A country’s long-term potential for economic growth, or at least sustainable economic growth, is essentially driven by three factors: growth in the labour force (and total hours worked), investment in physical capital and increased productivity. In recent decades, Canada has not been a strong performer compared with other high- income nations in terms of physical investment and pro- ductivity growth. As shown in our recent study Canada’s Lagging Productivity (2010), investment in physical capital has not kept pace with investment in human capital since the 1980s. Not surprisingly, the productivity growth rate has also declined since the 1970s, and our productivity perform- ance significantly lags behind those of comparable coun- tries, notably the US. There are many root causes for this underperformance, including reliance on a low Canadian dollar for competitiveness, excessive regulatory barriers and capital taxes that discourage investment.

But we have an enviable track record when it comes to labour force growth and job creation. Canada’s employ- ment growth was strong in the 1970s and 1980s relative to those of our peers; it waned in the 1990s, but improved again this decade, in line with underlying demographics. Canada’s investment in core education was also strong. The Conference Board’s online report How Canada Performs ranks Canada second only to Finland in the most recent assessment of education, using the benchmarking methodology we have developed.

As we emerge from the global recession, a number of structural factors will guide and influence the Canadian economy. These factors include the need to restore fiscal balance at the federal and provincial levels, after a period of exceptional fiscal stimulus; the impact of a strong loonie, driven by stronger prices for energy and other com- modities, on Canada’s competitiveness; our position within a North American economy that is no longer becoming integrat- ed; shifting global growth and trade patterns, notably the rise of emerging markets; and the uneven implemen- tation of climate change policies.

All of these factors are important, but for the purposes of this special issue of Policy Options, we will single out the structural importance of demographic forces and an aging workforce. Canadian organizations and the Canadian economy will have to adapt to the challenge of a struc- tural demographic shift if they are to remain robust.

Heading into the recession of 2008-09, Canadian labour mar- kets were exceptionally tight; the national unemployment rate was at what, according to our estimate, was the natural rate (the rate that pre- vails when labour markets are essen- tially at full employment, without fuelling inflationary wage pres- sures), and there was significant upward pressure on wages in some regions and sectors. There is no doubt this recession resulted in a sig- nificant slackening of the labour market, and it will take a couple of years before the healing is complete. But even as labour markets slack- ened overall, there were many pock- ets of continued pressure. High-skilled workers, especially those in public sector occupations, remained in short supply.

The recession is now over. The Canadian labour market is showing signs of strengthening and job growth is moving ahead strongly. The Canadian unemployment rate will stabilize as people searching for employment continue to return to the labour force, levelling off at around 8.5 percent in 2010. But the peak of the unemployment rate in this recession will be well below the average unemployment rate in Canada over the span of 1976 to 1999.

As shown in figure 1, the recent recession looks relatively mild in terms of lost GDP and lost employ- ment in comparison with past Canadian recessions. This is partly due to a fundamental transforma- tion over the past decade that brought Canada’s labour market from one in which there was excess supply of labour to one in which there is excess demand for labour, at least in some occupations and regions. No doubt, job losses during the recession resulted in temporary slackness in Canada’s labour market, the effect perhaps compounded by boomers temporarily delaying their retirements due to the plunge in stock markets.

But even as the ranks of the unemployed grew, the supply of workers in some occupations and skilled trades remained slim. Unlike US employers, Canadian employers made significant efforts to maintain their skilled workers, despite the harsh economic environment (as confirmed by detailed jobs data). There is some evi- dence that job losses were mitigated as firms in sec- tors facing labour shortage pressures snapped up workers who were laid off in other firms.

Retirement among the baby boom cohort is just getting under way, and employers appear to be well aware of the fundamental forces that are causing steady ero- sion in the growth in labour supply. The Conference Board of Canada’s 2010 annual compensation survey found that 54 percent of the respon- dents had trouble attracting and retaining talent. While this share is down from preceding years, it is still remarkably high in a period of reces- sion. More importantly, it is sure to rise as labour market conditions tighten and the wave of boomer retirees builds.

And the economic situation is only going to get more demanding for Canadian employers. We expect that over the next three years, the national unemployment rate will decline back toward 6 percent, which is effectively full employ- ment. Finding workers and contain- ing wage pressures are already resurfacing as key issues for Canadian employers in some regions and sectors. As the baby boom cohort begins to retire in earnest, labour will increasingly become a scarce resource. Despite already sig- nificant immigration rates, domestic population growth " those aged over 15 " will remain soft, due to low fertility rates and a small cohort of women in their child-bearing years. A slower increase in the popu- lation born in Canada and declining overall rates of labour market partic- ipation will continue to erode growth in labour supply in the fore- seeable future, slowly pulling down Canada’s growth potential.

There will be ongoing competi- tion for talent across employment categories, sectors and regions. Upward pressure on real wages will persist, and organizations in both the private and public sectors will need to change the fundamentals of their operations by substituting capital for increasingly scarce and expensive labour.

The role of immigration in Canada’s economic development over many centuries is generally appreciated by most other Canadians, as the Nanos Research poll results elsewhere in this issue confirm yet again. Less well understood is the role that immigra- tion will have to play in the coming years if Canada’s economic develop- ment and growth are to be sustained. Around the world, there are sig- nificant differences in attitudes and policies toward immigration, with clear economic consequences. At one end of the spectrum is Japan, whose population is aging the most rapidly among major industrial countries. The share of its population over the age of 65 is expected to increase from 22 percent in 2010 to over 30 percent by 2030, and its total population is already in decline. However, it has yet to introduce broad policies that actively encourage immigration. Although some controls on foreign workers have been relaxed, its under- lying economic growth potential is being steadily eroded by this aging phenomenon and by a shrinking workforce. Similarly, there are numerous countries in Europe that are now suffering the negative effect of an aging workforce and weak labour force dynamics on the sus- tainable growth potential of the economy. Much of Europe is strug- gling to find the right balance between economic and social objec- tives in its approach to immigration. At the other end of the spectrum is Canada, along with Australia and the US, which are actively encouraging immigration as one means of build- ing their labour forces and economies over time.

