The Broadbent Blog


The dismal state of Canadian manufacturing

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It is hardly news, but the scale of the manufacturing crisis in Canada continues to astound.

Between 2002 and 2013, manufacturing employment fell by 557,000 jobs, meaning that one in four (24%) of the jobs that existed in 2002 have disappeared. As a share of all jobs, manufacturing fell from 15.0% to 9.8% over this period.

There has been no meaningful or sustained recovery from the Great Recession for the manufacturing sector. Total employment in 2013 was no greater than in the recession year of 2009.

Over the same period, manufacturing as a share of GDP has fallen from 14.8% to 10.6%, with the vast majority of that decline concentrated in Ontario and Quebec. Total output has fallen by 9.7%.

Sophisticated manufactured exports (industrial and electrical machinery; aerospace; auto; consumer goods) now make up just 36% of all Canadian exports, down from 54% in 2002.

It is often noted, with reason, that manufacturing has been shrinking in all advanced industrial countries. But the decline in output in Canada from 2002 to 2011 was, according to a database assembled by the US Bureau of Labor Statistics, the worst of thirteen industrial countries.

Output fell by 11.5% in Canada, but rose by 12.4% in Germany, by 22.1% in Japan, and by 23.2% in the United States.

Manufacturing jobs have been lost in all advanced industrial countries due to higher productivity, technological change, and the shift of low value added production to lower wage developing countries.

But, Germany, Japan, Korea and the United States among others have been able to maintain dynamic manufacturing sectors by exporting sophisticated capital goods and related services to the developing world.

Should it matter to Canadians that manufacturing has been shrinking while the resource sector and services have been growing?

recent report from the Mowat Centre suggests that we should indeed be concerned.

Direct jobs in manufacturing are significantly more productive and highly paid than the average, and are much more highly skilled than is often assumed. The majority of jobs now require a university or college degree.

And manufacturing remains a key part of the so-called knowledge economy, still accounting for the majority of all business spending on research and development.

Canada has major strengths in communications technologies, aerospace, pharmaceuticals, bio tech and the automotive sector, all of which sustain good, well paid jobs directly and through close linkages to other sectors such as transportation, finance and business services.

The crisis in Canadian manufacturing has often been attributed to the high Canadian dollar, partly the result of the resource boom over the past decade. This has been the major factor, but a big part of the story has been our absolutely dismal productivity performance.

According to the US Bureau of Labour Statistics database, output per hour in Canadian manufacturing rose by just 10.6% from 2002 to 2011, compared to 20.2% in Germany, 40.4% in Japan, and 55.7% in the United States.

Low productivity growth on top of an overvalued exchange rate has massively eroded Canadian cost competitiveness in both export markets and the domestic market, resulting in lost jobs, lower output, and a huge deficit in the trade of manufactured goods.

Our poor productivity performance is the result of many factors, but boils down to too few companies investing in a major way in innovation, in new machinery and equipment, and in worker skills. Canadian manufacturing will survive and prosper only by producing sophisticated and unique products and related services through high value-added operations.

There is no simple prescription for turning things around. But the Mowat Centre does underline the importance of a strong federal government commitment to the future of Canadian manufacturing and the need for public support for major new investments.

The Harper government has ceaselessly promoted Canada as an “energy superpower.” They should pay at least as much attention to the renewal of Canadian industry.

This article originally appeared in the Globe & Mail's Economy Lab.