spouses of these refugees made up 1.3 per cent of all immigrants that year.

Refugees (also designated as asylum seekers) are admitted on humanitarian grounds to reduce the suffering of foreign individuals subject to persecution by countries whose governments violate human rights. International agreements commit Canada to accepting such asylum seekers, who are admitted if they meet certain standards of proof justifying a fear for their safety in their native countries. Most asylum seekers are admitted after they arrive in Canada and are able to prove before independent tribunals that the threats they face are genuine. In the case of officially and privately sponsored asylum seekers, the existence of these threats is verified before they come to Canada.

The most important conclusion emerging from this description of the immigrant selection process is that only slightly fewer than half of immigrants are expected to have prospects for success in Canada high enough to benefit the country’s economy. The other half are admitted in part on the basis of humanitarian considerations or inducement to create a sufficiently large pool of potential immigrants with characteristics indicative of future economic success.

Record of economic performance

The government of Canada publishes data on the incomes and tax payments of recent immigrants and the rest of Canadians. These data allow us to calculate average incomes and tax payments for each of these two groups. The results for the two groups are comparable because both include income earners, their dependants and parents and grandparents. Their ages and gender ratios are roughly the same. Patrick Grady and I used these data in the Public Use Microdata File (PUMF) to calculate the average incomes of recent immigrants, who had arrived in Canada between 1987 and 2004, and of “other Canadians.”1

The starting year 1987 marked a dramatic increase in the annual number of immigrants admitted. During the period 1950–86 the annual average was 138,000. By 2004 it reached 236,000.

The calculations showed that in 2005 the average income of the recent immigrants was 70 per cent of the average of other Canadians. The percentage was 79.1 per cent in terms of employment income. Most important, the percentage was 54.4 for the personal income taxes paid. This basic information about incomes and taxes paid was used to estimate the difference in amount of sales taxes, social levies, corporation taxes and other taxes paid by these immigrants and other Canadians. Where empirical information was not available, assumptions about the differences were used that aimed at biasing upward the amount paid by the immigrants.

We estimated the average value of government services consumed by these two groups. The largest proportion of all government spending in Canada goes to enhance general welfare and is available to all residents. Over half goes to health care and social welfare, and about one sixth to education. The remainder of government spending finances general government, housing, transportation, defence and other programs.

The study assumed that in the case of the health care and social welfare programs the value of services absorbed by immigrants is the same as that absorbed by other Canadians. For other spending programs minor adjustments were made for differences between the two groups. For example, immigrants are assumed to benefit to the tune of only 72 per cent from spending on the protection of persons and property on the grounds that the immigrants have less property in need of protection. In the case of spending on education, data available from other sources suggest that immigrants absorb 9 per cent more than other Canadians.

After taking account of the average taxes paid and government services consumed by other Canadians and recent immigrants, we estimated that on average immigrants receive about $6,000 more in government benefits than they pay in taxes, whereas other Canadians receive benefits equal to the taxes they pay.

Assuming that on average immigrants receive these benefits for 45 years while in Canada, this average annual figure means a fiscal transfer to each immigrant of about $272,000, disregarding future growth in income and all discounting. Under different assumptions about the number of recent immigrants still in Canada and depending on the final year to which the calculation is applied, the fiscal burden to taxpayers is in the range of $16 to $23 billion.

Objections to the estimates of the fiscal burden

Simon Fraser University economists Mohsen Javdani and Krishna Pendakur have questioned this estimate.2 Their main criticism focused on the study’s assumption that government spending on pure public goods, like defence and research, accrues in equal share to immigrants and other Canadians, when in fact the arrival of immigrants does not diminish the benefits other Canadians receive from this spending – in other words the marginal cost of providing the benefits is zero. Our response to this issue was to argue that, historically, spending on such pure public goods has been a function of the size of Canada’s population and national income, so the growth in these magnitudes caused by immigrants will lead to higher spending.

