The Manufacturing Jobs Crisis: Why Should We Care? What is Causing it?

Introduction

The Canadian Labour Congress, the Ontario Federation of Labour, the Quebec Federation of Labour (FTQ) and the United Steelworkers recently commissioned a major, technical report on the manufacturing sector from the economic consulting firm Informetrica. (The study “Economic Effects of Structural Changes in Manufacturing: A Retrospective View” is available from http://www.informetrica.com/IL_ManReport1_Final.pdf).

The study confirms a great deal of what the labour movement has been saying in our Manufacturing Jobs Matter campaign.

By way of background, as of August 2007, Canada had lost 291,000 manufacturing jobs since the peak in November 2002.

Manufacturing Matters to All Canadian Workers

To a considerable degree, the manufacturing jobs crisis is shrugged-off by decision-makers as of no great concern given our low unemployment rate and booming energy and minerals sector. But this study shows that manufacturing is a key creator of jobs in other sectors of the economy.

Over the past twenty years and more, manufacturing has shrunk as a direct source of jobs. But it has remained much steadier as a share of GDP or total production (16% in 2006).

To show how manufacturing supports jobs, the study estimates the impact of a $10 Billion or 3.3% increase in manufacturing exports sustained over 4 years. (The effect of a fall in exports would be the same in size, though a negative rather than a positive).

This increase in exports would generate 67,000 new direct manufacturing jobs, PLUS another 48,500 spin-off jobs, three quarters of which would be in the service sector (everything from financial and legal services, to hotels and restaurants).

Most of the positive job impacts would be in central Canada, about one-half in Ontario and one-quarter in Quebec. But one in four of the new jobs would be in Atlantic Canada and the West.

The increase in exports would generate a significant increase in government revenues – enough to reduce the debt of all levels of government by $8 Billion, and enough to also finance new annual spending of $2 Billion on public services. This would create another 26,500 jobs, mainly in the public sector.

In another simulation, the study calculates that an increase in manufacturing investment of $2 Billion or 10% above the average level in recent years would create an additional 23,000 jobs (assuming an equal division between investment in structures and in machinery and equipment.) Three in four of those new jobs would be outside the manufacturing sector, in industries like construction and consulting.

Manufacturing is Key to the “Knowledge-Based Economy”

As we are constantly told, Canada will do best in a changing global economy if we shift to production of goods and services which sell in world markets because they are innovative, of high quality and/or unique. With countries like China and India becoming major exporters, only a highly productive economy built on innovation, knowledge and skills will sustain high wages and living standards.

Far from being part of the “old economy”, the Informetrica study tells us that manufacturing accounts for the majority (56% in 2006) of all business investment in research and development.

The study also shows that the manufacturing jobs crisis is hollowing out almost all manufacturing industries, not just those (like clothing) which are most vulnerable to very low wage competition. Electrical equipment and computers – both usually considered to be on the more innovative end of the spectrum – have been among the big losers.

Manufacturing Pays Our Way in the World

Canada’s deficit in the trade of manufactured goods has exploded in recent years, hitting $28 Billion in 2006. It’s true that we are now exporting a lot of oil and gas and minerals, but resource exports can finance only about one-fifth of our imports. Some see service exports as the way to pay our way, but services make up only 13% of our exports; we run a huge ($14 Billion) deficit in the trade of services; and service exports have not been increasing rapidly. Put it all together, and an ever-increasing manufacturing trade deficit is unsustainable.

As the report argues: “sustaining healthy manufactured exports remains critical to the country’s balance of foreign payments.”

Foreign Trade is the Key Cause of the Current Crisis

Trade – slow or falling manufactured exports and greater import penetration of our market – are the key cause of recent declines in manufacturing production and job losses.

The study shows that job loss since 2003 is not due to falling demand in Canada for manufactured goods, nor to a decline in demand for goods in our major export market, the United States, which has been growing strongly until very recently. Nor have big job losses been caused by a sudden increase in labour productivity (output per hour). Above-average productivity growth is a long-run trend which does tend to reduce manufacturing employment unless offset by strong growth in the demand – foreign and domestic – for manufactured goods. Until recently, however, the offset from domestic and US growth was considerable, and indeed Canada gained manufacturing jobs from the mid-1990s until 2003.

The serious deterioration in our manufacturing trade balance is tied up with two key forces which are closely intertwined – the rise in the exchange rate of the Canadian against the US dollar, and the rising non- North American (mainly Chinese) share of the North American market. These trends are intertwined in that many Asian currencies – notably that of China but also the Japanese yen and Korean won – are either fixed or managed to closely mirror movements in the US dollar.

Since 2003, the Canadian share of the US market has fallen, as has the US share of the Canadian market for manufactured goods, while the Asian (notably Chinese) share of both the Canadian and US market has increased rapidly. The study details the Canadian share of the US market for manufactured goods, and the US and Chinese share of our market. The analysis shows that we have lost considerable ground to China in many sectors, from low to higher tech. China is now the single largest source of US manufactured imports in 10 of 20 sub-sectors and, as of 2006, had almost as large a share of the US market as Canada. Recently, China passed Canada as the number one source of US imports.

Meanwhile – despite the fall of the US dollar – the US share of our market has fallen while that of China has risen rapidly, in fact doubling in the past 4 years alone. To the extent that US manufacturers purchase Canadian inputs, that further undermines jobs in Canada.
The study does note that there are positive aspects of a higher dollar, but that the negative impacts on manufacturing are considerable and have to be taken into account in economic policy-making.

Solutions

The report sketches out some elements of a policy to help the manufacturing sector, including fostering strong economic growth; encouraging value-added production through investment in skills, infrastructure, and research and development as well as government procurement policies; and taking measures to secure our competitiveness in foreign markets. These will be further discussed and elaborated.