The pool of low-skilled Canadian workers is shrinking fast as more students go on to higher education, a development the Parliamentary Budget Officer says helps explain the growth in the Temporary Foreign Worker Program.

A new report released Thursday by Jean-Denis Fréchette says more educated Canadians are not likely to apply for the jobs going wanting in fields like child care, agricultural work, retail or restaurant help.

Taking such jobs would fit the definition of "underemployment," leading to high turnover rates.

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The shift in Canada's low-skill labour force has been fairly dramatic. In 2006, 14.6 per cent of the labour force had less than a completed high-school education, meeting the definition of being low-skilled. By 2013, that proportion had dropped to just 10.7 per cent.

"The main consequence of this shrinking of the lower-skilled labour force is that it is potentially harder for employers, at current wages, to find 'suitable' candidates, namely candidates whose skill level matches that of the position for which they apply," states the report.

(What is the temporary foreign worker program? Read The Globe's easy explanation)

The rapid growth of the temporary foreign worker program over the past decade or so has been highly controversial, in part because of incidents of alleged abuse of foreign workers by employers. There have also been widespread concerns that the program distorts the labour force.

The federal government acknowledged these concerns in 2014 by announcing sweeping reforms to the program. The reforms essentially made the program off limits to employers looking to fill low-skilled positions in areas where unemployment is above 6 per cent, though exceptions were made for agricultural workers and live-in caregivers.

Affected employer groups have argued that the 6 per cent rule is unfair and that some of the reforms should be relaxed.

Thursday's PBO report provides some support for the argument of employers that filling these positions is not as simple as offering higher wages. The PBO report says offering higher wages is the most obvious response, but employers can only go so far.

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"There is a limit to how quickly some firms can raise wages or other benefits to attract workers," the report states. "Indeed, a compensation increase has to translate into either a higher final price or falling profits. An employer thus has to consider to what extent a rapid price increase will translate into a loss of business either to competitors or from consumers who switch to substitute products. Increasing wages and output prices quickly might be damaging for the firm and its existing jobs."

The report notes that the PBO was unable to provide a detailed regional analysis of the program because of a lack of regional data. The federal government recently provided funding to Statistics Canada to begin collecting more detailed labour information starting this year.

The report concludes that based on the partial information available up to 2012, "there is an appearance of tightness" in the labour market for lower-skilled positions in Alberta and in smaller communities in British Columbia and Ontario.

"However, one could argue that access to foreign workers unduly delays, on the part of the firms, the required productivity-enhancing investments that would allow them to offer higher compensation to attract domestic workers while mitigating price increases," the report states, advising policy makers to ensure the program is designed in a way that firms find it more profitable to rely on domestic labour rather than temporary foreign workers.