Our assumptions in estimating costs are spelled out in our study and may well need to be revised if new relevant information becomes available. Unless these revisions are very large, the basic point remains that the present selection system has not been successful in bringing into Canada immigrants who on average benefit other Canadians economically. This general and fundamental point has also been made by Javdani and Pendakur, who noted that their own study led them to conclude that a fiscal burden does exist but that it is much smaller than what we estimated.

The estimates of the fiscal burden have elicited other criticisms. One of the weightiest rests on standard models of the economics of immigration, which conclude that interaction between immigrant and native workers raises the average incomes of the latter. We did not consider this benefit, though it is discussed in my latest study.3

Harvard economist George Borjas, one of the world’s most respected specialists on the economics of migration, has estimated the size of this benefit, often referred to as the “immigration effect,” for the United States.4 He found it to be very small and accompanied by a large lowering of wage incomes and a large increase in the incomes of the owners of capital. For many concerned people, these income redistribution effects are unfortunate and their impact on overall welfare outweigh the modest gains from the immigration effect. Most important for this article, Borjas’s study did not consider the existence of the welfare state.

Assuming the immigration effect is of the same relative magnitude in Canada as in the United States, the negative fiscal burden is much larger than the positive immigration effect. The redistribution of income in favour of capital found by Borjas is also likely to have occurred in Canada. Given the public concern about the labour share in the economy, the net effect may well lead to new income redistribution policies that impose heavy efficiency losses on the economy.

Another fundamental argument is that immigrants are essential for economic growth in Canada. However, an increase in total national income is not the proper goal of economic policy. Instead, policies should be aimed at maximizing the income of the average Canadian (or per capita income) after the payment of taxes and the receipt of government benefits. By this proper measure, the effects of recent immigrants have been seriously negative.

Critics have raised other points as well. Suffice it to summarize a few of these issues.

It has been argued that the estimates we made in 2011 neglect the fact that immigrants increase their incomes with the length of their stay in Canada and with age. Studies have found that taking account of these factors does not affect the fiscal burden materially. Most important, data show that the more recent the immigrant cohort, the larger the initial gap between their earnings and those of other Canadians, and the smaller their income gains as they acquire work experience in Canada.

Another argument is that the children of recent immigrants will repay the fiscal burden caused by their parents with high future earnings and tax payments. Studies of the incomes of the offspring of immigrants found that their incomes remain below those of other Canadians. Eventually, they will be fully integrated into the Canadian economy and probably by then their average earnings will be equal to those of other Canadians and they will pay taxes equal to the value of the benefits they receive. The fiscal burden their parents imposed on Canadian taxpayers will never be repaid.

Immigrants are alleged to provide fiscal benefits by reducing the size of the unfunded liabilities of Canada’s social programs. This benefit is very small with immigration at current or even substantially higher levels, mainly because the immigrants relatively quickly become eligible for age-related benefits.

Another argument is that immigrants tend to fill job vacancies and often accept work that Canadians do not want, thus improving the workings of the labour market. However, this argument neglects what would happen to the labour market with no immigration. Job vacancies would disappear as other, often unemployed Canadians would be trained to fill them. Higher wages would attract employed and unemployed workers to jobs they currently do not wish to accept. The bottom line is that immigration is not needed for the efficient functioning of the labour market in Canada.

One alleged benefit brought by immigrants is that the cost of their education is paid abroad and Canadian taxpayers save accordingly. This proposition is incorrect since Canada’s education budget is saddled with the cost of educating the children of the immigrants. The real issue is whether or not the immigrants pay enough taxes to finance the costs of educating them. The estimates of the fiscal burden above suggest that they are not.

Finally, there are two effects that some think important in assessing immigrant selection policies. First is the undeniable fact that the immigrants themselves enjoy a substantial increase in welfare. The problem is that this benefit accrues to non-Canadians and at a cost to Canadians measured by the fiscal burden, and raises the question whether the goal of immigration policy should be to maximize the well-being of Canadians or that of the world’s population. The answer to this question involves difficult moral judgements and should be settled through a public referendum after voters have been informed about the size of the fiscal burden and how its elimination would allow tax reductions or increased spending on domestic programs.

