Saturday, June 9, 2007

An Update on Canada's Two Economies

As noted, Jackson is the chief economist for the Canadian Labour Congress. His article is much longer. It can be accessed here. Our trade deficit with China is even worse than that of the US considering the size of our economy. It looks as if we are becoming primarily a resource based economy, our traditional role and one that is encouraged b the provisions of NAFTA which forces us to share out resources.

An Update on Canada’s Two Economies - Implications for Workers and for Monetary Policy
Andrew Jackson
Chief Economist
Canadian Labour Congress

The Hidden Jobs Crisis

Superficially, the Canadian economy and labour market are doing well. Economic growth is running above 3% at an annual rate, despite the US slowdown. We have a low unemployment rate of just over 6% (6.1% in May) and a near all-time high employment rate of 63.4% ( This is the proportion of the working-age population with jobs.) The rate of new job creation continues to have been quite high in 2007 until recently, matching the demand for jobs coming from the entry of echo baby boomers into the workforce, high rates of immigration, and a desire for later retirement on the part of some older workers.

The Bank of Canada and many economists believe that the job market is very tight and that our economy is operating “above capacity,” pushing inflation above the target rate of 2%. The Consumer Price Index was up 2.2% year over year in April and the core rate, which strips out volatile items like food and energy, is running at 2.5%. The Bank of Canada said on May 29th that there is “excess demand” in the economy and that they will very likely raise interest rates in the near future. While the concept of operating “above capacity” takes into account more than the state of job market, continuing low unemployment and strong employment growth are driving fears of higher inflation.

Yet, as the Bank of Canada does recognize, wages are quite flat. And, inflation is a decidedly regional issue. In April, only Alberta had an inflation rate significantly above 2% (coming in at a very high 5.5%), and inflation is well below 2% in Ontario (1.8%) and Quebec (1.4%.) High inflation in Alberta is driven above all by soaring home prices, with the owned accommodation component up 17.7% in the past year.

From the perspective of working people, the real issue is not inflation but why apparently low unemployment and an apparently tight job market are not benefitting them. It is not that long ago that the Bank of Canada, the International Monetary Fund and the OECD all thought that an unemployment rate much below 8% would spark a sharp increase in real wages. But this is simply not happening.

In fact, most workers are not sharing in the growth of national income generated by the resource boom, jobs are becoming more insecure and precarious, and many good jobs are being lost to industrial restructuring and the crisis in the manufacturing sector. More than 250,000 manufacturing jobs have been lost since 2002, and the pace of job loss has recently begun to accelerate. Unemployment may be low, but Canada faces a major crisis in terms of the quality of jobs. This crisis will be worsened if the Canadian dollar remains over-valued and interest rates are increased.

Boom and Bust: Resources, Trade and the Manufacturing Crisis.

The Canadian economy is being driven by a geographically and sectorally concentrated resource boom. Prices of oil and gas and many base metals have soared, leading to increased production and major investments in new capacity, most notably the Alberta tar sands. The boom is being driven mainly by increased global commodity prices as a result of strong Asian growth. These higher commodity prices, along with the huge US balance of payments deficit, have led to a major appreciation of the Canadian against the US dollar. Since 2002, the dollar has risen from a low of 62 cents US to a recent high of almost 95 cents. The high Canadian dollar is mainly a function of shifts in Canada’s terms of trade, plus the weakness of the US dollar. Monetary policy has also played a role, as detailed below. Since major Asian currencies (notably those of China, Japan and Korea) are tied to the US dollar, Canadian competitiveness with Asia has been severely eroded.

Non resource based manufacturing and the forest industry are experiencing a major crisis due to
a slowdown in exports to the US. This reflects slower growth in the US market for products like paper, lumber, and autos and parts, and a loss of the Canadian share of the US market to rising Asian imports because of the high Canadian dollar. Meanwhile, Asian producers have grabbed a much larger share of the Canadian domestic market for manufactured goods. Since 2002, the US share of Canadian imports has fallen from 72% to 65% as the fall of the US against the Canadian dollar has mainly benefitted Asian exporters.

