The Growth Project

A highly educated workforce is often seen as Canada’s strength, but there are many challenges that prevent us from fully utilizing its potential.

We have more people with a post-secondary education as a share of the population than any other country in the G7. Yet, our productivity growth ranks well below our peers.

Higher education is often sought after to achieve a higher standard of living and is generally correlated with higher incomes. But a university education can only get you so far these days.

A quarter of workers earning minimum wage in Canada had a post-secondary diploma or higher in 1998. It rose to more than one in three (36%) by 2024, according to Statistics Canada.

Universities and colleges are minting graduates faster than the labour market can create jobs for them. There were twice as many unemployed workers with university degrees compared to vacant positions in 2022. Add a surge of highly educated immigrants, people working longer, and more lower-skilled job openings to the mix, and we have an oversupply of post-secondary educated workers, who are overqualified and underutilized.

More than two-thirds (67%) of working-age Canadians have a post-secondary education—substantially higher than the 47% average for Organisation for Economic Co-operation and Development (OECD) countries. This wouldn’t be a problem if the human capital of a highly educated workforce was generating the same returns here as elsewhere. However, decades of underperforming productivity growth in Canada despite a highly educated workforce has led to slower wage and economic growth.

This can be seen in the financial benefits of obtaining higher education in Canada, which are much lower than in other OECD countries including the United States. The difference in net lifetime earnings (excluding taxes and social contributions) for high school graduates and those with post-secondary education was 46% smaller in Canada than in the U.S. in 2018, according to the OECD.

Post-secondary graduates also receive a much higher wage premium for their education in the U.S. The difference is most pronounced in the crucial information services sector including technology, where Canadians earn 17.5% less than their American counterparts. This has led to brain drain in Canada.

There are also problems with the sectors where more highly educated people are employed—which aren’t necessarily the most productive in the economy. For example, professional, scientific and technical services (PST), and finance and insurance are Canada’s two most highly educated sectors, but productivity growth hasn’t taken off here. Finance and insurance saw output per hour worked grow at an average of 1.2% a year since 2017, and PST has virtually remained stagnant, seeing 0.1% annual productivity growth over the same time.

If education is Canada’s “superpower,” why aren’t we reaping the rewards?

We analyze four key factors preventing Canada from fully utilizing a highly skilled workforce to boost productivity and economic growth.

• 1.
  Education outcomes don’t meet labour market needs because the education system’s market responsiveness is creating inefficiencies.
• 2.
  A lack of recognition of immigrants’ foreign education, credentials and skills is leading to underutilization and overqualification in the workforce.
• 3.
  There’s a disconnect between schools investing in research and development and businesses adopting and implementing new technology that would create more higher-skilled jobs.

• 4.
  Highly educated graduates aren’t necessarily employed in the most productive sectors, which is pushing overall productivity lower.

We also discuss a series of measures that should be considered to maximize the return on a highly educated population and ensure Canadians continue to benefit from pursuing higher education.

Underutilization and overqualification in the workforce need to be addressed by creating work-integrated learning opportunities for students and incentivizing businesses to create upskilling programs and jobs.

Maximizing graduates’ productive potential will lead to higher wages, a more competitive workforce and eventually propel Canadian industries to challenge global counterparts.

1. Canada’s educational outcomes don’t address the labour market’s needs

Canada is producing graduates in record numbers, but they don’t always have the skills that are in demand in the labour market.

There are more graduates—in the case of millennials and Gen Zs—who are staying in school for longer. This is resulting in graduate degrees becoming more prevalent. Nearly 15% of Canada’s working-age population holds a graduate degree—just slightly less than the share that held a bachelor’s degree in 1997 (16%). However, the pace of job creation for positions requiring a university degree, particularly for advanced degrees, has not kept pace with the rising number of new graduates.

There are consistently more job vacancies for positions requiring only a high school diploma than there are for positions requiring a bachelor’s degree or higher. Skilled trades workers are perpetually in In 2022, there were nearly 1.4 vacancies requiring a high school education (or less) for each unemployed worker without a post-secondary education. Conversely, there were twice as many unemployed workers with university degrees compared to the vacant positions available.

