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 is allowing 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 levels of inflation.

The concept of potential growth is a very powerful one in economics and feeds into a lot of 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 is made up of two factors: population growth and productivity growth. Basically, 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, and particularly immigration, very clearly right now by comparing the United Kingdom, Canada and Australia. The UK is struggling with a serious labor shortage and inflation problem, while Australia and Canada have been able to adopt slightly less aggressive monetary policy 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 a very 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 2 because of infant mortality (which has declined over time) and some families having less than 2 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.

Fertility Rate (Births Per Woman)