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A Tale of Two Economies

Canadian PoliticsLabour

While the overall unemployment rate in Canada is low and the media paint a reassuring picture of broad-based prosperity, the reality is that disturbing new divisions of sector and region are being overlaid upon already deepening class differences. The past 25 years saw remarkably little progress for most Canadian workers. While real (inflation-adjusted) GDP per person has risen by about 50 per cent since the early 1980s, driven mainly by increased productivity, workers’ hourly wages have been remarkably stagnant.

Remarkably, between 1981 and 2004 the real median hourly wage (half of all workers earn more and half earn less) barely budged. This means that the bottom half of all workers experienced stagnant or declining hourly wages. More precisely, median wages have fallen most among younger workers, immigrants and men, and have risen a bit among women and older workers.


Erosion of real wages for the bottom half of the work force has been accompanied by a sharp decline in the security of employment. Especially among young workers, women and immigrant workers of colour, there has been a marked increase in temporary employment and usually very low-paid, “solo” self-employment. Many lower-wage workers experience significant periods of unemployment or under-employment for over a year, and have been virtually excluded from unemployment benefits under new, more restrictive rules.

The fruits of recent economic growth have gone overwhelmingly to the more affluent. It is well known that income inequality has increased, but less well known that this has been driven most by the rising share of the very highest income groups.

Over the course of the 1990s, the share of all taxable wage and salary income going to the top one per cent – roughly those making more than $150,000 per year – jumped from nine to 14 per cent of the total, and the share of the top one tenth of one per cent rose even more sharply. Even the proverbial middle class of reasonably secure, salaried workers has shared remarkably little in Canada’s increased prosperity, increasing their real incomes mainly by working longer hours, as individuals and as families.

At the same time, recent years have seen a remarkable rise in corporate profits as a share of GDP to an all-time historic high, boosting dividend and capital-gains income, which is highly concentrated in the hands of the very well-off. As is the case around the advanced capitalist world, this marked increase in capital’s share of national income has not been accompanied by high rates of new business investment. Expansion has instead been fuelled in significant part by unsustainable, debt-financed household spending, much of it on housing.

Expanding Divides

The recent good news for Canadian workers has been that jobs – while often of dubious quality – have become reasonably easy to find in a growing economy. The national unemployment rate averaged below seven per cent in 2005, and hit a more than 30-year low of just 6.4 per cent in February, 2006. And average hourly and weekly wages have both finally started to increase a bit in real terms, by about one per cent per year over and above the rate of inflation.

But the jobs situation is not as rosy as the headline numbers. The majority of the new jobs created in 2005 were in self-employment and in temporary jobs, as opposed to permanent payroll jobs. Large pockets of under-employment in low-paid and precarious jobs still exist among youth (for whom the unemployment rate is still 11.5 per cent), workers of colour and recent immigrants, and among a significant minority of adult men and women who lack skills demanded by employers.

What is striking, and relatively recent, is a growing sectoral and regional divide. Almost half of the new jobs created in 2005 were in B.C. and Alberta, which now have unemployment rates well below the national average. Total labour income rose by a remarkable 18 per cent in Alberta in 2005, driven up by much faster than average job and wage growth.

Most complaints from employers about skill shortages should be discounted. But there is little doubt that the Alberta boom is real. The most important driving force is, of course, soaring energy-sector profits, new energy development driven by sky-high oil and gas prices, and high prices for many other mineral commodities prompted by strong demand from Asia.

Meanwhile, the non-resource-based manufacturing sector, plus forestry, is going through a wrenching crisis. More than 200,000 manufacturing jobs, or a bit under 10 per cent of the total, have been lost since the peak at the end of 2001. About half of these losses were in 2005 alone, as the toll increases week by week. A wave of plant closures and mass layoffs comparable to that of the early 1990s is currently sweeping though industrial Ontario and Quebec, hitting not just light manufacturing, but also big plants like Michelin in Kitchener and GM’s giant Oshawa complex.

Among the hardest-hit sectors are auto and auto parts, especially the suppliers to the “Big Three”; clothing and textiles in the wake of changed international trade rules; a pulp-and-paper sector, which must contend with new, low-cost global suppliers hobbled by a high dollar; and, especially, light manufacturers who relied on the low Canadian dollar to sell to the U.S. market through much of the 1990s. The least hard-hit have been resource-based manufacturers and some producers of industrial materials, who have been protected by high prices and strong world demand.

Manufacturing’s Challenges

Manufacturing is important to the overall well being of the working class and all Canadians. The sector directly supports some two million mainly skilled and reasonably well paid jobs, about one in three of which are still unionized compared to unionization rates of 10 per cent or less in private services. Inputs to manufacturing support many higher-end jobs in private services.

