The Impact of Technological Change in the Canada/U.S. Contex

DeVoretz, Don

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People Aspects of Technological Change: Immigration Issues, Labor Mobility, the Brain Drain, and R&D--A Canadian Perspective

Case Western Reserve University School of Law

Canada-United States Law JournalVolume 25 | Issue Article 11January 1999People Aspects of Technological Change:Immigration Issues, Labor Mobility, the BrainDrain, and R&D--A Canadian PerspectiveDon DeVoretzFollow this and additional works at: https://scholarlycommons.law.case.edu/cusljPart of the Transnational Law CommonsThis Speech is brought to you for free and open access by the Student Journals at Case Western Reserve University School of Law Scholarly Commons.It has been accepted for inclusion in Canada-United States Law Journal by an authorized administrator of Case Western Reserve University School ofLaw Scholarly Commons.Recommended CitationDon DeVoretz, People Aspects of Technological Change: Immigration Issues, Labor Mobility, the Brain Drain, and R&D--A CanadianPerspective, 25 Can.-U.S. L.J. 67 (1999)Available at: https://scholarlycommons.law.case.edu/cuslj/vol25/iss/11PEOPLE ASPECTS OF TECHNOLOGICAL CHANGE:IMMIGRATION ISSUES, LABOR MOBILITY, THE BRAINDRAIN, AND R&D - A CANADIAN PERSPECTIVEDon DeVoretzDoes everybody remember Ross Perot? Ross Perot spoke about a "suck-ing sound" in one of his ill-fated attempts to become President. The idea wasthat, because of the NAFrA, jobs would be sucked down south to Mexico.Well, he had part of it correct. Actually, jobs were sucked down south, butthey went from Canada to the United States. They were not low-paying jobs;they were highly skilled jobs. The size, dimension, and the importance of thisphenomenon is currently under debate in Canada. This debate colors theview of the trading relationship, the political relationship, and the way Can-ada operates its universities.A colleague of mine, Rick Harris, who worked extensively on the tradeagreement, argues that the United States is so large and so dominant underNAFTA, that we are going to be forced to converge. For example, Rick hasargued that Canada should just adopt the U.S. dollar, like Israel did in the1970s. Then, tax rates will inevitably converge. But, at the heart of this issueis the brain drain.1In the 1980s, when Canada was discussing sleeping with the elephant,there was a serious question whether the Canada-U.S. Free Trade Agreement(FTA) would create pressures for migration between the two countries, orwhether trade would be a substitute. After all, you do not have to exchangepeople if you can exchange goods. Economists were so sure that trade was asubstitute for emigration that it was felt, at least in the Mexican context lateron, that it would stop Mexicans from coming north. Canadians did not reallyhave a big opinion on it, although Bob Mendella, who was cited here, is a2Canadian who was sure that trade would be a substitute for emigration.* Dr. DeVoretz is Co-Director of the Centre of Excellence in the Study of Immigrationand Professor of Economics at Simon Fraser University. He holds a Ph.D. in economics fromthe University of Wisconsin at Madison.I See Bruce Wallace, Say It Ain't So: The Debate Over Abandoning the Loonie HasFueled Fears About Preserving Canadian Sovereignty, MACLEAN'S, July 15, 1999, at 14 (de-scribing Richard Harris' suggestion that Canada negotiate a common currency with the UnitedStates).2See id.1DeVoretz: People Aspects of Technological Change: Immigration Issues, LaborPublished by Case Western Reserve University School of Law Scholarly Commons, 1999CANADA-UNITED STATES LAW JOURNALThere is a lot of evidence that points to the fact that trade and emigrationare complementary. This is especially frightening for Canadians. There isevidence that capital is moving in the wrong direction, too. Could it be thattrade fosters outward movement of both human and financial capital fromCanada? Could it be that the traditional principles we use in economics, thatlabor and capital should be going the opposite directions, are not true? Is the"sucking sound" we now hear both high-skilled jobs going south and foreigndirect investment going south? This could be the case and Canada could belooking at a fifty-cent dollar in the future instead of the current eighty-centdollar.There is a real intellectual issue here on the table - as we increase Can-ada-U.S. trade from one billion to one-and-a-half billion dollars per day, willthis accelerate the outflow of highly skilled Canadians and more capital toour leading