The result is that a rising number of highly educated Canadians end up working in jobs that do not make use of their degree. Statistics Canada estimated that the overqualification rate (share of Canadians with a degree in a position requiring high school education or less) for those born in Canada aged 25 to 64 was 11% in 2016. The OECD ranked Canada as having the second-highest overqualification rate out of 37 countries. Immigrants are also more likely to be overqualified, especially those who studied outside of Canada. Their overqualification rate in jobs was nearly a fifth at 19%.

This also indicates that the wage premium for receiving higher education is getting smaller. The wage premium, or the difference in average wages, between those with a bachelor’s degree and those without post-secondary education, is still widening. But, the wage premium between those with a bachelor’s degree and those with a master’s degree has become narrower in the aftermath of the pandemic. It averaged 23% from 1997 to 2019 and fell to 18% from 2022 to 2024. In other words, the earnings benefit of obtaining a graduate degree is shrinking as the job market becomes saturated with more highly educated job seekers.

Many countries with higher financial benefits from higher education also report significantly higher levels of inequality such as the U.S.  Therefore, we compared private costs and benefits of post-secondary education among OECD countries with higher levels of productivity and lower levels of inequality than Canada. Financial returns in Canada were above average, but they were still 4% below Luxembourg and nearly 40% below Ireland. Gross earnings benefits were often higher in other countries, but higher corresponding income taxes and social contributions offset much of the difference.

2. Canada struggles with the recognition of immigrant skills

Canada has sought young talent from abroad to address its ageing labour force as baby boomers retire, the average family size gets smaller and birth rates decline. Immigrants, on average, are more highly educated than their Canadian peers, but governments and industries often fail to recognize foreign-earned credentials, requiring newcomers to re-certify to work in their field, or work in completely unrelated positions in the interim.

As a result, more than a quarter (26%) of immigrants aged 25 to 64 with a degree from outside of Canada are overqualified for their jobs, based on data from the 2021 census. Productivity will continue to be hampered as ageing workers are replaced with younger workers, who are more likely to be educated abroad, and/or be underutilized.

The underutilization rate has improved significantly since the late 90s among those without a university degree, but there has been little change among those with a university degree. As the share of the population educated abroad increases, the R8 unemployment rate (which includes unemployed workers, discouraged job seekers, those awaiting recall and those working part-time involuntarily) has worsened for university graduates—rising from just below 5% in the late 90s to nearly 7% today. Underutilization and overqualification among university graduates also pushes out workers with lower education levels from job opportunities that they would have otherwise had access to.

3. Schools are investing in research and development but businesses are not adopting it

High levels of education don’t necessarily translate to higher levels of productivity and wages without complementary investment by businesses in technologies that fully utilize those skills. Canadian investment in intellectual property or productivity-enhancing capital investment has long been lagging.

Canadians have made significant investments in higher education and skills development in schools. However, businesses have been slower to invest in and adopt new technologies that use them. Canadian schools rank relatively well in R&D research—typically in 6^th place since 2016, according to the OECD. But, business R&D ranks much worse from 21^st place at best to 29^th place at worst, placing Canada below the OECD average for R&D spending as a share of gross domestic product.

In the early 80s, both Canada and the U.S. had similar per capita levels of capital investment and investment in intellectual property products (IPP). But by the early 90s, U.S. capital investment and IPP both took off at a much faster clip. Today, the U.S. invests more than twice as much on a per person basis than Canada. Per capita investment in capital and IPP peaked in Canada in 2014 and fell 18% as of 2022 after adjusting for inflation. Investment in non-residential structures and machinery and equipment slid during the 2016 oil price crash and never recovered. Looking at R&D specifically, Canadian business investment represents only 0.6% of GDP compared to 2.7% for the U.S.

The U.S. holds several other advantages over Canada. Those include the world’s largest venture capital market, a relatively less stringent regulatory and approval backdrop for new investments, and more federal funding for innovation, including US$400 billion towards clean energy in the 2022 Inflation Reduction Act. Canada continues to face challenges of internal trade barriers and red tape, unique to its decentralized government, that make costs and timelines for firms more unpredictable.

