A little context on the decline of manufacturing employment in Canada

Stephen Gordon looks at the numbers—and zooms out

The debate over “Dutch Disease” tends to focus almost entirely on what happened in Canada between the oil price surge in 2002 and the onset of the recession in 2008. Employment in the manufacturing sector fell by more than 300,000 during this period, but this number is almost never put into context.

Firstly, the share of people employed in manufacturing has been on a secular decline in industrialized countries for at least the last forty years:

It’s worth pointing out that this trend was established several decades before Chinese manufactures appeared on world markets.

Here are manufacturing employment levels, scaled so that all countries are equal to 100 in 1971 :

Canada is the only country in these graphs where manufacturing sector employment is still on par with what it was forty years ago in absolute terms. (The bump you see in the Canadian data from, roughly, 1995 to the late 2000s will be the subject of an upcoming post.)

The most important thing to note is that the manufacturing employment cycle has been going on for decades. We’ve seen this before, and we’ll doubtlessly see it again.

Update: Data source is the FRED data base at the St Louis Federal Reserve.




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A little context on the decline of manufacturing employment in Canada

  1. Interesting, it’s almost as if the decline in manufacturing jobs in western economies is completely unrelated to oil prices! Can we finally relegate Dutch disease to the dustbin of opposition politics?

    • Well, oil prices do matter. But so do lots of other things.

    • The ‘Dutch Disease’ is an economic theory that interpret facts. Only in Canada has it become a political issue. One doesn’t hear rhetoric from the side that simply references the theory; one hears rhetoric from the side that wants to silence all debate on the matter.

      Here is the Dutch Disease at a glance from various headlines:

      * G&M: Harper government funded study arguing Canada suffers from ‘Dutch Disease’

      * National Post: Thomas Mulcair’s Dutch Disease warning supported by OECD report

      * G&M: RBC: Shrugging off Canada’s competitiveness shortfall
      “Almost three-quarters of the competitiveness gap is due to the soaring loonie”

      * G&M: Strong loonie casts shadow over recovery: Mark Carney

      * CBC: Is Canada suffering from ‘Dutch disease’?
      “shifting international trade patterns are responsible for some of the 500,000 manufacturing jobs that have been lost in Canada”

      * G&M: ‘This is about as bad as it gets for Canadian exporters’

      * G&M: Slowing world economy hits Canada, U.S. trade
      “‘Canada’s trade performance continues to suffer amid a global economic slowdown and a high Canadian dollar,’ Toronto-Dominion Bank economist Francis Fong said in a note to clients.”

  2. According to the OECD, the Canadian dollar is overvalued by 25%. This makes all value-added exports and tourism much more expensive and a lot less competitive, killing business opportunities and jobs.

    With wage costs inflated by 25%, businesses will have to bust wages by 20% to restore competitiveness. (Which is why Harper is cracking down on EI and allowing corporations to hire migrant workers at a 15% discount.)

    The high dollar is of no benefit to anyone but cross-border shoppers (and the wealthy.) It increases purchasing power, which increases demand, which increases prices cancelling out any benefit. (Which is why prices are higher here than the US.)

    But when wage deflation occurs, the price of debt (both private and public) remains the same, which will make it 25% more burdensome. That will prolong the coming housing slump and wipe out a lot of people’s retirement savings in home equity.

    Most Canadians will find out the hard way that the benefits of an overvalued dollar are superficial, but the costs severe. (There is no free lunch.)

    • I don’t know about you, but I buy goods that are manufactured outside of Canada. Presumably, so do many others including those with low incomes. Why do you think that a high dollar is only useful for the rich?

      I have difficulty with your argument that a high dollar necessarily results in high prices. How would that explain the historically lower cost of goods in the US even when their dollar was a relatively strong currency, and certainly much higher than ours?

      • I’m not saying prices went higher. I’m saying prices didn’t decrease 40% when the dollar soared 60% from 2003 to 2008. Just like they didn’t increase when the dollar plummeted. That’s because businesses adjust their prices to what the market will bear, which cancels out most, if any, benefit.

        The inflation data indicates the roller coaster ride of the Canadian dollar over the past 15 years has had no affect on prices.