A second alleged benefit is an increase in the cultural diversity of Canadian society. This benefit is ill defined and nonmeasurable, and should be considered in conjunction with concerns expressed by some about the loss of Canadian culture and the possibility that religious and sectarian strife may develop in the future as it has in some European countries. Again, the issue should rationally be settled through a referendum, after a wide public discussion.

In sum, careful consideration of the criticisms levelled against the finding that the status quo implies a heavy fiscal burden on Canadians does not eliminate the case for reform.

Why is the economic performance of recent immigrants so poor?

Are immigrants discriminated against?: Javdani and Pendakur argue that the poor earnings record of recent immigrants is due to systemic discrimination in the Canadian labour market, symbolized by anecdotes of engineers and physicians from abroad being forced to drive taxis or work as janitors. There is no need to change selection policies: there is a need for government to prohibit discrimination in hiring. It would also help to require professional organizations to accept foreign qualifications more readily when granting licences to operate in Canada.

In response, it is important to note that laws prohibiting discrimination in hiring based on gender, age and race already exist. It is not clear how these laws can be improved to better protect immigrants without creating the need for reverse discrimination.

Governments give professional organizations licensing authority to protect the public from harm by unqualified practitioners. They do so by applying strict quality standards. Before changing their mandate, it is essential to consider potential costs to the consumer if standards are lowered.

An alternate explanation of the taxi-driving immigrants with foreign professional credentials is that the quality of their education and training is below that demanded in Canada. The rankings of universities by objective observers indicate that most foreign institutions of higher learning have standards below those in Canada. These rankings may misjudge the actual level of a particular university, but Canadian employers cannot have indirect evidence of the sort that is gained from experience with the graduates of Canadian universities and colleges.

This problem is aggravated by the alleged widespread use of counterfeit graduation certificates submitted to Canadian visa officers evaluating the educational and language qualifications of applicants. It is difficult to assess the magnitude of this problem, but an indication of its severity is that an internet search brings up the names of thousands of businesses in India offering to sell such fake certificates. Federal budget cuts have reduced the number of Canadian officers charged with the assessment of applications. As a result the vetting of visa applications has become less thorough and reliable.

Immigrants who do not meet economic criteria: Those who accompany a skilled immigrant are less likely to be able to pass the points test than the family member who qualified as “skilled.” Among those are the parents and grandparents of recent immigrants, whose age, low language skills and work experience make it difficult to find even low-paid jobs in the formal economy. They often work in the informal sector by providing services in the homes of their offspring, but this work does not result in tax payments. Admittedly, by making it possible for other family members to enter the labour force, they indirectly contribute to tax revenues. This benefit is likely to be very small relative to the cost of providing the parents and grandparents with extensive medical care at the end of their lives.

Refugees have not passed the points test and often do not have the language skills needed to succeed in the labour market. Live-in caregivers also are not required to pass the points test and a significant portion of their income accrues in the form of free lodging and food. Their taxable earnings are so low that under Canada’s progressive tax structure they are unlikely to pay any taxes.

The relative numbers of all such immigrants, who have not passed the points test and have low average incomes, have not increased significantly in recent years. Therefore, their existence cannot explain the decreasing average income of recent immigrants, a phenomenon observed since 1986. However, it remains true that, if their number can be reduced through revised policies, the average earnings of all immigrants will rise and the fiscal burden will be lowered.

Absorptive capacity: A final possible explanation for lower earnings of recent immigrants is that the total number of about 250,000 admitted annually (about 0.75 per cent of the population) is taxing the economy’s capacity for absorption. Absorptive capacity was one of the most important criteria used in setting annual levels of immigration when the present policies were created in the 1980s.

Since that time, Canada’s economy has changed considerably. The pace of technical change has accelerated so that the decline and rise of different industries requires the labour force to be more flexible and willing to retrain and relocate. Recent immigrants without Canadian work experience are less able to respond to these challenges than they were in the past when change was less abrupt. In effect, more rapid technical change has reduced the absorptive capacity of the Canadian economy.