All this is leading to moreIn Canada, just over half of recent bachelor’s degree graduates are working in a field that is closely related to their studies. Graduates who held bachelor’s degrees in education, math, computer science, architecture, engineering, or business management and public administration were more likely to be working in a field closely related to their studies. But, humanities, physical life sciences, tech, visual and performing arts, and social and behavioural science graduates were significantly more likely to work in a field unrelated to their studies.

4. Highly educated graduates aren’t necessarily employed in the most productive sectors

Canadian sectors with the most highly educated workers aren’t generally sectors where productivity is taking off.

For example, the retail sector has seen output per hour worked grow 13% over seven years. Yet, it remains an industry with low levels of productivity overall. It employs a lower share of university graduates compared to other sectors. More productive sectors have also struggled to generate significantly faster productivity growth including professional, scientific, and technical services (PST), which rely heavily on the “quality” of workers and should be seeing a more significant boost from a highly educated workforce.

PST and finance and insurance are Canada’s two most highly educated sectors, but they have not seen rapid productivity growth. Finance and insurance saw output per hour worked grow at an average pace of 1.2% a year since 2017, and PST has virtually remained stagnant, seeing 0.1% annual productivity growth over the same time.

Not only is Canada failing to fully leverage workers’ educational accreditations and skills, but over half of total output is generated in industries that do not require a post-secondary diploma or degree.

More than a fifth (22%) of Canada’s workforce is employed in the public sector, which is the highest since the early 1990s. The public sector has one of the highest unit labour costs—meaning it is relatively more expensive to produce a unit of output—which makes it one of Canada’s least productive sectors.

Specifically, the size of Canada’s public administration sector has ballooned in recent years—increasing headcount by 224,000 since February 2020. That’s equivalent to a 22% increase in employment compared to 6.8% across all sectors. The public administration sector accounted for a disproportionate share of pandemic hiring, which actually nudged Canada’s overall productivity lower instead of higher. About 85% of workers in public administration have a post-secondary education as of 2024, according to StatCan.

What can be done to maximize the return on a highly educated labour force:

• 
  Improve the broader regulatory backdrop to remove barriers to business investment.

  We’ve argued before that Canada’s fragmented regulatory project and approval backdrop across multiple levels of government (municipal, provincial, and federal) adds a unique complication to business investment decisions. Reducing the red tape, inefficiency and hidden costs, while keeping the standards more broadly could also help incentivize more business investment in the kinds of new technologies that would increase workforce demand for a highly skilled population.

• 
  Create work-integrated learning opportunities for all students.

  Giving undergraduate students, regardless of their field of study, access to work-integrated learning opportunities including internships and co-op placements will help them learn on-the-job skills that cannot be taught in classrooms. Students can leverage prior work experience and their applicable skills when applying for jobs after graduation to reduce underutilization.

• 
  Improve the utilization of immigrants’ skills.

  Many immigrants are arriving to Canada with prior work experience and credentials. Often, these credentials are not recognized by Canadian employers and regulatory bodies. Newcomers usually have to re-certify and pass additional exams in order to work in their fields. An expedited certification process could help ease the underutilization of immigrant skills. Immigrants with previous work experience being able to work in their fields under supervision while studying for qualifying exams could help fill job vacancies in priority industries (such as nursing) and also help to reduce underutilization.

• 

  Incentivize corporate-funded upskilling programs.

  Corporations could be motivated to contribute to lifelong learning funds for employees to finance reskilling or upskilling while working through government tax incentives. For example, enrolling tenured employees in courses to learn how to use the latest software to promote efficiency on the job would be beneficial. Creating higher-skilled jobs could also be incentivized through tax breaks.

• 
  Improve access to capital for newcomers.
  There are significant gaps in access to capital for business owners as Canada has welcomed talent from abroad. Newcomers and visible minorities have a higher propensity for innovation. About 36% of small and mid-sized businesses with visible minority ownership introduced at least one innovation between 2018 to 2020 compared to less than 30% of all SMEs. But, more than 15% of visible-minority-owned businesses struggle to access funding—double the rate for overall businesses, according to StatCan.
  The public sector could provide grants for student entrepreneurs and provide tax incentives for enterprises adopting new technologies. One priority should be establishing programs that target funding for specific groups of the population, who are more vulnerable to funding gaps including women, visible minorities, and newcomers.

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