        (One can check out the historic exchange rates at “fxtop.com” and inflation rates at “tradingeconomics.com”)

    • You might want to go and look at your old macroeconomics textbooks. The effects of a higher exchange rate include lower prices and increased purchasing power.

      • I don’t think those books you refer to take into consideration all the facts, like why prices are higher in Canada than the US even though the dollar is at parity.

        If one looks at the inflation data over the past 15 years, as the dollar sunk and soared, the reality is it had no affect on inflation. Our numbers mirrored the Americans’.

        From 1997 to 1999, the dollar dropped from 74 cents to 65 cents (13%.) Yet inflation dropped from 2% to 1%. According to “theory” prices should’ve significantly increased.

        From 2003 to 2008, it went from 63 cents to 100 cents (60% increase.) Yet our inflation pattern was the same in the US.

        This is all easily explainable: demand. If the government decreed that everyone’s wages increase by 50%, what would happen? Prices across the board would jump up to match. Businesses charge what the market will bear.

        So when the dollar rises in value, businesses can charge more in relative value. The end result is that prices remain the pretty much the same. When the dollar sinks in value, businesses have to charge less in relative value, which keeps prices the same.

        No doubt someone somewhere is making money off the overvalued dollar. But it isn’t the average Canadian. Are we paying 40% less for goods and services than 2003? Certainly not.

  3. Harper’s gamble to make Canada a dirty-energy “super-power” in this century is utterly boneheaded. Not only are future green regulations going to make dirty energy obsolete, the Alberta bitumen sands now have to compete with other unconventional oil sources like fracking. Presently, there is so much sulfur-laden heavy oil In North America that Alberta has to pay a 30% discount.

    What’s even more ridiculous is that the price of oil only has to fall below $80/barrel to create a mid-1980s crisis all over again. (The price of oil recently slumped and Alberta went into a $6B deficit.)

    If “booming” Alberta can’t make it on resources, then the rest of the country is clearly doomed.

    Instead of collecting resource welfare checks, we should look to the future. The real wealth is in information and innovation-based goods and services. These create the best business opportunities and jobs ensuring a solid future for our children.

    • I agree. Although fossil fuels will continue to play a major role of the G-20 countries energy mix for some time to come, clean energy technologies/resource management/database development/land reclamation, will provide good paying jobs for anyone who acquires an accredited degree in this field.

  4. Oh look, Stephen Gordon is arguing with nobody again.

    • I don’t see where I made any argument at all. Sometimes it’s just a good idea to look at the data.

      • what is the source for you data, if i may ask? thanks.

        • The FRED data base. I’ve added a link to the post.

      • Your statement, if true (and there’s no reason not to believe it) would make both you and the OP right.

    • I appreciate this sort of analysis, and I don’t see it as arguing at all. This is a relevant current economic issue, seeing as there is an ongoing debate that pitts oilsands development against manufacturing. This data suggests that those two are less connected than have been presented in the media.

      • “This data suggests that those two are less connected than have been presented in the media.”

        No it does not. The steep drop in “Manufacturing employment” from the above graph from 2004 to 2009 is directly related to the steep rise in the dollar from 2003 to 2008. This is due, in large part, to the rise of oil exports and investment in bitumen sands development. According to Dutch Disease theory, such economic activity causes the dollar to become overvalued.

        The media has reported how various organizations, like the OECD, have interpreted the data. The OECD says the Canadian dollar is overvalued by 25%, based on PPP. Andrew Coyne, for example, references the Sauder School of Business in a column, which says it’s overvalued by 20%.

        I’d like to hear Mr. Gordon come out and say the Canadian dollar is not overvalued. So far, I have not heard him mention this in any of his columns taking the contrary position in the Dutch Disease debate.

        • The Canadian dollar is not overvalued.

          • I think we need more than words here. How is the OECD wrong in their calculation based on PPP, which says it’s 25% overvalued?

          • PPP is an estimate of what the exchange rate would be in the absence of international capital flows. It’s not much of a guide when net capital flows are not zero.

          • Why is GDP per capita usually adjusted for PPP? That would appear an adjustment where the levels of net capital flows between countries doesn’t matter.

  5. Nice colourful lines and all, interesting to see…

    There has certainly been population growth, and steady consumption of goods. We just have production tools and methods that employ less people, I guess.

    Always an interesting lunchtime read.

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