Canada’s nostalgia for the factory floor has become a huge barrier to growth
Kevin Carmichael explains why it’s a myth that our success is tied to manufacturing.
Bank of Canada governor Stephen Poloz scooped Statistics Canada this week.
During a press conference in Ottawa, Poloz let slip that Statistics Canada plans to begin publishing monthly data on trade in services later this year. Paul Vieira of the Wall Street Journal later confirmed the tip. Canada’s official data collector told him that it was “working towards sharing provisional data with users later this year.” Because it’s 2018.
The absence of these data contributes to the fiction that Canada’s fortunes are tied to the success of companies that make things that create a sound when dropped on the floor. “The vast majority of our economy consists of people working in the services sector,” Poloz said. Indeed; only about five per cent of employed Canadians work at a factory.
Yet those workers occupy a far greater proportion of our collective imagination. Consider the debate around the North American Free Trade Agreement. It is dominated by concerns about where and how automobiles are put together. Politicians must be planning to grant robots the franchise because there will be fewer and fewer voters who rely on employers such Ford Motor Co. and Linamar Corp. for a paycheque.
There are lots of reasons manufacturing controls the economic narrative. Nostalgia is one. Another is the lobbying of automobile makers and their unions, which thrive on the notion that there is something special about the things they make.
Even Statistics Canada is complicit. It’s relatively easy to measure tangible things, so the agency produces monthly reports on manufacturing shipments
and goods exports. It currently compiles data on trade in services only quarterly, meaning there are far fewer stories written about what is going on with that segment of the economy.
Poloz said there is no qualitative difference between an economy based on services and one where growth is driven by fabrication. That assessment will surprise some people. Factory workers are symbols of the middle class and their disappearance is often used to explain the rise of income inequality and the lacklustre economic growth that followed the financial crisis. Manufacturing jobs have traditionally come with higher salaries, in part because shop floors lend themselves to union drives. Some research suggests manufacturing boosts overall productivity and is a precondition for a vibrant services sector.
All of that could be more myth than fact.
The International Monetary Fund this month published research that questions the love affair with factory jobs. The multi-country study found no evidence that poorer nations need a sprawling manufacturing sector to escape low-income status; services offer an equally sure path to wealth. The IMF researchers also cast doubt on the supposed link between higher inequality and fewer manufacturing jobs. Instead, they found that inequality had increased within a broad array of industries, suggesting the answer to narrowing the gap between rich and poor lies in equipping workers with the skills they need to win jobs that come with bigger salaries attached.
“The goal of supporting equitable growth would be better served by policy efforts to raise productivity across all sectors and make the gains from higher productivity more inclusive,” the study said.
In Canada’s case, you might argue the sooner we go all-in on services, the better.
One of the reasons the Bank of Canada feels compelled to keep interest rates so low — inflating asset bubbles and enticing households to pile on debt — is because the country’s goods exporters need a crutch. Our share of U.S. non-energy goods imports has declined to less than one per cent from about 17 per cent in 2002.
The shift is mostly the result of China eating everyone’s lunch over the past couple of decades. But even if U.S. President Donald Trump goes ahead with tariffs on tens of billions of dollars worth of Chinese imports, there is little reason to think Canada would benefit. The Great Recession wiped out manufacturing capacity that hasn’t come back because the competition to sell things such as electrical equipment, fabricated metals, and clothing is too fierce.
Some will say the problem is a strong dollar. But the exchange rate has been fairly weak for a few years now and Canada continued to lose market share in global imports of durable goods. At this point, a weaker currency only would punish the entrepreneurs who might lead an economic resurgence by discounting the value of their intellectual property for international buyers.
There is reason to think that Canada could do pretty well at services. Liam Condon, president of Bayer AG’s crop sciences division, told me in an interview in Washington on Friday that research-based companies like his require stable governments and predictable rules. Canada can provide that. We also have a clutch of good and relatively affordable universities capable of churning out a steady flow of new talent. Our openness to immigrants also is an asset.
Services companies already are the new export champions. Firms in areas such as transportation; tourism; telecommunications; and computer-and-information services “are doing quite well indeed,” Carolyn Wilkins, the No. 2 at the Bank of Canada, said at the same press conference at which Poloz made his comments. Exports of services now make up a greater share of export growth than goods, according to Statistics Canada’s quarterly data.
That happened with little support from politicians, most of whom continue to talk about the economy as it existed a few decades ago, not as it is now. They do so because that’s also the economy that their voters cherish. It’s time to face reality because our nostalgia for the factory job has become a barrier to economic growth.