The baby boom generation in Canada is about to start retiring in growing numbers. Who will replace the boomers in the workplace? The answer, increasingly, will need to be ”œmore immigrants.” The born-in- Canada population will continue to grow, but with much lower fertility rates. Although the fertility rate rose slightly during the early 2000s, to 1.66 in 2007, it is still well below what is needed to maintain the popu- lation through natural increase, which is 2.1 children per woman. Therefore, Canada will need more immigrants if the labour force is to grow and remain vibrant. Other demographic groups that will be called on to contribute to Canada’s labour force stability are mature work- ers, Aboriginal people, women, peo- ple with disabilities and youth.

The Conference Board’s formal long-term economic outlook for Canada to 2030 assumes that immi- gration rates will increase gradually, peaking at 350,000 annually. By that time, according to our forecast, immi- grants will represent over 80 percent of the net annual population growth. This of course is an assumption; if Canada is to increasingly rely on immigrants, obviously it needs a mod- ernized, integrated and well-managed immigration policy.

What, then, should be the key attributes of that policy? Our research and analysis has identified six underlying principles for a strengthened immigration policy going forward.

Increase the weight given to eco- nomic factors. A reinvigorated immi- gration policy, growing toward 350,000 by about 2030, will need to recognize the importance of skills-based immigration to address Canada’s labour market needs and to unlock immigrants’ potential for making a long-term economic con- tribution. This policy shift is quite feasible; immigrants have higher levels of education than the Canadian-born population, but their skills are often underemployed. Canada’s immigration policy has traditionally been guided by a blend of social objectives such as family unification, humanitarian and refugee objectives and economic objectives. This is still a sound basis for policy; the issue is the relative weight we give to specific objectives. An easy way to achieve the econom- ic objective would be to maintain the number of annual immigrants meeting social objectives or criteria, and steadily increase the number selected by economic factors.

Ensure that we have an immigration system that is streamlined, coordinated and well-managed. Canada cannot afford to have an immigration sys- tem, or any national policy for that matter, where there is misalignment between the federal and provincial levels. All participants should commit themselves to building a client-ori- ented system where the parts are interlinked and where services are delivered as efficiently as possible. Since provincial governments tend to be closer to the ground in terms of their interface with business, their engagement is essential.

Be prepared to expand the use of temporary foreign worker (TFW) pro- grams to fill short-term gaps in labour markets. As a matter of public policy, Canada should develop an array of tools to balance short-term labour market needs with the longer-term objectives of a growing and skilled labour force. TFW programs, deliv- ered by provincial governments through their close contact with local business, are one such policy tool. We must also ensure there is adequate protection in place for these workers.

Increase employers’ upfront involve- ment. If a renewed immigration poli- cy is to address Canada’s labour market needs appropriately, it stands to reason that employers need to be included in the decision-making and delivery process. Otherwise, they may rely excessively on quick fixes like TFW programs, and the potential to build an integral system that oper- ates effectively over the longer term will be diminished.

Create new and improved pathways to permanent residency for TFWs and foreign students. The quid pro quo for expanding the use of TFWs is to devel- op a more regular route to permanent residency for workers who meet appro- priate qualification criteria. Improving the possibilities for foreign students to attain permanent residency is another excellent way to increase Canada’s immigration levels with individuals who have already demonstrated an interest in Canada and have begun to make Canadian values their own through their studies here.

Improve foreign credential recogni- tion, access to language training, settle- ment services and opportunities to gain meaningful work experience. To be fully effective in the labour force, immigrants will need the same hard and soft skills and demonstrated competencies that other participants in the Canadian labour market have. The earlier foreign credentials can be assessed and recognized, the faster workers will be able to fully use their skills and become integrated into the workforce. Language skills are criti- cally important for effective commu- nication and influence in the workplace, and they are often a defining factor in whether individu- als can fully utilize their core job skills. And the ability to fit into the broader Canadian community and to grow through job experience will help to define the overall success of each immigrant.

Other issues related to overall management of the immigration sys- tem will have to be addressed. The economic interest in attracting more immigrants will have to be balanced with concerns about Canada’s securi- ty interests, the operational integrity of the system and our capacity to integrate new entrants effectively into society. The flow of applications has to be managed and backlogs addressed, as does the par- allel system for refugees. These topics are beyond the scope of this article, but they clearly are part of building a more sustainable and integral immigration system with even greater overall demands being placed upon it.

Labour supply is more plentiful now in many industries than it was two years ago, but the recession has provided only temporary reprieve from the tight labour mar- ket conditions faced during 2007 and much of 2008. Current and looming skill shortages have impli- cations for immigration policy and practice, as well as for the use of TFWs. In the face of widespread shortages, modernization of Canada’s immigration policy is of paramount importance. Failure to adequately plan for the coming deceleration in labour supply growth will likely leave organiza- tions short of skilled employees and could dampen growth prospects for the entire Canadian economy. Immigrants can come to the rescue, but only if the policy framework and the supporting infrastructure create the right conditions for success.