Demographic Problems in Canada


The biggest demographic challenge Canada faces is the increase in the ageing population. In the next 2 decades, Cana is set to experience a tremendous increase in the ratio of the population above 65 years to that of the working population. This demographic trend will impose challenges on the sustenance of better living standards, financing of social programs and productivity. Canada can better solve the challenges posed by this demographic problem by reducing public debt. The government should formulate reforms on the pension plan, health care system and improvement of the gross domestic product to avert negative implications of the demographic trend in the economy. As the ageing population increases and the baby boomers go for retirement, the share of working population will decline. Productivity will reduce and lead to declining living standards. As the article penned by Brown and Foot states, an increase in government spending cannot solve these demographic challenges. This paper supports this assertion and argues that the government could counter the challenges better by investing in drivers of productivity growth.


Reduction in Government Spending

Increased government expenditure will create more budget deficits, especially because the increased ageing population will result in reduced productivity. This measure will further worsen the economic situation as the young population will be left with a heavy debt burden. Cutting government spending has been an important policy to reduce the budget deficit in Canada. An example is during the 1990s when Canada successfully employed this policy. After evaluation of different departments, the government cut spending by 20% on the appropriate government departments. The cut in government spending resulted in great benefits in the economy such as increased exports, lower interest rates and a favourable exchange rate. Similarly, the UK, with the same demographic structure cut spending in the 1950s. In the same vein, the government significantly reduced the debt to GDP ratio.

However, a reduction in government spending should not be done in all sector of the economy. The most appropriate approach for Canada is to cut spending on a pension. This will compel people to extend their retirement and work longer for the purpose of increasing their productive capacity. A cut in government spending on some sectors will have an adverse effect on the economy. For example, a cut in public sector investment will reduce the aggregate demand and consequently a ruction in aggregate supply. Though, a cut in benefits and pensions will have an insignificant impact on economic growth.

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Tax Increase

The increases in government spending resulted in budget deficits. Instead of this approach, the government can seek to increase revenue to finance programs such as health insurance of the ageing population. One of such approaches is to increase taxes. However, the tax increases should be applied according to the state of the economy. Tax increases during a recession should be avoided as they can discourage spending. The tax increases should only be applied during the periods of high economic growth. They should also be applied to the high-end class because of their low-income elasticity of demand. The government should be cautious not to increase taxes on the low and middle-income earners as it can create a disincentive to work. The tax revenue raised will be channelled to finance the government programs which increase the living standards of the old population.

Utilising the Potential of Underutilised Workforce

As the ratio of older population increases relative to that of the working population, Canada I yet again faced with another demographic challenge. The birthrate is reducing significantly. This indicates that in the next 25 years, the country will not have sufficient population to join the workforce. Instead of increasing government expenditure, Canada can seek alternative ways to replenish its workforce in the future. One of the strategies is to fully utilise the potential of the population that is underrepresented in the workforce. These classes of people include young people, people with disabilities, the immigrants and the older workers. The government should remove the obstacles that hinder these classes of underrepresented people from fully participating in the labour force. For example, the workforce participation of people aged 15 to 24 years is 65%. The government should provide support such as career information and student work programs to enhance their participation in the labour force.

The second segment of the population that should be tapped in the labour force is the older population. The retirement age had been previously fixed at 65 years. However, the demographic profile of Canada was different at that time. The baby boomers were entering the labour market and the older population was required to retire and create space. The life expectancy has increased in Canada and the people have the energy to work longer beyond their retirement age. The older population also has plenty of skills and experience that can help them offer invaluable services to the country. The government should remove systemic barriers by offering flexible choices to the workers who still feel they have the energy to participate in the labour force. The mandatory retirement age should be revoked to enable the older population to extend their services and still receive their benefits. The government can also introduce part-time work programs to facilitate the older population to work from home.

The people with disabilities make up a potential workforce that has not been fully utilised. About 45% of the people with disability are not in the labour force. About 60% of the people living with a disability claim that they were prevented from joining the labour force. Instead of setting funds aside to help this class of people, the government should enable them to participate in the labour force. Some of the people living with disability need job redesign or a reduced work schedule such as working from home. Many offices and buildings do not have mobility facilities for the physically challenged people.

Integrating Immigrants into the Canadian Workforce

Immigration into Canada has a long history dating back to the 17th century. Immigrants form a significant proportion of the Canadian workforce accounting for about 65% growth in the labour force. The immigrants have a higher level of education compared to the Canadian-born people. In contrast, the unemployment rate of the immigrants between ages 25 and 54 is 22%; double that of the Canadian-born population. The Canadian government should tap the potential in this latent workforce. One of the mechanisms the government should use is to create a robust immigration program to mitigate the impending decline in the labour force. The immigrants should be integrated into the workforce in their line of skills and experience. The government should also expedite the processing of immigration applications by removing unnecessary bottlenecks. The government should also strengthen the nations brand as a top destination for skilled immigrants. Language barrier is a significant challenge to the foreigners seeking to work in Canada. The government should establish programs that will assist immigrant to learn language skills that they need to integrate well into the Canadian workforce. These initiatives will ensure that Canada attracts the best talents to replenish its workforce.

Improvement of labour productivity

As the baby boomers leave the job market, the demand for labour is expected to escalate. However, the government should not hold the fact that growth in output will necessarily depend on the growth in the number of employees. It rather depends on growth in labour productivity. The increase in labour productivity is enhanced by expansion and optimisation of capital equipment, development of human capital and adoption of new technologies. These measures will raise the value of the employees work. The measures will also improve the quality of jobs and increase GDP growth per capita. Productivity is not enhanced by a large number of people working for long hours but increasing efficiency to raise output per hour worked.

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From the foregoing, an increase in government expenditure will not help to solve the demographic challenges of Canada. As the article clearly stated, the policy has led to disastrous economic effects such as inflation, worsening unemployment rates, increase in the cost of living, high-interest rates and high property prices. It is clear that the government employed a wrong approach to solving the problem of an increase in labour demand. The government should instead cut government spending to avoid budget deficits and a high debt to GDP ratio. The government can also reduce budget deficits by increasing taxes during periods of high economic growth. A wide range of options that can help the government counter the expected shortage in the labour force is explored. One of the options is to utilise the large pool of the underutilised labour force that includes youths, persons with disability, and the older population. The Canadian government can also tap the potential of immigrants and incorporate them in the labour force, given their high academic and professional qualifications. Finally, the government should not be worried about the declining labour force. It should rather seek to increase the productivity of its existing workers to spur growth. These policy options will save the country from the macroeconomic instability that the government has caused by increasing government expenditure.

Jan 19, 2021 in Research
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