Analytical Studies Branch Research Paper Series

11F0019MIE

Volume 2007
Number 294

Chronic Low Income and Low-income Dynamics Among Recent Immigrants

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Chronic Low Income and Low-income Dynamics Among Recent Immigrants

by Garnett Picot, Feng Hou and Simon Coulombe

Executive summary

Host countries, such as Canada, look to the skills and initiative of immigrants to promote economic growth. Immigrants, in turn, look to the host country for opportunities to gainfully employ their skills and abilities. These considerations are particularly important when immigrants are highly educated. Host countries are increasingly seeking highly educated immigrants to drive economic growth in the "knowledge-based" economy. Not surprisingly, immigrants look to use their higher education levels to achieve high economic standards of living.

However, if immigrants are unable to convert their training to productive use, the expectations of both the host country and the arriving immigrants remain unmet. Immigrant contributions to the host country, which are central to the economic justification of relatively open immigration policies, may not be fully realized. In light of these considerations, there is considerable concern regarding the deteriorating economic outcomes among immigrants entering during the 1980s and 1990s.

This paper addresses three issues related to the economic welfare of immigrants. First, in the face of rapidly rising immigrant educational attainment and an increasing share of immigrants in the skilled economic class, did family economic welfare outcomes (as measured by the low-income rate) among entering immigrants improve after 2000, when macro-economic conditions were much more favorable than in the early 1990s? Second, did the probability of entering and exiting low income change significantly between 1993 and 2003 as a result of the rising educational attainment and the shift to "skilled economic class" of entering immigrants? Third, how common was chronic low income among entering immigrant cohorts? Did this change over the 1990s, and if so, how? And among which types of immigrants was chronic low income concentrated?

Our study is unique in that it addresses the economic welfare of the immigrant family, not just the individual. Low income is a simple measure that incorporates the effect of changes in income from all sources, not just earnings, and concentrates on changes in income among families at the bottom of the income distribution, those of most concern from a welfare standpoint. In this study, low income is defined as family income below 50% of median income of the total population, adjusted for family size. Since low income is a family concept, it provides a better welfare perspective on the immigrant families' economic resource position than individual earnings.

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Trends in immigrant low-income rates between 2000 and 2004

Within the context of a "knowledge-based" economy, immigrant selection procedures were altered in 1993 to encourage the immigration of more highly educated immigrants. As part of this impetus, the number entering in the "family" immigrant class was reduced, replaced by economic immigrants in the "skilled" class. At the same time, the overall level of immigration remained relatively high by historical standards over the 1990s and early 2000s. These changes were extremely successful in altering the characteristics of landed immigrants. Over the period covered by this study, 1992 to 2004, the educational attainment of entering immigrants rose dramatically (among those aged 15 years or older, 17% had a degree in the 1992 entering cohort, 45% in the 2004 cohort), and many more were in the "skilled" economic class, with far fewer in the "family" class. The share in the economic class (including principal applicants, spouses, and dependants) rose from 29% in the 1992 entering cohort to 56% in the 2003 cohort.

The first section of the paper examines whether these changes in the supply characteristics coincided with an improvement in the outcomes of immigrants beyond 2000, or reduced the likelihood of chronic low income among the entering cohorts of the late 1990s. We focus on the post-2000 period simply because until now, the latest data available on low-income rates among entering immigrants were from the 2001 Census (with income data for 2000), which is now very dated.

We find little evidence of improvement, and if anything, continued deterioration in outcomes. For immigrants entering after 2000 (our latest data are from 2004), low-income rates during their early years in Canada were higher than for those entering around or before 2000. The relative low-income rates of entering immigrants (relative to the Canadian born), perhaps a better measure of immigrant outcomes since the measure controls for economic cycles and policy changes that affect the entire Canadian population, were particularly high during the early 2000s, as compared to the 1990s. Similar trends were observed in individual earnings of entering immigrants. The deterioration was concentrated among immigrants who had entered very recently (in Canada one or two years). It was not evident among immigrants in Canada for longer periods and seemed to be related to early adjustment issues. The relative deterioration between 2000 and 2003 in family welfare outcomes of entering immigrants was widespread. But there was some recovery in 2004, and the lingering effects by that time were concentrated among older entering immigrants, those from Africa and East Asia, those in IT-related occupations (information technology), the highly educated, and those in the skilled class.

How much of the deterioration (or at least lack of improvement) during the early 2000s was related to the high-tech downturn of the period? We do not really know. We do know, however, that in the late 1990s and early 2000s, the number of entering immigrants who looked to that sector for employment was large and rising rapidly, and that the effect on the domestic labour supply was significant: by 2001, fully 22% of the Canadian IT labour force were immigrants who had arrived during the previous five years. But as most entering immigrants were not in IT- or engineering-related occupations, it is unlikely that the high tech downturn accounted for all of the outcomes observed above.

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The probability of entering and exiting a low-income spell

While the study of immigrant cross-sectional low-income rates is informative, it tells us nothing of the dynamics of low income. From a policy perspective, short-term low-income spells are of less concern than persistent, long-duration spells, as the negative effects of low income are likely to be much more pronounced when long-duration spells are experienced. Accordingly, the second part of the paper focuses on the entry and exit patterns associated with the first low-income spell after entry to Canada.

This is the first paper to address low-income dynamics among entering immigrants, primarily because of earlier data constraints. Only recently have the data on immigrants been linked to the longitudinal file based on taxation records for the population as a whole (the LAD¹ file maintained at Statistics Canada), thus providing a sufficiently large sample, and a longitudinal panel of sufficient length, to study low-income dynamics among entering immigrant cohorts.