The absorptive capacity of the Canadian economy is taxed further because, under the policies adopted in the 1980s, the annual immigration level is constant, whereas before it was sensitive to cyclical market conditions. As a result, immigrants add to the unemployment rate during recessions, while during booms there are vacancies that immigrants could have filled. Empirical studies have shown that during recessions, recent immigrants suffer higher rates of unemployment than other Canadians, most likely because they have no previous labour market experience in Canada.

Possible reforms of the immigrant selection system

Under the assumption that immigrant selection policies should be designed to increase the well-being of Canadians, it is essential that they minimize or eliminate the fiscal burden created by the present system. Some recent policy changes have been made in this spirit.

Thus, it has been made more difficult for asylum seekers, parents and grandparents to obtain landed immigrant visas, mainly through the imposition of more stringent tests on the ability of their offspring to support them financially. Efforts are under way to increase knowledge about the quality of foreign educational institutions, which will be useful for applying the points system and for potential employers. More landed immigrants are being selected by provincial (rather than federal) assessment authorities. These authorities make use of the superior labour market information available to provincial governments, which are likely to be better informed about local conditions than their colleagues in Ottawa and foreign embassies.

These recent policy changes during Jason Kenney’s tenure as Minister of Citizenship and Immigration have likely reduced the future fiscal burden somewhat. But more radical reforms are necessary if immigrants are to improve the economic condition of Canadians.

First, future immigrants should no longer have the right to bring their parents and grandparents to Canada. The cost of the government services they absorb, especially health care, are much greater than the taxes they pay. Given the large pool of potential immigrants, this policy should not force a reduction in the average quality of immigrants admitted. For the sake of fairness, immigrants already in Canada should retain the right to bring parents and grandparents; immigrants arriving after adoption of the proposed policy should be able to bring parents and grandparents for short periods of time, as is permitted under recently adopted policies.

Second, and more fundamentally, the points system used to select immigrants should be ended. Thereafter, an immigrant and his or her immediate family should be admitted only if the principal applicant has a prearranged job with a Canadian employer. These immigrants can become Canadian citizens with all the derived rights after a period of about two or more years of successful employment.

This policy would take advantage of the important fact that employers offer jobs only to individuals whose contributions to output are of sufficient value to match their compensation, and leave something for profit. Employers acting in their self-interest have the incentive to take account of all of the characteristics that the points system attempts to measure, and employers will probably take greater care in the assessment than would even the most diligent civil servants.

Once the proposed policy is enacted, it is likely that businesses will emerge that specialize in helping employers select qualified workers abroad, thereby reducing search costs and increasing the reliability of information about potential workers. The federal government may want initially to support such businesses financially.

The proposed policy is very much in the spirit of the Libertarian ideology, which suggests that welfare is maximized through voluntary exchange, including employment contracts between consenting adults. However, this principle needs to be modified in the presence of the extensive welfare state in Canada, with its progressive income taxes and universality of access to social programs. Without modification, Canada could be flooded with immigrants holding low-paid jobs that result in a fiscal burden for reasons discussed above.

To overcome this problem, the proposed selection policies should include the requirement that the prearranged pay be greater than the average pay of Canadians in the region in which the employer is located. At such pay levels, the immigrants would pay taxes at least equal to the benefits they receive.

There are many details that would have to be included in the proposed legislation to protect the system from fraud. Immigrant workers should receive citizenship only after accumulating a good employment record and should be expelled if they do not. Provisions need to address the possibility of employer fraud and take account of temporary layoffs and bankruptcy. The job offers and pay must be genuine and inspectors must prevent abuse of immigrants, who are vulnerable during the probationary period before they become citizens.

These provisions of the proposed policy reform are likely to be expensive. There will be unexpected consequences that in turn can limit the attainment of the objective of eliminating the fiscal burden imposed by immigrants. There are no perfect methods for selecting immigrants. However, the cost of these proposals is likely to be much less than the $20 billion saved by the eventual elimination of the fiscal burden. Most of the personnel and institutions used by the present system can be employed by the new one. Access by enforcement agencies to payroll records of employers and tax files of the Canada Revenue Agency will be helpful in reducing fraud.

