Canada is unique in its broad public support for high immigration levels, and for good reason. A world with fewer migration barriers can boost living standards in all countries by moving workers where they are most productive. But easing employer access to low-wage temporary foreign workers, a key piece of the federal government’s recently announced Workforce Solutions Road Map, risks undermining real wage growth and increasing income inequality.
Proponents of increased immigration levels argue that immigration is essential to grow the economy. But what matters is not the total size of the economic pie but the size of the average slice and how it is divided. Increasing low-skilled immigration to increase the overall size of the economy risks driving down average living standards in Canada. The economic growth literature is clear: raising GDP per capita through immigration requires prioritizing skilled immigrants to raise the average skill level of the labour force and harness capital investments, especially in new technologies.
The high-skill streams of Canada’s temporary foreign worker programs, such as the global skills strategy, have much potential to strengthen Canada’s position in the global war for talent. These programs allow employers to identify foreign talent and provide growing businesses with a fast and responsive system for recruiting foreign workers. By temporarily binding temporary foreign workers to employers, businesses are ensured that they will retain this talent over a period of time, thereby incentivizing them to invest in talent search, while migrants are assured fast and seamless transitions to permanent residency through the express entry system. The benefits to Canada’s economy have the potential to be broad.
The same benefits do not arise from low-wage temporary foreign worker streams. Published lists of employer approvals in the low-wage stream of Canada’s temporary foreign worker program reveal that these are overwhelmingly jobs requiring no more than short periods of on-the-job training. Low-wage temporary foreign workers are therefore not filling skill gaps and they compete for jobs with Canada’s most vulnerable workers, especially recent immigrants, including refugees. Evidence shows that binding temporary workers with limited marketable skills to specific employers creates a power imbalance, which opens the door to abuse.
For these reasons, Canada’s low-wage temporary foreign worker program has been controversial. Media coverage in 2013-2014 documented reports of employer program misuse, including by Tim Hortons and McDonald’s franchises in areas with high unemployment rates. The federal government’s response in 2014 to this controversy was twofold. First, it curtailed growth by imposing a fee on the labour market impact assessments businesses are required to undergo to ensure adequate efforts have been made to fill jobs domestically. It also limited the share of temporary foreign workers to 10 per cent of employers’ workforces, and it restricted hiring of temporary foreign workers in areas where the local unemployment rate exceeded six per cent. Second, it broke off the component of the program not requiring labour market impact assessments and renamed it the international mobility program.
Figure 1 provides our best estimates of how employer reliance on temporary foreign workers has become entrenched in Canada’s labour markets. After briefly declining following the 2014 reforms, the program has continued to grow, which almost entirely reflects growth under the less-scrutinized international mobility program. This persistent growth is evidence that the program has grown beyond its objective of being a temporary measure for businesses to fill temporary labour shortages to becoming a permanent business strategy to minimize labour costs.
The true temporary foreign worker employment share is no doubt bigger as the data does not include foreign students, who have the right to work in Canada and have increased five-fold since 2000. However, neither the government nor Statistics Canada tracks the employment of foreign students. The simple and troubling reality is that we don’t know what percentage of Canada’s low-wage jobs are currently being done by foreign students, but an analysis of census data performed by one of us suggests it has increased. It is likely that the imperative for foreign students to work has increased along with the tuition fee premiums they are required to pay.
A recent study of a policy change in the United Arab Emirates shows that allowing temporary foreign workers to move to other firms when their initial contracts expire improves their initial wage outcomes. Migrants’ willingness to accept substandard wages and working conditions is further exacerbated by the dream of obtaining permanent residency status. Despite much rhetoric about lessons learned during the pandemic and the need for expanded permanent residency pathways for temporary foreign workers, evidence reveals that low-skill temporary foreign workers have always been, and continue to be, more likely than higher skilled temporary foreign workers to obtain permanent residency status because they are more likely to seek it. Of course, when temporary foreign workers make the transition to permanent residency and their job opportunities open up, they are likely to be just as unwilling as other Canadians to accept the low wages and unappealing working conditions of these jobs, leading to continuous pressure to bring in more temporary foreign workers to replace the prior group.
There is no question that Canada’s low-wage labour markets are now exceptionally tight. Figure 2 shows that the number of vacancies per job seeker in late 2021 and early 2022 far exceeds the level seen prior to the COVID recession. In January 2022, there were 7.1 job vacancies for every 10 job seekers (0.83 million job vacancies and 1.16 million job seekers) down from a peak of 8.4 in December 2021 (see figure 2). Increases in job vacancies requiring a high school diploma or less have been especially acute – 74-per-cent increase between the fourth quarter of 2020 and 2021 compared to a 63-per-cent increase overall.
