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The Progressive Economics Forum

Canada’s Manufacturing Crisis in International Perspective

The U.S. Bureau of Labor Statistics has just released a comparison of manufacturing output, employment, productivity, and unit labour costs in 16 different industrialized countries.  Here’s the link:

http://www.bls.gov/news.release/pdf/prod4.pdf

This data confirms that Canada’s manufacturing industry is in the midst of a uniquely terrible crisis.  Some commentators have suggested that the sharp decline in Canadian manufacturing is an inevitable and largely universal result, reflecting a “natural” evolution of economic structure in the face of rising income levels, technological changes, and the rise of the BRICs.  (This argument is even sometimes heard on the left: see, for example, http://www.socialistproject.ca/bullet/bullet050.html.)

It is certainly true that the faster rate of productivity growth in manufacturing, and the tendency of households to consume more services as their income levels rise, tend to imply that manufacturing output and employment will shrink over time relative to the overall economy.  But this in no way explains what’s happened in Canada’s manufacturing industry over the past five years – a time in which the manufacturing share of total employment fell by close to one-third.

The BLS data confirms that Canada’s manufacturing meltdown has been distinct in many ways from the situation across the industrialized world.

The report summarizes average annual growth rates over the 2000-2007 period for a number of indicators.  In terms of real manufacturing output, Canada ranked the worst of all the 16 countries considered, with real output declining at an average rate of 0.3% per year.  (Korea had the most vibrant expansion of manufacturing output, an average of 6.9% per year.)

In productivity, as usual, Canada ranks near the bottom of the pack.  Average output per hour in manufacturing grew 1.1% per year during the 2000-2007 period.  Only Italy was worse.  Korea, again, led the pack with an average (and stunning) 7.6% annual increase in manufacturing productivity.  (With my CAW hat on, I must hasten to say that this poor productivity performance is not universal: there are a few industries, auto chief among them, where Canadian productivity excels!)

Employment fell at an average rate of 1.2% per year.  (That equals the 1.1% increase in productivity, plus the 0.3% decline in productivity, plus a small adjustment for a slight reduction in average hours per worker.)  That was in the middle of the pack of the 16 countries for the whole 2000-2007 period.  Remember, however, that manufacturing was still doing well in 2000 and 2001.  Since 2003, however, the decline in Canadian manufacturing employment has been the second worst of our peers (the U.K. has experienced more job losses).

Hourly compensation (in national currency terms) grew by 3.4% per year during the 2000-2007 period, ranking us 11th out of 16th.  The shocker in this table was Japan, which experienced precisely zero hourly compensation growth at all during this period, which is a stunning indictment of the Japanese industrial relations system.  This is the period of time in which major Japanese exporters (led by Toyota) significantly expanded their share of world markets (especially in autos) and enjoyed record profits as a result.  Yet workers got no raise at all over a 7-year period.

In national currency terms, Canada’s rate of unit labour cost increase (2.3% per year) was the second highest of the 16 countries – despite our sub-par compensation growth.  The negative productivity performance overwhelms the relatively muted compensation growth.  And that’s before we throw in the terrible effects of the Canadian dollar appreciation.  In U.S. dollar terms, Canada’s unit labour costs grew at a devastating 7.1% per year (compared to a slight average annual decrease in the U.S.).

Canada’s manufacturing decline reflects a complex combination of challenges – not solely the rising dollar.  But clearly it is false to assume that this crisis is inevitable or universal in nature.  Canada’s performance is uniquely poor – and government policy (ratifying the rise of the currency, failing to implement pro-investment and pro-productivity measures, allowing untrammeled imports to destroy whole swaths of industry) clearly bears a good share of the blame.

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Comments

Comment from JK
Time: September 27, 2008, 7:58 am

This study from Statscan covers the employment trends, but doesn’t provide comparisons.

http://www.statcan.ca/Daily/English/080926/d080926c.htm

Comment from John Hunter
Time: September 27, 2008, 11:58 am

Thanks for the link to that very interesting data from BLS. I think that it is important to notice that while Canadian (and worldwide) manufacturing jobs are decreasing, manufacturing output is increasing.

To often people think output declines are the reason for job declines. That isn’t accurate. Output is actually growing while jobs and hours worked are declining. If you look at the data the jobs are not moving from Canada or the USA to somewhere else. They are decreasing everywhere (even in China). Though perhaps in the last 5 years jobs actually have increased in China (I have not seen any good data), but previously they had actually lost far more manufacturing jobs than the USA.

There certainly can be large swings in manufacturing output but over the long term even when people are convinced manufacturing is dying (in the USA for example, people have been saying that for decades) it actually is increasing. This is happening while manufacturing jobs are decreasing (in Canada, the USA and worldwide).

Comment from Paul Tulloch
Time: September 28, 2008, 9:53 pm

I find the “natural” evolution argument a crock of simulated waste upon which many so easily and mindlessly just shrug their shoulders and say, “oh well”. Strangely enough it is what you hear from our leaders today.

Manufacturing has and always will be the backbone of any economy. The value chain of any production entity whether it is public or private relies on wealth generation. And a majority of that wealth is manufacturing raw materials into nice little trinkets that make our lives easier and more pleasurable (in theory or perpecived or culturalized or reified or whatever.)

There is a potential that some of the value chain can be hived off and geographically segmented, however the whole flat earth model is so convoluted and a neo con Utopian fantasy, that again over simplification is at the heart of the discourse and does not in many ways reflect reality.

The data does reflect the vaporization of a lot of manufacturing assets in Canada. Personally I have been through a a handful of fully operational plants that due to the high dollar valuation will never ever produce here again.

Yes there are innovation arguments and other such side discussions one can hypothesize for the manufacturing meltdown but they are peripheral.

In a small open economy such as ours, one cannot in any sensible way suggest that it is the natural evolution of the ways and means that our manufacturig base is stripped away in such a fashion as it has. We as a knowledgable, resource blessed, wealthy advanced economy could have a plethora of manufacturing based in our frontier. We have smart workers, a dedicated workplace results oriented culture, technology and infrastructure through the roof.

The missing ingredient is an industrial policy and a serious of governement policies to meet the needs of such an investment environment. Instead wour government sits on its hands as investment opportunities locate to new greenfield sites in oethr countries and the decisions over re-investment in brown field sites are one dimensional, closure.

To sit and say that it is natural, is quite similar to say that the financial markets melting down is natural!

The mistake is, yes within a select context of economics physics, these are natural tendencies, but eventualy like the financial markets, a correction eventually is needed by policy makers as the system implodes on itself. Wealth generation within the center of ones economy is what is imploding right now. Any sane economist that does not see that should have their license revoked. (ahhh maybe that is what we need, some regulation of the economics industry)

Anyway I am ranting but re-investment is the key to building an economic system that is environmentally sensitive and respectful. MAybe one day it will also be human friendly too, but that will have to wait I guess.

Comment from Jason
Time: May 23, 2009, 3:20 pm

Publicly available CFR and Club of Rome strategy manuals from 30 years ago say that a global government needs to control the world population through neo-feudalism by creating artificial scarcity. EconoChristian.com shows that now that the social architects have de-industrialized the United States, they are going to blame our economic disintegration on lack of energy supplies.

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