trading partner? Economists were nafve thinking that the oppo-site would happen.How can you measure this flow of brain power, what metric do you use?Moreover, how many people move under the system now, north as well assouth? Secondly, speaking as an economist, do we really just want to use ametric of numbers? Do we have a more refined measure?I am going to try to give you the measurement dynamics in a few min-utes, but first I would like to point out some policy issues. There are fourviewpoints on the table when you talk about a free movement labor policy.One view derives from mainstream economics. Mainstream economistswould say free movement increases the welfare of the world or, in this case,the NAFTA trading bloc. So, do not interfere; do not stop it; there should beno government intervention. Who else in the business world agrees with this?Bill Gates agrees with this. When the Congress increased the number of H-1B visas from 65,000 to 115,000, it was colloquially called the "Bill GatesAmendment." 3 Bankers in Canada also believe that the free movement oflabor is very good, so we should not interfere with it. In sum, you can find alarge number of people who agree with the intellectual precept that freemovement is welfare-improving.Some scholars are more cautious and hold that, when you move people,ideas, and capital to a new location, such as Redmond, Washington or SiliconValley, you are moving a nodule of growth. This is the so-called "endoge-nous growth theory." With migration, you are losing out on the dynamics ofgrowth and further trade opportunities. It is not, therefore, just a question ofwhere people are, it is how you put them together with other inputs.43 See American Competitveness and Workforce Improvement Act of 1998, Pub L. No.105-277, 112 Stat. 2861-641 (codified as amended at 8 U.S.C. § 1101).4 See Wallace, supra note 1, at 17.[Vol. 25:67 1999]2Canada-United States Law Journal, Vol. 25 [1999], Iss. , Art. 11https://scholarlycommons.law.case.edu/cuslj/vol25/iss/11DeVoretz-PEOPLE ASPECTS OF TECHNOLOGICAL CHANGE (Can.)The second argument goes a long way in explaining if Canadians andAmericans are so alike, why is there such a huge income gap? Canada islosing the better people and capital to the United States. When you put thismixture together, continued productivity differences appear.The third public policy issue concerns human capital; who is paying forthis? In a world in which students pay for their entire degree, clearly no tax-payer would care whether people moved or not. If you go to Queen's Univer-sity, and you get your MBA and you leave for Buffalo, Canadian taxpayerswould not care because a Queen's University MBA is fully paid for by stu-dents. But in reality we have a problem. There is a divergence in the twocountries' public school systems, and eighty to eighty-three percent of post-baccalaureate degrees are publicly paid for by Canadian taxpayers. So, thereis a concern about the size of the transfer of human capital over and abovethe first two arguments. We have to address that issue. If you want people tomove, because it is welfare-improving, who will compensate the Canadiantaxpayer?The fourth issue stems from the fact that traditionally, we compensate theCanadian taxpayer when we lose a Canadian graduate to the United States bygetting somebody from Beijing or Shanghai. In fact, Canada is even moreaggressive in getting immigrants than the United States. This leads to an eq-uity issue. The irony is if Canada actually replaces a Canadian graduate witha graduate from Bangalore, it turns out that an Indian taxpayer is subsidizingBill Gates. This is a real public policy issue if the free movement of humancapital is ultimately financed by a poor third party?In the final analysis, the debate in Canada is over numbers and questionsabound. Did NAFTA or the FTA matter in this personnel flow? Was RossPerot partially right?Clearly he was. The movement all began after 1989 with the FTA. Pro-fessionals representing nineteen high-tech, Information Technology (IT)groups moved to the United States pushing the numbers up from almost14,000 to almost 19,000.5 These are only the permanent movers, and theseare very conservative numbers. The United States is receiving in large num-bers the cr~me de la cr~me. In a period of eight years, the United States has6received about 40,000 Canadian professionals and managers.5 See Don DeVoretz & Samuel A. Laryea, Canadian Human Capital Transfers: The USAand Beyond 17 (June 7, 1998) (unpublished manuscript on file with Canada-United StatesLaw Journal) (compiling U.S. Immigration and