Avoiding the fatal conceit

Finally, there is an important, positive benefit created by the proposed system. Currently, the number of landed immigrants targeted to come to Canada in the next year is approved by parliamentary vote on the advice of the minister of citizenship and immigration. The minister’s advice is informed by public consultation with organizations that have a stake in the issue and the results of a general public survey carried out over the internet. The number of annual landed immigrants since 1986 has remained virtually unchanged: around 250,000. Parliamentary approval is routine and takes place without independent review or hearings by the immigration committee.

The fiscal burden caused by immigrants and other economic problems suggest the need for a thorough discussion of what annual intake of immigrants best serves the interest of Canadians. The discussion should include attempts to define this interest, how it could be measured and how it is affected by immigration.

In his critique of economic and social planning – a critique that led him to predict the downfall of regimes that rely on it – Friedrich Hayek identified one of the problems faced by such attempts. His was a lone and often ridiculed voice at a time when dirigiste regimes appeared to be prospering. Hayek’s argument turned on the complexity of the economy and of public preferences. The best-trained economists, engineers and other social scientists, assisted by the most sophisticated computers, can never know the policies needed to maximize welfare. Experts who believed they could design optimal policies suffered from what he famously called “the fatal conceit.” Shortly before he died in 1992, his predictions of collapse were realized when the Soviet Union and China suffered serious crises and their planning regimes collapsed.

Determination of the annual number of immigrants involves planning that is very much like that carried out by planners in Maoist China and the former Soviet empire. The economists, technical experts and other social scientists responsible for the choice of Canada’s immigration number are in effect suffering from Hayek’s fatal conceit. The proposed prearranged employment contracts use market signals in place of the judgements of experts to determine the optimum annual rates of immigration. The foregoing analysis suggests that this new system is likely to be much more effective than the status quo.

Hayek realized that government is needed to protect the rights of individuals and their property from domestic and foreign sources of violence. The proposed reliance on market signals in the determination of the optimum rate of immigration is similarly subject to exceptions. The most important arises as a result of the existence of the welfare state: the pay promised under prearranged job offers must at least equal the average earned by other Canadians.

Finally, most legislation contains escape clauses. In the world of Hayek the state has the right to override market signals when a country is threatened by foreign invasion. Similarly, the proposed immigrant selection policies would be suspended if they resulted in catastrophic labour surpluses or shortages. The timing and extent of such emergency measures should be the responsibility of Parliament, possibly requiring a supermajority.

 

Notes

1 Herbert Grubel and Patrick Grady, Immigration and the Canadian Welfare State 2011 (Vancouver: Fraser Institute, 2011). The numbers of individuals for which income and tax data were calculated were sufficiently large to represent a valid sample of the total population of Canada: 64,792 recent immigrants and 692,509 other Canadians. The study is available at fraserinstitute.org/research-news/display.aspx?id=17546

2 Mohsen Javdani and Krishna Pendakur, Fiscal Transfers to Immigrants in Canada, Working paper 11-08 (Vancouver: Metropolis British Columbia, Centre of Excellence for Research on Immigration and Diversity, 2011).

3 Herbert Grubel, Canada’s Immigrant Selection Policies: Recent Record, Marginal Changes and Needed Reforms (Vancouver: Fraser Institute, Studies in Immigration and Refugee Policy, 2013). The study is available at fraserinstitute.org/research-news/display.aspx?id=20300

4 George J. Borjas, Immigration and the American Worker: A Review of the Academic Literature (Washington, DC: Center for Immigration Studies, 2013), retrieved from http://cis.org/immigration-and-the-american-worker-review-academic-literature

 

Herbert Grubel is Professor of Economics (Emeritus) at Simon Fraser University in Burnaby, B.C., and author of the recent study Canada’s Immigrant Selection Policies: Recent Record, Marginal Changes and Needed Reforms, published by the Fraser Institute.

Vancouver airport photo courtesy SWBMarshall/Flickr