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September 25, 2020IMMIGRATION AND FIRM PRODUCTIVITY: EVIDENCE FROM THE CANADIAN EMPLOYER-EMPLOYEE DYNAMICS DATABASE Previous studies on the impact of immigration on productivity in developed countries remain inconclusive, and most analyses are abstracted from firms where production actually takes place. Statistics Canada recently released a study that looks at the empirical relationship between immigration and firm-level productivity in Canada.
Literature from the U.S., European and Canadian research find that the impacts of immigration on Gross Domestic Product (GDP) per capita, the fiscal balance, and the wages of native-born workers, are generally small, either positive or negative. A few Canadian studies have also touched on this issue, and the results are mixed (Aydemir and Borjas 2007; Fung, Grekou and Liu 2017; Picot and Hou 2016; Tu 2010). Most of the previous studies in this area treat immigrants as a shift in labour supply in labour markets. A common limitation of this approach is that these analyses are abstracted from firms where production actually takes place and employment decision is made.
An emerging body of research has been looking at the effects of immigration on firm productivity in the U.S. and some European countries. These studies suggest that immigration can either negatively or positively affect the receiving country’s labour productivity through changes in the factors of production, changes in skill content of labour, efficient labour specialization, and innovation activities in the firm.
If a large increase of immigrant labour reduced employment costs, the labour factor of production becomes more intensive in an economy and leads to a reduction in labour productivity. This might be especially true if there is a large increase in the supply of lower-skilled immigrants which reduced the cost of less skilled labour and encourages firms to become more labour intensive.
However, if immigrants provide skills complementary to domestic-born workers, and highly educated immigrants are more innovative than the domestic-born, the increase in immigration may lead to an increase in labour productivity through increased specialization both within and across the firms in a local labour market, and gains in innovations and the adoption of new technologies in the firm.
In order to examine the empirical connection between immigration and firm-level productivity in Canada, Statistics Canada study uses a data file derived from linking the Canadian Employer-Employee Dynamics Database that tracks firms over time with the Longitudinal Immigration Data File (IMDB) that includes sociodemographic characteristics at landing for immigrants who arrived in Canada after 1980. By following individual firms over time, the study attempts to determine if an increase in the share of immigrants lead to an increase in firm productivity, worker wages and business profits.
The analytical approach of the Statistics Canada study is to determine the relationship between the changes in the share of immigrant employment in a firm and the firm’s labour productivity, after accounting for time-invariant omitted variables at the firm level, regional and sectoral shocks to productivity growth, and some key time-variant predicators of firm productivity. The changes are measured alternatively at one-year, five-year, and ten-year intervals to distinguish possible short-run vs long-run association. This study also considers the effects of immigrants by length of stay in Canada, education, language, and immigration class. Economic-class or skilled principal applicants, who are selected for economic reasons, may have a stronger effect on productivity growth than other immigrants.
The study found that the average share of immigrant employment was about 13.5 per cent in the sample used in the study. The share of immigrants with relatively low skill level (immigrants in classes other than economic classes, non-high-skilled immigrants, non-STEM immigrants and immigrants with lower education) was higher than the share of immigrants with relatively high skill level. The share of recent immigrants who were in Canada less than 10 years (7.75%) was higher than the share of established immigrants (5.75%). The share of Science, Technology, Engineering, and Math (STEM) immigrant employment was the lowest among the different types of immigrants and it was only about 1 per cent for an average firm in the sample.
The share of immigrant employment increased for almost all types of immigrants in an average firm over a ten-year period, except for non-official language immigrants, but the increase was small. Over a ten-year period, the share of immigrant employment increased by 0.58 percentage points in an average firm. The largest increase was for immigrants with official language skills and with university education. The smallest change was for high-skilled immigrants.
Statistics Canada study found that there is a positive association between the change in the share of immigrant workers and firm productivity growth and no effect on capital-labour ratio from immigration. It also finds that immigration has a positive effect on worker wages and firm profits.
The association between the changes in the share of immigrants and firm productivity increased with the length of period used to measure the change. Second, the change in firm productivity had stronger associations with the change in the shares of immigrants who tended to have lower skill level, including new immigrants (relative to established immigrants), immigrants who were not principal applicants in the economic class (relative to principal applicants in the economic class), non-high-skilled immigrants (relative to high-skilled immigrants), and non-STEM immigrants (relative to STEM immigrants).
With the one-year changes, a ten percentage-point increase in the share of immigrants was associated with 0.8% increase in firm productivity. A similar magnitude of association was observed for the change in the share of recent immigrants, immigrants who were not principal applicants in the economic class, non-high-skilled immigrants, non-STEM immigrants, and immigrants without a university degree.
When changes are measured over a five-year period, the relationship between the share of immigrants and firm productivity became somewhat stronger. A 10 percentage-point increase in the share of immigrants was associated with 1.1 per cent increase in firm productivity. The patterns of association by immigrant characteristics remained similar to those observed for the one-year change.
The overall association between changes in the share of immigrants and firm productivity became even stronger when changes are measured over a ten-year period. A 10 percentage-point increase in the share of immigrants was associated with 1.9 per cent increase in firm productivity. This overall effect remains small given that the share of immigrant workers rose by about 0.6 percentage points on average over a ten-year period in the firms that were included in the study. Thus, the change in the share of immigrant workers was associated with 0.12 per cent increase in productivity for an average firm. For a comparison, firm productivity rose by about 11 per cent for a 10-year interval on average over the study period. Therefore, the effect of immigration accounted for about 1 per cent of the overall productivity growth in an average firm.
Looking at the results by industry, the study found that the association between the changes in the share of immigrants and firm productivity was twice to three times as strong in technology-intensive industries as in other industries. In technology-intensive industries, the changes in firm productivity had stronger association with the change in the shares of immigrants who tended to have less favourable labour market outcomes at the individual level. In contrast, these differences were much smaller or non-existent in non-technology industries.
The association between immigrants and firm productivity also varied considerably by immigrant characteristics and industry sectors. The effect was higher for low-skilled /less-educated immigrants as compared with highly-skilled/university-educated workers, as firm productivity growth was more strongly associated with changes in the share of recent immigrants who tend to work in low skilled occupations (relative to established immigrants), immigrants who intended to work in non-high skilled occupations (relative to immigrants who intended to work high-skilled occupations), and immigrants who intended to work in non-STEM occupations (relative to immigrants who intended to work in STEM occupations). Those differences were more pronounced in technology-intensive and knowledge-based industries.
Source: Statistics Canada, Immigration and Firm Productivity: Evidence from the Canadian Employer-Employee Dynamics Database
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