Naturalization Service data on Canadian emi-gration from 1982-96).6 See Ian Jack, The Brain Drain to the U.S. "is Real and Costly," NAT'L POST, Apr. 17,1997, at E8.3DeVoretz: People Aspects of Technological Change: Immigration Issues, LaborPublished by Case Western Reserve University School of Law Scholarly Commons, 1999CANADA-UNITED STATES LAW JOURNALTo put these numbers into perspective, professionals include physicians,nurses, electrical engineers, and architects. For example, forty-four percent ofthe 1994-95 nursing class of all of Canada has left for the United States.7That rivals the Philippines. Eighteen percent of the 1989-90 cohort of physi-cians have already left for the United States. 8 Is Canada getting people upfrom the United States? Those gross numbers could be discounted by aboutthirty percent. We are not getting our fair number back. Seventy percent ofthe flow is post-baccalaureate, and seven out of ten are on a one-way flow tothe United States. And that is my point, we are not sending you hockey play-ers.The third point is the major one - there is a structural break in this flowand it happened after the FTA. This break comes about for two reasons. The1990 Immigration Act changes during the same period as FTA, but I think itis part and parcel of the North American integration of the economy.9Canada sees itself as looking at a door that is opening up wider andwider. Canadians are being pushed out by various policies, including educa-tional and tax policies. It is not just the FTA and NAFI'A that has acceleratedthe movement out, it is also Canadian domestic policies.If we look at the two periods of pre- and post-FTA, we find out that thetotal social cost of all the resources embodied - student tuition, books, andgovernment subsidy - in the people that left between 1982 and 1997 is aboutnine billion Canadian dollars, of which the most recent portion is about two-thirds or six billion dollars. 10The subsidy component is 5.3 billion dollars, or approximately half thevalue of the education that immigrants received. Why is this transfer an issuein Canada? The amount of money embodied in this flow is equivalent ofhaving two and a half Canadian universities operating exclusively to providethe United States with highly trained people. We only have about twentyuniversities of substance in Canada, and for two and a half of these to berunning each year to provide the United States with graduates does makeCanadians very anxious. The glib political response in Canada is not to worryabout it. They say exchange is good. Canada's chief statistician providesnumbers showing that the rest of the world is compensating Canada for theCanadian graduates leaving for the United States. But, it is very difficult for aShanghai graduate in engineering to translate their skills to Canada when7 See Anne Dawson, Brain Drain Loss in the Billions, Study Claims, LONDON FREEPREsS, Oct. 15, 1998, at A10.8 See Jack, supra note 6, at E8.9 See Immigration Act, R.S.C.1990, c. 52, s. 1.10 See Dawson, supra note 7, at A10.[Vol. 25:67 1999]4Canada-United States Law Journal, Vol. 25 [1999], Iss. , Art. 11https://scholarlycommons.law.case.edu/cuslj/vol25/iss/11DeVoretz-PEOPLEASPECTS OF TECHNOLOGICAL CHANGE (Can.)they do not speak English. It is extremely hard, even in a Cantonese-speakingcity like Vancouver. The language of IT is still English.The numbers suggest that the amount of permanent movers is relativelysmall, but they are growing. Back in the 1960s, many more Canadians werecoming to the United States. The value of these workers is much higher to-day. The response to this has been either a wringing of hands, and a feelingthat Canada should do something about it, but we do not know exactly whatto do; or not to worry at all.As a Canadian, I see it as a churning problem. Canadians send people tothe United States who are highly trained and in exchange Canada receivesIndian programmers from Bangalore. But I see high churning costs with allthis movement. Would it not be better if the folks from Bangalore just wentdirectly to Redmond, Washington instead of making the intermediate stop inCanada while Canada loses the entire graduating class from Waterloo? Thisis a serious problem. I will try to estimate the costs of this moving around.Canada received 50,578 of these high-tech people, and lost in that same pe-riod 48,670 people. So the net flow around the world from the Canadianpoint of view is that Canada gained about 1,900 people in these high-techoccupations. If you just did head counting, you would say, that is not so bad,and we almost won. But it is