Why we need to pay more attention to GDP per capita
While GDP growth provides a yardstick of the size of economies, GDP per capita provides a better measure of individual prosperity.
Last week, new data showed that net migration into the UK in 2023 reached a record high of 866,000. Many migrants arrive to work, and their earnings help boost GDP growth. High levels of migration ensured that the UK economy just about kept growing in 2023 despite falling into recession in the second half of the year. UK GDP rose by 0.3% in 2023. Without migration, GDP would have contracted. GDP per UK inhabitant, or capita, fell by 0.7% in 2023.
This illustrates an important distinction. Net migration boosts headline GDP growth. But it can slow growth in GDP per capita - total GDP divided by population. This is because some migrants do not work, perhaps because they are students, dependents or cannot immediately find a job. And some of the new entrants to the jobs market earn less than the prevailing national average wage.
Growth in most major western economies has been bolstered by relatively high levels of net migration in recent years. Australia has had one of the fastest rates of growth in migration. Between 2010 and 2023, its population expanded by 21%, mainly because of migration. That helped the Australian economy to grow by a total of 38% over this period, faster than any other major economy, including the US. But on a per capita basis, Australian GDP grew by a far less impressive 14%, about the same as Germany or Japan.
Growth in per capita GDP often reveals a different picture from the more commonly cited GDP growth. In Australia, Canada and the UK, rapid growth in net migration means that GDP growth ran far ahead of per capita GDP between 2010 and 2023. The gap in Canada is especially striking. Canadian GDP rose 27% while per capita GDP increased at less than one third the rate, up by 8%. UK growth of 21% between 2010 and 2023 delivered an increase of just 11% in per capita GDP.
Commenting on the Canadian economy, the IMF recently said, “while Canada grew faster than other G7 economies except the United States, much of this relative strength was explained by strong immigration…income per capita shrank by 1.5 percent in 2023, more than in peers, reflecting the mechanical effect of immigration but also echoing Canada’s longstanding problems with productivity growth”.
As the British economist Professor Alan Manning and former chair of the UK government’s Migration Advisory Panel has observed, “More people in a country leads to a bigger economy, but not necessarily an improved standard of living” (Centrepiece, Spring 2023, Growth and Immigration: Unpicking the confusion). Although GDP growth rules the roost in policymaking, the media and discussion, GDP per capita provides a better measure of peoples’ own experience of growth.
In 2008, a report by the Economic Affairs Committee of the House of Lords argued that the UK government should place more weight on GDP per capita saying it, “is a better measure than GDP because it takes account of the fact that immigration increases not only GDP but also population…Rather than referring to total GDP when discussing the economic impacts of immigration, the government should focus on per capita income (as a measure of the standard of living) of the resident population”.
Despite this advice, the UK government, like most others, and the media, continue to focus on GDP growth.
As the data for Australia and Canada show, in high migration economies this can lead to a distorted and overly flattering view of how growth is translating into standards of living. For countries with negligible or negative net migration, the effect works in the opposite direction.
Take Japan. Alone among major western industrialised economies, Japan has maintained restrictive immigration policies, doing so in the face of a low birth rate. As a result, Japan’s population has shrunk by 3% since 2010.
Between 2010 and 2023, the Japanese economy grew by just 9%, less than half the UK’s growth rate and one third that of Australia or Canada. On the single most important and widely followed measure of economic progress Japan did very badly. Japan is the West’s growth laggard.
But look at the growth in per capita GDP and the story is transformed. Japanese GDP per head rose 13% between 2010 and 2023, faster than the UK and Canada, roughly in line with Australia and better than France, Spain or Italy. On this measure of economic progress, Japan is no weakling.
The point is that standards of living in Japan, already a rich country, have done well by western standards even if GDP growth has been weak. A shrinking population contributes to low Japanese GDP growth, just as rapid migration boosts GDP growth in the US, UK and elsewhere. But to understand how people in these economies are doing, we need to look at GDP per capita.
The Financial Times recently provided another example of the pitfalls of relying on GDP growth rates. The Spanish economy has outperformed in recent years. The IMF estimates that Spain will grow by 2.9% this year, the fastest growth rate of any advanced country, including the US. But Spain is also seeing rapid migration, which increased by 5.0% in the year to the third quarter. As a result, Spanish per capita GDP is rising far more slowly than overall GDP – up by a forecast 1.7% this year, a decent performance, but putting it in eighth place among advanced economies, well below US per capita GDP growth of 2.3%.
GDP growth helps boost the public finances and provides a yardstick of the size of economies. But GDP per capita provides a better measure of individual prosperity. In a world where ageing and migration are re-shaping economies, we need to pay more attention to GDP per capita.