A large deficit in the trade of manufactured goods - defined as non resource-based goods - has opened up since 2002 and our trade deficit with China and developing Asia is now greater as a share of the economy than that of the US. Our overall merchandise trade surplus has shrunk despite high energy and mineral prices, and we now import about $1.25 worth of manufactured goods for every $1 of manufactured exports. (Manufactured goods are defined here as machinery and equipment, consumer goods and auto products combined as opposed to resource-based and industrial goods.) We import $35 Billion worth of goods, mainly consumer goods and machinery and equipment - from China, but export just $7.7 Billion worth of goods - mainly resources - to that country in return. We also run large trade deficits with Korea, Japan and virtually every country in the world except the US, which is the almost exclusive buyer of our booming oil and gas exports. Laid on top of the problems caused by the high dollar are specific problems in the forest sector and the automotive sector, and the fact that many Asian markets for manufactured goods are not truly open to Canadian exports.

While some parts of manufacturing have remained profitable, the competitiveness squeeze caused by the high dollar and the huge and growing trade deficit with Asia has resulted in the loss of some 250,000 manufacturing jobs since the peak in 2002. Another 31,000 manufacturing jobs were lost in April and May of 2007 combined as the second round of the manufacturing jobs crisis has intensified. Jobs have been lost to plant closures and to layoffs caused by lower production, a corporate drive for intensified productivity in remaining operations, and outsourcing of production inputs to other countries as part of the creation of global value chains. More job losses are clearly on the way now that the dollar has breached the 90 cent barrier, and indeed many layoffs which have yet to take place have already been announced.

There is evidence that relatively few manufacturers are taking advantage of the high dollar to purchase mainly imported machinery and equipment in an effort to restructure their operations in a more positive way for workers. In fact, machinery and equipment investment fell sharply (by 1.5%) in the first quarter of 2007, and business machinery and equipment investment is heavily concentrated in the primary resource sector.

Manufacturing Matters for Workers

The conventional wisdom is that re-structuring of the manufacturing sector is not a major problem, and that the economy is “adjusting well.”

However, manufacturing is an important direct source of almost 2 million good jobs due to above average productivity, in turn the result of higher than average capital investment per worker and a strong base of skilled workers. Manufacturing operations also support many spin-off jobs, including good jobs in business services and in transportation. It is true that there are also good jobs in the resource sector, but mines and oil and gas production are extremely capital intensive operations. Once built, they will require relatively few workers. Between 2005 and 2006, the mining sector (including oil and gas operations) created just 20,000 direct new jobs and total employment is less than one tenth the level of manufacturing.

Manufacturing is often denigrated as part of an “old economy” which must be replaced by a new “knowledge-based economy”, but more than two-thirds of all business research and development in Canada takes place in manufacturing, especially in industries like aerospace and electrical machinery and equipment. Skill levels in manufacturing have been rising.

There are big structural problems down the road if we allow manufacturing to shrink too much, especially if growth is driven by an energy sector which is based on non renewable resources being extracted far too fast, in an environmentally unsustainable fashion, with little value-added in Canada. As a key case in point, if the Keystone pipeline proposal is approved by the National Energy Board, increased production of bitumen from the Alberta tar sands will be refined in the US, just as dwindling natural gas supplies from Alberta have been diverted from value-added, job-creating petro-chemical production to natural gas exports. Most of the gains of the recent energy boom are being captured by owners of oil and gas companies, many of them foreign-owned.

Resource-led economies are prone to boom-bust cycles and to have a relatively narrow core of good jobs, as opposed to diversified economies with a strong manufacturing base which are more stable and have relatively more jobs in higher productivity sectors. Part of the recently much-lamented productivity slowdown in Canada is due to the fact that most of the workers displaced from manufacturing are moving to much lower productivity jobs in private services

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