a very expensive process. The net transfer, thechurning cost of these people is very expensive. The first cost is the cost ofrecruiting, the second cost is the cost of failure. What happens if the graduatewho left Canada, who speaks French and English, immediately rises to thetop in a firm in the United States and is replaced in Canada by someone withan equivalent degree on paper, but who does not speak French or English andneeds two years of remedial training? Well, for Canada, it generates a lot ofcosts. It cost us a billion dollars during the last ten years alone. So, in fact,we may be losing out substantially.How did all this get started? How do we find ourselves in the position ofbeing at the wrong end of the vacuum cleaner? It is because we run a veryegalitarian educational system, which, at this point, leads to the highest edu-cated labor force in the OECD. It is a good thing that had unintended conse-quences. In Canada, fifty-five percent of the baccalaureate degrees areawarded to women. Now, over half of the graduating class in law and medi-cal schools at the University of British Columbia are females. This growththat was described to you earlier in Canada's education stock, which gave ussome confidence and pride, really is the increased participation of females inour educational system. One of the consequences is that many of these fe-males who gain this training are leaving.Canada faces a dilemma. In order to catch up to the United States, Can-ada poured resources into the educational system. But, we have an open bor-5DeVoretz: People Aspects of Technological Change: Immigration Issues, LaborPublished by Case Western Reserve University School of Law Scholarly Commons, 1999CANADA-UNITED STATES LAW JOURNALder, and the rate of return in economist's language for educated manpower isso much higher to come to the United States than it is in Canada. So the edu-cated manpower left.There are very few things we can do to the public policy framework. Wecan stop educating our kids, which is tantamount to shooting ourselves in thefoot. Not only will we never catch up to you, but we will fall behind. We canmove to a full cost recovery system, where our students would pay the totalcost of education, which is politically unacceptable. The third thing we cando is to tolerate the continuing outflow of a large number of students, whichis probably politically unacceptable, too. So, what can Canada do? Get out ofNAFTA? Some people say that is not a bad idea.I have a very simple idea - let the market work. Produce what is called acontingent loan scheme. It works very simply. If a student gets his degreefrom Simon Fraser University in electrical engineering and receives a sub-sidy of about $100,000, then he would not have to repay the subsidy if hefinds a job with a Canadian company since he will pay taxes.But, if he leaves, he owes us money and we would like it back. Thiswould do two things; one, it would stop the moral hazard problem, the strate-gic planning by students to get an electrical engineering degree at SimonFraser, expecting to be recruited in Redmond, Washington. If the studentsrealized in advance that if they do get that job, they will owe $100,000, theymight think twice about doing that. The second thing is that the taxpayer whois losing billions of dollars would recapture some of that money. I knowthere is the problem of enforcement, but a legal document can be constructedwhich is enforceable. So the contingent loan scheme would help a lot.The second part of the two-prong attack would be to recognize that thetax system itself is completely out of whack. When you are paying sixty-fourcents on a marginal dollar in British Columbia at an income level of only$36,000 U.S., you do not have to go very far to explain why older people areleaving. This has two parts. The younger people are behaving strategically,and you must recapture some of their loans. The middle-level people arelooking at the tax system and saying Buffalo does not look so bad.The accelerated brain drain to the United States will be a thorn inNAFTA and trade relations over the next five years. I hope this has provokedyou enough to consider drawing up legal documents for a contingent loanscheme.[Vol. 25:67 1999]6Canada-United States Law Journal, Vol. 25 [1999], Iss. , Art. 11https://scholarlycommons.law.case.edu/cuslj/vol25/iss/11

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People Aspects of Technological Change: Immigration Issues, Labor Mobility, the Brain Drain, and R&D--A Canadian Perspective

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