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Why Population Growth Matters So Much to Canada's Cities

February 28, 2013

Director
Centre for Municipal Studies

Last week, the Conference Board’s Centre for Municipal Studies released its Winter 2013 edition of Metropolitan Outlook, a publication dedicated to the analysis of the economic perspectives for Canada’s 28 largest census metropolitan areas (CMAs). In what has become something akin to a broken record, the report’s headline was that economic growth continues to be strongest in Western Canada, particularly in CMAs located in Saskatchewan (Saskatoon and Regina) and Alberta (Calgary and Edmonton), as they continue to benefit from strong primary sector activity.

Moreover, the strong economic performance of Western Canada has propelled population growth in the western CMAs, thanks to their very attractive labour markets in this period of economic boom. In fact, population growth in the four CMAs located in Saskatchewan and Alberta has averaged 2 per cent or more per year over the past five years (see chart “Western Cities Leading the Way in Population Growth”), compared with a national average of 1.2 per cent per year. This is a blessing to housing demand and consumer spending in these areas.

Chart of Western Cities Leading the Way in Population Growth

Population growth is a key driver of overall economic growth. In fact, to put it simply, economic growth is the sum of three components:

  • productivity growth,
  • growth in the capital stock and
  • labour force growth

The latter is driven directly by population growth. If you take Canada for example, potential economic growth has been hovering around 2.5 per cent in recent years and the contribution to growth of the three components can be roughly distributed in the following way: 1 per cent from productivity, 0.5 per cent from the capital stock and another 1 per cent from the labour force.

Of course, in analyzing economic growth in Canada’s CMAs, one quickly realizes that the national picture masks a wide variety of results from one CMA to another, since population growth varies significantly among Canada’s CMAs. CMAs located in Saskatchewan and Alberta, where the economy has been booming for a decade or so, have been a magnet to people. At the other end of the spectrum, CMAs like Windsor and Greater Sudbury have been hit by declines in the population level for years now, putting a serious lid on overall economic growth.

Canada's Population, by Age

As we look into the future, it is certainly not a secret that Canada’s population is aging. As a result, one can expect a weaker contribution from the labour force to overall economic growth, as an aging population will increase the amount of workers leaving the labour force each year. Therefore, if we are to maintain an economic growth potential approaching anything like 2.5 per cent, Canada will have to turn to productivity growth to offset the weaker labour force growth. That is why the Conference Board has argued that Canada must adopt an innovation strategy, given that innovation is a key to stronger productivity growth.

This overall portrait varies widely among CMAs. True, every CMA could use a more innovative economy to lift productivity growth and, in turn, overall economic growth. However, the sense of urgency is not quite the same. In CMAs where population growth of 2 per cent or more is still the norm, potential economic growth remains at or around 3.5 per cent per year. In their case, the aging of the population might bring potential economic growth down to 3 per cent, which is still very decent in today’s industrialized world. But for those CMAs where the population is barely growing, potential economic growth is already at about 1.5 per cent per year, implying that it could come down to as low as 1 per cent per year over the coming years. For these communities, lifting productivity growth becomes imperative and the sooner the better, at least from an economic growth standpoint.

I am not arguing that happiness in a CMA is solely driven by economic growth. However, economic growth fuels government revenue growth, which offers any government some room to manoeuvre on the spending front. This applies to local governments as well, since communities with stronger population growth generate the largest increases in the residential property tax base, increasing the budget available to the local authorities. At the same time, however, stronger population growth boosts municipal government expenditures. As well, communities with stronger economic growth tend to show the largest increase in property values, which also boost the potential revenue stream of a local government.

In sum, population growth supports economic growth, which will ultimately dictate governments’ capacity to pay for social programs and infrastructure. Every community wants the best possible public services, but without action on productivity in this era of aging population, several communities may not be able to afford them.

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