If I were invited to a Golden State Warriors party and I was the only non-player invited, the average height of the people in the room would immediately decrease as soon as I entered the room. However, no player will lose his height.
Why am I mentioning this? Because it’s otherwise great analysis As for the cause of Canada’s decline in real per capita GDP after 2022, author Philip Smith blames the result, but he does not believe that Canada is comparable to the fellow Warriors.
Smith points to a number of factors that explain Canada’s recent decline in GDP per capita. One of the main factors is the huge number of non-permanent residents (NPRs) who have entered Canada in recent years. Many of them are students who are not working. Many of them work part-time. And many of them have low productivity jobs. When you combine all these factors like Smith does, you can see why GDP per capita is decreasing.
However, Canadian citizens and permanent residents (PRs) who have been in Canada for a long time are more productive. It is therefore quite possible that while the NPR sector’s lower productivity is dragging down the Canadian average, the national and PR sector’s GDP per capita is higher than before. We don’t know if this is actually the case because the data hasn’t been analyzed enough.
But here’s a secret attempt. The number of NPRs in Canada increased from 3.5% of the population in 2022 to 6.5% by January 2024. This is an increase of 3.0 percentage points. Because these NPRs were disproportionately students, and those who were employed were disproportionately in low-productivity jobs, a generous assumption is that they boosted GDP by 1.0% over two years. That’s what I think. So, all else being equal, if GDP in the numerator increases by 1.0% and population in the denominator increases by 3.0%, GDP per capita will decrease by 2.0%. In other words, these non-permanent residents are pushing down GDP per capita. However, other regions of Canada may see an increase in GDP per capita.
This is not to deny other causes. I think Canada’s economic situation is bad. But it’s hard to see how the increase in NPR is making the situation worse. Let’s go back to the analogy when I joined the Warriors party. The average went down, but not a single player went down in height. Some might argue that NPR students, who make up a large portion of NPR, receive subsidies for attending the school. There are few private universities in Canada, and tuition fees at public universities remain relatively low. But that’s a different problem, and one that is easy to solve, at least conceptually. Like many state schools in the United States, it has a high nonresident population.
Towards the end of his analysis, Smith writes:
Real GDP growth remains positive and unemployment, although rising, remains low. The decline in GDP per capita is rather explained by the following factors:
• As baby boomers continue to retire, the share of the most experienced workforce cohort is decreasing.
• Declining labor productivity is a complex, high-priority, long-term problem with no simple, immediate solutions, although it is related to the following short-term drivers: and
• NPR population growth. Fortunately, this factor can be resolved relatively quickly, but it requires difficult political decisions and implies a short-term suppressive effect on GDP growth.
Why does Mr. Smith think this needs a “fix”?
