Is Canada losing its virginity?

Angst is expressed by some because Canada’s economy is threatened as the share of manufacturing in GDP has declined, as well as its share in total employment? Manufacturing has fallen from 20% to 10% of GDP from 1970 to 2012, and its share of employment from 19% to 10% from 1976 to 2012. (Figures from Statcan). 

1.    In the past, a similar change took place with agriculture, where its share of employment has declined to less than 2% from around 20% of total employment in 1921. The latter is now lauded as a vast improvement in labour productivity due to the mechanization of agriculture, as well as improved crop growing and animal husbandry practices. Much of the surplus agricultural labour migrated to manufacturing and the resource sector, each of which has also experienced improvements in labour productivity. Today, service sector employment accounts for 77% of total employment in Canada, and some despair that we have become an economy of burger flippers and coffee dispensers, although, beware, these two are and can be mechanized further.

2.    A parallel discourse points to the difficulty employers have of filling positions in the construction, resource, and certain manufacturing industries, issues addressed with skills training measures in the 2013 Canadian federal budget. The aim is to match the unemployed with available employment opportunities. At the same time, each year Canada brings in around 100,000 temporary foreign workers, some of whom leave after doing seasonal work, but at any one time there are an estimated 300,000 in Canada as a result of those who have not left from previous years.

3.    It may be that the unemployed Canadians cannot be retrained for the available jobs, do not want to be retrained, do not want to move to where the jobs are, are not attracted by the higher earnings, are looked after by government income safety net measures, or by some combination of the above. A frequent comment is that Canadians are not prepared to do the jobs filled by temporary foreign workers. It was not so long ago that earlier Canadians were doing the backbreaking work, which forged the conditions for the various industry sectors which now flourish, agriculture, forestry, mining and assembly line manufacturing.

4.    Is the declining relative contribution of manufacturing a disaster as some suggest? Probably not. Manufacturing’s share of GDP has been on the decline since 1970 for many if not all developed countries including Canada. For Australia, Canada, France, and the UK, it is now around 10%, for Brazil, Italy, the Netherlands and the USA 15%, and for Germany and Japan around 20%. Unsurprisingly, Germany and Japan are less natural resource intensive than Canada and Australia, so their share of manufacturing employment is higher even though it too has been declining.

Source: http://opinion.financialpost.com/2012/05/29/everybodys-dutch/ ; and Statcan Cansim Table 282-0008.

5.    Each country is endowed with certain resources natural and human, which when combined with the available and affordable technology will be among the main determinants of the industry structure of each economy. Since technology is always changing, and very rapidly today, it is understandable why sectoral shares of an economy change. Technology affects sectors differently and at different rates and times.

6.    Why is the manufacturing sector declining and the service sector growing in relative GDP terms? Part of it, I suspect, has to do with the structure of firms in the sectors. Manufacturing firms have substituted capital for labour, (as agricultural f(a)irms did in the past), with for example the use of robots; and more services may now be performed outside the manufacturing sector.

7.    For example, if an automotive firm has a legal department, these personnel would be counted as part of the manufacturing sector. Assume the automotive firm decides to close its legal department and contract out for legal services, these persons will then become allocated to the “Professional category” of services. Between 1976 and 2012, this category has risen from 4% to 9% of total services employment. It would require a more detailed analysis of Canada’s labour force survey to discover whether particular jobs are today performed within a different industry as compared with previous years.

Conclusion

Saying that Canada has lost its maidenhood by becoming predominantly a service economy, like many other developed economies, is more likely recognition that manufacturing industries are adapting to improve their competitiveness.

Employment in services should not be equated only with low skilled jobs, although there are employment opportunities there.Some services employment, plumbing, carpentry, electricians, computer programming, laboratory assistants, and teachers for example, require considerable skills and skill training. Further analysis of what the 77% of the Canadian labour force labeled at services occupations and employment would answer what is happening in the Canadian economy.

 

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One Response to “Is Canada losing its virginity?”

  1. cmaule Says:

    From The Conversable Economist March 28th, 2013

    “Proposed explanations for the declining labor share in the United States and abroad include changes in technology, increasing globalization, changes in market structure, and the declining negotiating power of labor. Changes in technology can affect the share of income going to labor by changing the nature of the labor needed for production. More specifically, much of the investment made by firms over the past two decades has been in information technology, and some economists have suggested that information technology reduces the need for traditional types of skilled labor. According to this argument, the labor share has fallen because traditional middle-skill work is being supplanted by computers, and the marginal product of labor has declined. Increasing globalization also puts pressure on wages, especially wages in the production of tradable goods that can be produced in emerging market countries and some less-developed countries. These pressures on wages can lead to reductions in the labor share. Changes in market structure and in the negotiating power of labor could also lead
    to a declining labor share. One such change is the decline in unions and collective bargaining agreements in the United States.”

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