Don't Disregard Demography
By Peter G. Hall, Vice-President and Chief Economist, Export Development Canada
Concerns about the current path of the world economy have analysts and strategists transfixed on the latest monthly data releases, and with just cause. Talk about our demographic challenge has all but ceased. It may not be our first worry, but we take our eyes off this issue at our peril.
Why? The reasons are manifold. The most basic is that population – particularly the labour force – to a large extent determines the productive capacity of an economy. Slower labour force growth limits an economy’s growth potential, unless there is a compensating surge of productivity growth. A more pressing concern is the ageing of the population. Canada’s baby boomers have now begun to retire, and it is entirely possible that for many, the current recession may accelerate the process. But it is precisely these skilled workers, with their wealth of corporate history, that will be in shortest supply in the eventual economic rebound. In a few short years, retirees will outnumber their much younger work force ‘replacements’ – a gap that will widen in the following 10-15 years.
A further concern is the case of Japan, where about 18 years ago, the economy hit a wall. A significant recession was followed by sluggish growth that has persisted almost uninterrupted since then. Huge monetary and fiscal stimulus has been largely ineffective at resuscitating the economy. Along with other key factors, demographics influenced Japan’s post-1990 experience. Population growth, 1.4% annually in the mid-1970s, slowed to just 0.4% by 1990 and is now flat. Labour force growth has been even further constrained by an ageing population, and instead of compensating, productivity growth slowed abruptly, radically changing Japan’s growth potential.
Is Canada in for the same? Our population patterns are about 15 years behind Japan’s. All things being equal, we would now be facing Japan’s early-90’s experience. Our median age is currently higher than Japan’s was in 1990, and our steadily-declining birthrate is now just below Japan’s 1990 rate. However, Canada has been able to stem the decline in population growth. From the same starting point, annual population growth has eased to 0.9%, more than twice Japan’s 1990 pace. The difference? Immigration policy, very active in Canada, but absent in Japan.
Will immigration continue to be Canada’s population panacea? Most seem to believe so, but in truth the jury is still out. First, the skilled immigrants Canada needs are in strong demand in their own countries. Globalization created significant skilled labour shortages within certain key emerging markets, bidding up domestic wage rates and reducing the attractiveness of foreign job offers. Supplies of lesser-skilled workers are ample, but that’s not where Canada’s key need is. Second, Canada is not the only foreign suitor at the table. But for the U.S., all other G-7 nations have more serious population problems than we do, and are in search of skilled immigrants. Third, assimilating the skilled workers we do attract remains encumbered by ongoing difficulties in recognizing foreign credentials. The situation clearly calls for creative solutions to looming shortages. One clear short-run consequence is that pay packages for skilled labour will be richer.
The bottom line? When the challenges of the recession are past, recovery will present new and potentially daunting ones. Those prepared to deal with tight labour supplies are far more likely to survive the recovery than those who don’t.
"The views expressed here are those of the author, and not necessarily of Export Development Canada."