IMMIGRATION TO RESOURCE-RICH ECONOMIES: Evidence from Canadian provinces of migrant workers mitigating the effects of ”Dutch disease”

The negative effects of a regional resource boom on the local manufacturing sector – a phenomenon that economists call ''Dutch disease'' – can be partly mitigated by the arrival of temporary foreign workers and migrant labour from elsewhere in the country. That is the central finding of research by Michel Beine, Serge Coulombe and Wessel Vermeulen, published in the December 2015 issue of the Economic Journal.

Their study examines the impact of different kinds of migration flows on the Canadian provinces with booming natural resource sectors. It finds that temporary foreign workers and migrant workers from other provinces have prevented pressure on the local manufacturing sectors, which compete for workers with the resource sectors and for sales with manufacturing sectors in other provinces and other countries. And while the movement of workers from other parts of Canada could in theory create labour shortages in those non-booming provinces, in practice this has not happened.

The researchers note that an economy in a resource boom is typically characterised by labour shortages in a wide variety of occupations as well as an overvalued real exchange rate. As a consequence, it tends to be difficult for a region with a booming natural resource sector to produce other traded goods for export. This means that it often has a non-diversified industrial base.

These problems of Dutch disease in a booming economy are partly related to fierce competition for scarce labour from the booming sector and the non-tradable sector. In principle, these effects could be mitigated through a positive labour supply shock, such as immigration from other parts of the country and other parts of the world. But if the inflow of workers comes internally from other regions, Dutch disease could be propagated to those regions, driving up wages and discouraging traded goods production.

The new study analyses both theoretically and empirically how various migration channels might mitigate the effects of Dutch disease at the regional level in Canada. The researchers first show that resource windfalls tend to reduce the relative size of the local manufacturing sector. They then estimate the extent to which Dutch disease has been mitigated by migration flows into the provincial economies.

They consider three channels by which migrants can arrive, each of which is likely to have different effects on regional local labour markets:

• Foreign workers coming to Canada through various temporary programmes. These workers are directly hired by local employers and have a 100% employment rate, so this channel is purely market- and employer-driven.

• Migrants from the other Canadian provinces, a channel that is partly market-driven. The prospect of finding a better job is an important motivation for interprovincial migration. But Canadians might also migrate internally for other reasons: to benefit from some geographical amenities or take advantage of better education and health services at a lower tax rate.

• Permanent economic migrants selected under a system that is not market-driven but which allocates points based on personal characteristics such as age, education and language proficiency. When admitted into Canada, permanent immigrants live wherever they want and do not have to go to booming areas where there are labour shortages.

The empirical results confirm that the three migration flows have different effects on Dutch disease in Canada''s booming provinces. The impact of the permanent immigration channel on regional Dutch disease is nil. But both the temporary foreign workers channel and the interprovincial migration channel seem to have a significant positive effect on the manufacturing sectors of the booming provinces, relieving the pressure of potential labour shortages.

The mitigation effect of the two migration channels could be substantial for booming regions. For example, in the province of Alberta between 2002 and 2009, the results suggest that 50-60% of Dutch disease was alleviated by the combined inflows of temporary foreign workers and interprovincial migrants.

Since part of the mitigation effect in booming provinces comes from labour movement from non-booming provinces, this movement of labour could in theory create labour shortages in non-booming provinces and thereby propagate Dutch disease to those regions. In practice, this has not actually happened in Canada since the resource boom has occurred in the provinces of Alberta, Saskatchewan and Newfoundland, which account for only 15% of the total population.

''Dutch Disease and the Mitigation Effect of Migration: Evidence from Canadian Provinces'' by Michel Beine, Serge Coulombe and Wessel Vermeulen is published in the December 2015 issue of the Economic Journal. Michel Beine is at the University of Luxembourg. Serge Coulombe is at the University of Ottawa. Wessel Vermeulen is at Oxford University.