The growth in service sector employment is due in part to the classification system used to assign employees to industries, which does not adjust for changes in industry supply chains. It is similar to the problem of deciding whether to allocate a firm to the automotive or clothing industry if it produces both products. The shift from manufacturing to services is in part a classification issue.
Outsourcing goods and services production abroad will decrease employment in Canada for that sector, but will increase employment when foreign firms buy (outsource/import) from Canadian firms as they do for Canadian wheat, energy minerals and comedians. Good paying jobs in services require education, training, and retraining for those already in the workforce. Many more goods and service activities are now tradeable as a result of lower transportation and communication costs, which alter the organization of industry supply chains.
Are there good and bad jobs?
Public discourse on the labour force points to the loss of manufacturing jobs in Canada. These are considered good or well paid jobs compared to service sector jobs such as flipping hamburgers. What do the data show? What are reasons for these changes? The discourse leads (in a later posting) to topics such as immigration and integration through multicultural policies. First some facts:
- Today Canada’s population is 34.5m of which 19m (55%) are in the labour force, 1.4m of which are unemployed, an unemployment rate of 7.4% .
- By sector 2% of the labour force are in agriculture, 13% in manufacturing and 76% in services. In 1941, 25% of the labour force was in agriculture and 17% in manufacturing.
- One of the biggest changes has been the fall in the share of employment in agriculture and the increase in services. At the same time agricultural output has increased as a result of vast increases in productivity associated with mechanization, fertilizers and improved seeds. (I don’t recall reading much about the loss of employment in agriculture, which in the past was much larger than the present day loss in manufacturing.)
“Manufacturing employment fell by 375,000 workers in 2010, bringing employment in the sector down to 1.7 million workers, 2.1% below its 2009 level.
Shrinking employment in manufacturing is a common trend in almost all OECD countries. From 1998 to 2008, the United States lost close to one-quarter (4.1 million) of its manufacturing jobs. Elsewhere in the OECD, from 1990 to 2003, manufacturing employment fell by 29% in the United Kingdom, 24% in Japan, 20% in Belgium and Sweden and 14% in France.
Canada’s manufacturing industry lost 278,000 jobs (1 in 6) from 2000 to 2007, which reduced the sector’s share of total employment from 16% to 12%. That share then declined to 10% in 2009 after the 2008–2009 recession, when manufacturers faced weaker demand and cuts to industrial capacity, resulting in the loss of 188,000 jobs.”
Good and bad jobs – a misunderstanding; and supply chains
1. Jobs classified as manufacturing have decreased in all high income countries. At the same time wage rates in some manufacturing have declined, due to a combination of decreased demand for labour in manufacturing in high income countries like Canada, the outsourcing of work to low wage countries, and the substitution of capital for labour such as the use of robots. The last means that there are now jobs in designing, operating and maintaining robots. Some may be classified as service sector jobs and others as manufacturing. Design and maintenance is a service activity.
2. Service employment embraces a myriad of job types, from low wage rate Tim Horton type employment, babysitting and homecare for the elderly, to design, operation and maintenance of the space shuttle and Canadarm. The 76% of the workforce in services includes a multitude of high and low wage occupations. The service classification is too embracing and a more detailed breakdown would show how job types and economic activity is changing. If some activities which were previously called manufacturing are now branded as services, then what is happening is a reorganization of the manufacturing process is.
3. There is a growing literature on industry “supply chains” which focuses on the way industry processes are split up, organized and located. Previously this was often described as vertical integration and diversification, as in the case of the aluminum industry which has stages from bauxite to alumina, aluminum and fabricated aluminum end products. The automobile industry requires metal, glass and upholstery inputs plus paint, tires, radios, GPS systems and many other inputs. All these are part of the industry’s supply chain which has to be set up and coordinated either through in-house production or through outsourcing in Canada and abroad. When services such as accounting, finance and marketing are done in-house by a firm, whose main business is manufacturing a product, the employment will be allocated to manufacturing. When these activities are outsourced to firms which specialize in performing these services, the employment is classified to services.
4. As industries reconfigure their supply chains, the allocation of employment to the manufacturing and service sectors changes, even though the end product remains the same. Part of the loss of manufacturing jobs is due to supply chain reorganization. This sectoral shift in employment happened earlier on a massive scale in the agricultural sector, when employment in agriculture declined but agricultural output increased with the substitution of capital for labour, a form of supply chain reorganization.
“The Council of Supply Chain Management Professionals (CSCMP) defines supply chain management as follows: “Supply Chain Management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, supply chain management integrates supply and demand management within and across companies. Supply Chain Management is an integrating function with primary responsibility for linking major business functions and business processes within and across companies into a cohesive and high-performing business model. It includes all of the logistics management activities noted above, as well as manufacturing operations, and it drives coordination of processes and activities with and across marketing, sales, product design, finance and information technology.”
5. Technological change affecting transportation and communications, for example, are two reasons for the reorganization of supply chains and the need for people to be retrained to manage certain activities. Where the end result is the employment of people in firms specializing in new activities such as programming, computer maintenance and operation, the number of service sector jobs will increase at the expense of manufacturing jobs. Training may be required but the resulting service job may be well paid. This is not to deny the existence and growth of lower paid jobs in the retail sector for example, but it is not as extreme as the 76% service sector share of employment implies. (Those more familiar with Canadian labour force statistics than myself can state whether this conclusion is correct.)
What does outsourcing mean?
- A firm’s purchase of inputs for its supply chain can take place from another part of the firm either in Canada or abroad; or it can involve a purchase from an independent firm in Canada or abroad. There are four possibilities: from an independent firm in Canada, from an independent firm abroad, from another part of the same firm in Canada or from another part of the same firm abroad. Each firm decides which alternative provides the cheapest and most reliable course of action for the firm.
- Employment in Canada will be affected by the choice made by firms as will export and import data for goods and services. Wage rates in Canada versus those abroad will be one factor determining the location of operations and where purchasing occurs. The choice of whether to outsource or insource is not new. It is in part a result of where labour and other costs are lower.
In a subsequent entry, I will discuss the ageing Canadian population, the impact for immigration, and the integration of newcomers to Canada as permanent residents and temporary foreign workers.