We find that the probability of entry to the first low-income spell is very high during the first year in Canada (34% to 46%, depending upon the cohort), and falls dramatically to around 10% in the second year, lower in subsequent years. About 65% of entering immigrants enter low income at some time during the first ten years in Canada, and of these, two-thirds do so during the first year. If entering immigrants escape low income in the first full year in Canada, their chances of remaining out of low income are quite high. Regarding exit from the first spell, from 34% to 41% exit after one year, but this value was lowest for the latest three cohorts (2001 to 2003). From 31% to 36% remained in the first spell after three years, and this value was highest among the cohorts of the early 2000s.

The entry and exit data support the notion of continued deterioration after 2000. The likelihood of entering low income was significantly higher among the 2003 cohort than for the 2000 cohort, although aggregate economic conditions had changed little, and demographic differences among the cohorts were controlled for.

Since the selection system was altered to attract more highly educated immigrants, and the proportion in the skilled class rose significantly over the period, we assess the relationship between these variables, and entry and exit probabilities, in an attempt to determine the effect that these immigrant characteristics had on economic welfare outcomes. Findings can be summed up as follows:

• Initially, university-educated immigrants had a marginally lower likelihood of entering low income than their high school educated counterparts (0.8 times as likely, controlling for other demographic differences), but this relative advantage fell significantly over the period examined, so that by 2004, there was only a small difference (0.9 times as likely).
• There was little difference in the likelihood of exit from low income between the more and less highly educated immigrants, meaning that once in low income, average durations of low-income spells were roughly the same.
• With respect to immigrant class, immigrants in the skilled economic class were more likely to enter low income than their family class counterparts, possibly because the family class immigrants often entered an already economically established family. This relative disadvantage observed for the skilled class increased significantly over the 1992 to 2004 period, when the number of skilled class immigrants rose. However, this should not necessarily be interpreted as meaning that individuals in the economic class do worse in the labour market (i.e., in term of individual earnings) than their family class counterparts. The opposite has historically been the case.
• Immigrants in the skilled and family class were equally likely to exit low income once in it, meaning their average durations were about the same.

In summary, there is only a small difference in low-income entry and exit patterns between the more and less educated, and skilled class immigrants were more likely to enter low income than their family class counterparts. It seems that the rapid rise in highly educated and highly skilled entering immigrants over the 1990s had little effect on low-income outcomes (specifically, the likelihood of entering and exiting low income, and the chronic low-income rate). For example, for the 2003 entering cohort, the probability of entering low income during the first year in Canada was about 2.3 percentage points lower than it would have been had the educational and class characteristics of the entering immigrants not changed.² This effect is very small, given the dramatic improvement in these immigrant characteristics. The business cycle has a much bigger effect: the entry rate into low income dropped by about 11.5 percentage points (or 29%) between the peak and the trough of the cycle.

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Chronic low income

To assess the cumulative effect of possible multiple entry, exit and re-entry patterns, the third section of the paper focuses on "exposure" to low income over a five- or ten-year period following entry to Canada. First, a "five-year" rate was computed to allow the results to be as current as possible (including up to the 2000 cohort). The focus was on "chronic" low income, defined as being in low income at least four of the first five years in Canada. For the five-year rate among entering cohorts between 1992 and 2000 (the years for which chronic low income could be measured), about 19% of entering immigrants found themselves in this position. This was about 2.5 times higher than that observed among the Canadian-born population. A "ten-year" rate was only marginally lower. If one defines chronic low income as being in the state for at least seven of the first ten years in Canada, the rate was 16.5%. Thus, chronic low income appears to be quite persistent, even over a ten-year horizon.

Although immigrants in the 2000 entering cohort had much higher education levels and were more likely to be in the skilled class than the 1992 cohort, these changes had only a small positive effect on the chronic low-income rate. The rate for the 2000 cohort was about 2 percentage points (or 10%) lower than it would have been had these characteristics not changed. This is a relatively small improvement for such a massive change in education credentials and immigrant class distribution. Furthermore, when changes in other characteristics such as language, source region, age, or family status are accounted for, overall changes in the characteristics of immigrants have even a smaller effect on the chronic low-income rate between the 1992 and 2000 cohorts.

While changing characteristics had no net effect on the chronic rate, changing economic conditions did. With improvements in economic conditions over the business cycle, chronic low income fell somewhat between 1992 and 2000 cohorts. However, one might think of "structural" chronic low income (abstracting from business cycle effects) as rising over this period, since chronic low-income rates were seen to rise after controlling for the unemployment rate.

Policy analysts often need to know the distribution of chronic low income: which groups account for most chronic low income, and how (if at all) is this changing? We found that changes in entering immigrant characteristics altered the face of the immigrant chronically poor in that more had higher levels of education and were in the skilled economic class. For example, in the 2000 cohort, 52% of those in chronic low income were skilled economic immigrants, and 41% had university degrees.

1. The LAD (Longitudinal Administrative Database) is a 20% sample of all Canadian tax filers and their families. Families are formed to allow family income to be determined. Population coverage is very high in the LAD, as 95% to 97% of the entire adult population is covered (Finnie and Sweetman, 2003). The LAD file exists for the period 1982 to 2004, but reliable family income information for all parts of the income distribution exists only since 1992. Hence, we use the data on individuals over age 20 for the 1992 to 2004 period. Immigrants entering Canada since 1980 are identified on the LAD, and information on educational attainment, intended occupation, self-reported language and immigrant class is added from the landing records. For more information on this data file, contact the Small Area and Administrative Data Division at Statistics Canada (Telephone 613-951-9720, toll free 1-866-652-8443).
2. This is on a base entry rate of around 40%, resulting in only about a 6% drop in the rate due to changing education and immigrant class characteristics of entering cohorts.

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