Goods and services: Canada's other two-speed economy

Canada's service sector is churning out jobs while goods sectors, like manufacturing and the energy industry, continue to falter. That's not a bad thing.



Canada’s bifurcated recovery has been a recurring theme since the end of the Great Recession. It used to refer to the regional divide in growth. Energy-producing provinces were initially in the fast lane, while everyone else lagged. Then oil prices crashed and the regions traded places.

Now “two-speed economy” is coming to mean something different, as the latest jobs figures from Friday confirm: a boom in service-sector jobs versus ongoing declines in goods-producing industries.

With service-sector job growth up two per cent in December from a year ago, it’s the biggest annual increase since early 2013. The largest annual gains were in the cultural and recreational industry (all those foreign tourists flocking to low-cost Canada, no doubt), while the biggest month-over-month increase was in professional and technical services.

But as the chart above shows, even before the surge in service jobs in December, the divide between job growth in the services and goods industries was stark. The latter has been laid low by widespread layoffs in the oil and gas sector, and a nearly complete absence of hiring in the manufacturing sector, despite all the benefits of the low loonie.

And the trend has been building. Over the past five years, all but a fraction of new jobs were created in the service sector, with health care and social services—otherwise known as the business of taking care of old people—being the biggest driver so far. What gains there have been in the goods-producing sector of the economy were overwhelming concentrated in the construction industry. (Thanks, housing boom!)

In a speech last November, “From Hewers of Wood to Hewers of Code,” Bank of Canada Governor Stephen Poloz praised the surge in Canada’s service-producing sector for creating new jobs and lifting growth: “Since the onset of the global financial crisis, growth in Canada’s service sector has been stronger on average than in the goods sector. Most of the employment growth seen in Canada since late 2014 has been in service industries that pay above-average wages, helping to support national income.”

As Poloz noted, the rise of service jobs is part of a long, multi-decade evolution of Canada’s economy that now sees eight out of 10 Canadians working in the service sector. You’ll often hear people wax nostalgic about returning to an era when Canada’s economy was based on people actually building things, but you have to go back to the 1950s to find a time when a majority of Canadians were employed in producing physical goods.

What’s more, the job market gap between the goods and services sectors doesn’t break down along the same regional lines that have led to imbalances in the Canadian economy over the last decade or so. In manufacturing-heavy Ontario, the goods sector added just 5,000 new positions last year, while services added 76,000. Meanwhile in Alberta, jobs in the goods sector fell by 53,000, while the services sector added 34,000—not enough to make the province a net job creator, but certainly proving that Alberta’s economy is more diversified than just oil and gas jobs.

It’s true that the wages of many of the new service jobs being created don’t always match the goods-sector jobs that have been lost. Wholesale and retail trade was the third-biggest driver of employment last year, yet those are not high-wage jobs, and certainly don’t come close to replacing high-paying positions in the oil and gas sector. On the other hand, the average hourly wage in the health care and social assistance sector—last year’s biggest jobs winner—was higher than in manufacturing. Not all assembly-line work comes with a big, fat paycheque.

This latest jobs report, coupled with Canada’s first trade surplus in two years, will certainly make the Bank of Canada happy, at least for the time being. Many trouble spots remain, from global trade uncertainty around Brexit and the Trump presidency, to Canada’s wobbly housing market at home.

Then there’s the simple question of whether there’s a limit to how much an economy can depend on service jobs alone. As Poloz asked rhetorically in his speech in November about the rise of the service economy, “How far can these trends go?”

We’re well on our way to finding out.