Strong demand for low-wage workers has led Canada’s business lobby to push for eased access to temporary foreign workers, to which the government responded on April 11 by announcing its Workforce Solutions Road Map, which will see a reversal of the 2014 temporary foreign worker program restrictions. Most notable, as of April 30 this year, the workforce cap on low-wage temporary foreign workers will increase from 10 per cent to 30 per cent in seven sectors: food manufacturing; wood product manufacturing; furniture and related manufacturing; accommodation and food services; construction; hospitals, nursing and residential care facilities. Positions in on-farm agriculture, caregiving, and fish and seafood processing will have no limit on the number of temporary foreign workers employed, making permanent an exemption introduced in 2015. For all remaining sectors of the economy, the cap will increase to 20 per cent.
In addition, the maximum permit duration will increase from 180 to 270 days for these low-wage positions. Labour market impact assessments will be valid for 18 months, up from nine months during the pandemic, and six months before the pandemic. Finally, the government will end the moratorium on the hiring of temporary foreign workers in regions where the unemployment rate exceeds six per cent.
For economists, labour shortages are an opportunity to be embraced. Competition for scarce workers forces employers to use existing workers more efficiently, by, for example, offering longer hours for those willing, introducing new technologies that may be complementary to the tasks of workers, and investing in employee training, thereby raising skills and labour productivity. To compete for workers, employers will be pressured to enhance their wages, benefits, and working conditions, thereby making the least desirable jobs less odious.
Increased competition also compels employers to be less selective in their recruitment efforts and to offer opportunities to job seekers who would otherwise have difficulties getting a toehold in the labour market, such as recent immigrants and workers with disabilities.
Finally, the combination of a tight labour market and pandemic interruptions appears to be increasing worker mobility out of low-wage sectors, such as from the retail and food-accommodations industries toward sectors with better pay and more opportunities for career advancement.
No doubt some low-margin employers will be unable to compete, but business failures are a necessary reality of a healthy well-functioning economy. Thirty-seven per cent of Canadian businesses fail within the first five years, and 57 per cent by 10 years, according to a recent Industry Canada analysis. In the food and accommodations industry, only 31 per cent survive 10 years. This continuous flow of business creation and destruction ensures all production inputs, including workers and capital, are employed where they are most efficient and contribute most to the economy. There is good reason to believe that Canada’s $100-billion public expenditure for the Canada emergency wage subsidy has interrupted this competitive process. Allowing it to return is an important step in easing the current labour crunch.
Despite exceptionally tight labour markets, Canadian wage growth remains lethargic. Statistics Canada’s most recent estimate suggests a 3.4-per-cent year-over-year increase in average wages over all employees, less than the 4.3-per-cent average increase recorded in the second half of 2019. In the seven sectors targeted for enhanced temporary foreign worker expansions in the Workforce Solutions Road Map, job vacancies increased 89 per cent between the fourth quarter of 2020 and 2021 but the average wage being offered to fill these vacancies increased by only 3.6 per cent (holding the sector mix of the vacancies constant). Over the same period, consumer prices in Canada increased 4.7 per cent, suggesting declining real wages, which, of course, is entirely at odds with labour shortages.
Does relying on foreign guest workers to fill low-wage job vacancies make sense in this environment? Is a justifiable rationale for the low-wage stream of Canada’s temporary foreign worker program to support businesses that fail in the absence of a ready source of cheap labour that is contractually tied to them?
What is the solution?
Optimal policy in high-wage labour markets is not optimal policy in low-wage markets. We need to think more clearly about what economic objectives we are seeking to achieve when easing access to low-wage temporary foreign workers.
Abruptly ending the low-wage temporary foreign workers stream might unduly disrupt businesses that have become reliant on this program. An alternative proposal, which deserves more consideration, is a “cap and trade” system in which Immigration, Refugees and Citizenship Canada issues a fixed number of permits to satisfy current demand, but gradually lowers the number of permits issued in subsequent years. Employers may respond to this rationing of permits by trading unused permits to other employers whose willingness to pay for permits is higher. The cap ensures certainty in the number of permits issued, while the market for temporary foreign workers is left to determine the competitive market price for permits. In this way, temporary foreign workers will be employed by firms where they are the most productive, thereby improving the economic efficiency of the system and the wages and working conditions of Canada’s lowest-wage workers.