The economics of immigration: The UK vs. Australia and Canada
Executive summary:
- Australia and Canada are experiencing a surge in population growth, while growth rates have slowed substantially in the UK due to post-Brexit frictions.
- The robust population growth allows Australia and Canada to generate stronger job gains without causing tighter labor markets and strong wage growth.
- The sluggish population growth in the UK is helping make for a tight labor market and persistently high inflation levels.
The concept of potential growth is very powerful in economics and feeds into many asset class return calculations. For example, it can inform the neutral rate of interest, which feeds into longer-term interest rates. Additionally, potential growth can be an anchor for longer-term growth assumptions, which are fed into discounted cash flow models used in equity markets.
Potential growth comprises two factors: population growth and productivity growth. An economy’s long-term prospects are determined by the growth in potential workers and how much each worker can produce. Productivity growth is notoriously hard to forecast, with demographics being a bit more straightforward using average life expectancies, fertility rates, and immigration.
We can see the impact of demographics, particularly immigration, very clearly right now by comparing the United Kingdom, Canada, and Australia. The UK is struggling with a severe labor shortage and inflation problem. At the same time, Australia and Canada have been able to adopt slightly less aggressive monetary policies as immigration has provided relief to the labor market.
Fertility rates in the developed world have been low for a long time
Before jumping into the differences in migration, we should take a step back and look at the broader demographic trends across the three countries. The fertility rate, or births per woman, is an important indicator for long-term population growth. For a population to stay at a constant level, a country needs to have roughly 2.1 births per woman (called the replacement rate). It is slightly higher than two because of infant mortality (which has declined over time) and some families having less than two children (which has grown over time). As the chart below shows, most of these countries have seen fertility rates below 2.1 for some time now. Hence, for the population to keep growing (which has a follow-on effect on the economy growing), these countries must rely on migration.
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Source: Refinitiv Datastream, World Bank, May 12, 2023
Canada and Australia have seen rapid population growth
Now let’s look at recent population growth estimates for each country. While population censuses are only taken every couple of years, labor statistics agencies provide estimates of the population each month as part of their labor force report. The chart below shows the six-month change (annualized) in the population aged 15 years and older.1 As you can see, Australia and Canada are experiencing a surge in population as net migration recovers after falling during COVID. In comparison, the United Kingdom has seen a continued slowing in population growth as post-Brexit frictions make the UK a less desirable destination for immigrants.
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Source: Macrobond, July 11, 2023
This population growth has two big implications for economies. The first is it boosts demand and provides a buffer against recession. One of the reasons that Australia had been able to avoid recession for so long was partly due to the strong population growth. The second and related point is that it allows an economy to delay hitting capacity constraints as quickly. An economy that has a faster population can, all else equal, achieve stronger job growth without creating tightness in the labor market.
Net migration can alleviate labor shortages
The U.S. Federal Reserve Bank of Atlanta (Atlanta Fed) has a measure that looks at the average monthly job growth that can be achieved without seeing a declining unemployment rate. Currently, this estimate sits at 99,000 jobs per month. We can do similar calculations for other countries using similar assumptions. We assume that participation rates remain unchanged—that is, the proportion of people of working age (15 years and older) working or looking for work holds steady. Over the longer term, this is unlikely to be appropriate as older cohorts enter retirement, but it is acceptable over a shorter horizon. We also take population growth from the respective governments and assume that the working-age growth equals the overall population growth (given that immigration tends to be skewed toward working-age individuals).
The table below compares the sustainable job growth numbers across the countries, scaled to the size of the United States, for easy comparison.2 The strong population growth means that Canada and Australia are able to generate stronger job gains without causing tighter labor markets and wage growth.
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Source: Refinitiv Datastream, July 10, 2023
Indeed, we have seen the wage growth in Australia and Canada be notably lower than in the U.S. or UK over the last 18 months—a period during which the migration flow has returned for both countries.
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Source: Refinitiv Datastream, July 10, 2023
United Kingdom is in a difficult place
Of course, not everything can be seen with rose-tinted glasses in Australia and Canada. The former is currently seeing significant rent price increases (partly due to this strong population growth coupled with housing shortages), and both are going through a period of higher interest rates with significantly elevated levels of household debt. However, both countries are in a much more advantageous position than the United Kingdom. After all, not only is the UK economy suffering from a tight labor market and persistent inflation, but as we noted in our Global Market Outlook, it has yet to surpass pre-pandemic levels of economic activity.
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Source: Refinitiv Datastream, July 10, 2023
The bottom line
In the post-COVID era, a recovery in net migration in Australia and Canada has boosted population growth, helping to stave off labor shortages in both regions. The situation differs considerably in the UK, where a much-slower pace of net migration has contributed to higher wage growth and a tighter labor market. Ultimately, these differences underscore the vital role that immigration can play in shaping a country’s economic growth trajectory.
1 The chart shows the growth of 16 years and older in the United Kingdom.
2 The actual figures for Canada, Australia, and the United Kingdom are 24,800, 20,600, and 12,900, respectively.