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The federal government’s decision to reduce the number of low-wage temporary foreign workers won’t resolve all of Canada’s economic troubles, but economists say it is a step in the right direction.

Ottawa last week said companies won’t be able to hire foreign workers through the low-wage stream of the Temporary Foreign Workers Program (TFWP) in regions where the unemployment rate is six per cent or higher.

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This is likely to impact jobs such as cooks, cleaners and hotel attendants and affect the retail, restaurant and hospitality sectors the most. Overall, the steps announced could lead to 65,000 fewer people participating in the TFWP.

“The increase in the number of temporary residents in the past two years has been unsustainable in terms of housing, infrastructure, health,” Benjamin Tal, deputy chief economist at CIBC World Markets Inc., said. “The short-term impact might be difficult on small businesses, especially, but the mid-to-long-term impact of this policy is actually positive.”

As businesses lower their reliance on “cheap labour,” they will either have to raise wages to attract “locals” or replace labour with capital, he said. “This won’t be easy for businesses, but it will increase productivity and be beneficial for the economy.”

Canada relies on immigrants to boost its economy and replace its aging population in the workforce. But record population growth in the past two years, primarily due to a rise in temporary residents, in the midst of a housing crunch has led economists and think tanks to urge Ottawa to provide more clarity on how it plans to accommodate hundreds of thousands of newcomers every year.

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The announcement last week was the latest step in tackling the situation. Canada imposed a two-year cap on new international students last year and restricted eligibility for work permits for postgraduates and their spouses. In March, the federal government said it would take steps to limit the number of temporary residents for the first time.

Still, the latest move isn’t expected to move the needle to a great degree and “solve all our problems,” Tal said, since the TFWP brings in just a fraction of the overall number of newcomers.

There are currently about 2.8 million non-permanent residents in the country, according to Statistics Canada, which includes foreign workers, students and asylum seekers. Only about nine per cent, or about 250,000 people, entered through the TFWP.

In contrast, about 42 per cent of the total number of non-permanent residents are students and 44 per cent include postgraduate work permit holders, spouses of students, students of exchange programs and others. The remaining five per cent are asylum seekers.

Aside from temporary residents, Canada also has separate programs that admit about 500,000 permanent residents on an annual basis. Many temporary residents who are already here look to become permanent residents through those programs.

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Trudeau last week said the government is having “ongoing conversations” about reducing Canada’s overall immigration numbers and “we are making sure the entire package makes as much sense as possible for the needs of Canadians and the economy.” He said reducing the number of low-paid temporary workers is the “first step.”

The federal government is expected to announce its next yearly immigration target in November and it is expected to reveal the number of temporary residents that Canada expects to bring in for the first time.

An overall decline in immigration numbers could lower headline gross domestic product (GDP), which measures the value of goods and services produced during a specific time frame, as growth in recent years has been driven by more workers, Bank of Nova Scotia economist Rebekah Young said.

On the other hand, the move could boost GDP per capita, which has been on the decline in recent months.

“We are also likely to see the unemployment rate numbers fall,” she said. “It has been ticking up mostly as new arrivals have outpaced new job creation. The brunt of unemployment has been felt by recently arrived immigrants, along with younger Canadians, where there may have been some displacement by temporary workers.”

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Overall, however, Young said there is need for an “abundance of caution” since there are still a lot of unknown factors.

“We don’t have a really solid handle on the demand side of population growth, as it has been highly heterogenous across categories of entry,” she said. “When the Bank of Canada is thinking about supply-demand imbalance, what the potential slack is in the economy and whether they should cut two or three more times this year, they need to consider not only that supply-demand uncertainty, but also policy and timing uncertainty. Sectors of the economy will also be affected unequally.”

What makes the situation more complicated is that there’s also growing pent-up savings in general among Canadians, which could further make the Bank of Canada’s job tricky as it would eventually be unwound.

“While a slowing economy has put more symmetry around risks to the inflation path ahead, we’re still not out of the woods,” Young said. “But on the margin, this is a step in the right direction.”

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