Higher-than-average productivity in manufacturing helps secure the fiscal base for high-quality public and social services. Manufacturing adds value to our resources, and manufacturing production for export is central to our ability as a country to import goods and services.

Manufacturing – supported by a low Canadian dollar – played a major role in the economic recovery of the mid-to-late 1990s, adding jobs to a sector that had been extre-mely hard-hit in the early 1990s by free-trade-driven restructuring and the high-interest-rate/high-dollar policies of the Bank of Canada under John Crow. But this contribution has shifted into sharp reverse, as resources have become the key economic driver.

The two key, interrelated factors at play behind today’s manufacturing crisis are the high Canadian dollar and intensified international competition driven mainly by the rise of Asia as a major export platform for North America.

The appreciation of the Canadian dollar – from a low of U.S. 64 cents in 2002, to the low-to-mid U.S. 80 cents range through most of 2004 to mid-2005, to recent highs of close to 90 cents – has eliminated any cost-competitive advantage over U.S. competitors for most manufacturers, threatening our share of both the Canadian and the U.S. markets.

Some sectors are just as or even more productive than their U.S. competitors. But most Canadian manufacturers, especially smaller businesses, relied on the low dollar to offset lower productivity relative to the U.S., the result of smaller-scale, weaker investment in innovation, new machinery and equipment, and training. The low dollar also helped insulate us from the massive crisis flowing from intensified Asian competition, which has devastated U.S. manufacturing over the past decade.

The North American manufacturing market as a whole is being flooded by huge volumes of increasingly high-quality products from Asia, especially China with its low wages and under-valued currency. Mirroring the trend in the U.S., Canada’s annual trade deficit with China has trebled since 2001 to $21 billion in 2005, the result of a profound imbalance between exports (mainly resources) to China of $7 billion, and imports of $29 billion.

Asian production is displacing Canadian production for both the domestic and U.S. export markets across a growing range of more and more sophisticated products, including the traditional Canadian specialties of electrical machinery and equipment, auto and, looking forward, aerospace.

A Superficial Boom

Many commentators have likened Canada’s economic problems to the “Dutch Disease” that afflicted the Netherlands in the wake of energy development in the North Sea. Currency appreciation devastated traditional manufacturing and drove up unemployment, even as the overall economy superficially boomed.

Similarly, the Canadian exchange rate has been driven up very rapidly by a commodity price and export volume boom, which threatens jobs in other sectors (not just manufacturing, but also high tourism and some high-end services like film production). The Bank of Canada’s interest-rate policies have played a small role, but it is the growing role of Asia as an importer of commodities and as an exporter of manufactured goods that is driving a major shift of employment between sectors and regions.

In Canada, the effects to date on the overall job market have been cushioned by relatively low interest rates, which have supported consumer spending and a booming housing sector. But interest rates are on the rise. We, like the Dutch, will soon have to confront the uncomfortable reality that many fewer good, direct jobs are being created in the highly capital-intensive oil-and-gas sector and its related service industries than are being destroyed in more labour-intensive manufacturing and its related input providers.

Moreover, it is far from certain that energy prices will remain at high enough levels to validate a massive new round of energy mega-projects, even assuming that this was desirable from a resource conservation or environmental perspective. Commodity booms have a nasty habit of collapsing into busts, and this one is vulnerable to a long-feared recession in the U.S. and any slackening of growth in Asia.

Crisis Requires Action

As things stand, industrial communities across the country face a massive adjustment crisis. Many of the jobs being lost are held by long-serving, older workers in unionized plants, and they will find it extraordinarily hard to find comparable employment in their own communities. Some will be fortunate enough to have the skills in demand in the booming resource sectors and will join the exodus west and north, but many will need retraining and mobility assistance.

Tragically, the labour-adjustment programs on the ground that used to exist have been largely destroyed since the last round of industrial restructuring in the early 1990s. There is virtually no funding available today for programs that can help, like retraining on the job prior to a layoff or serious longer-term skills retraining with adequate income support, as opposed to quickie courses in how to fill out a resume. Laid-off industrial workers in low-unemployment areas will quickly exhaust EI benefits, which, even at the maximum, barely keep even a single person above the poverty line.

No mobility assistance is provided under the EI program to help workers with the cost of moving a family to booming, high-housing-cost areas, and programs that once provided ongoing income support for displaced older workers are but a distant memory.

Despite the growing scale and severity of this new industrial restructuring crisis, there is remarkably little discussion of what it means for Canada’s long-term economic future. The official line is that “market signals” should be heeded, and no tears need be shed – let alone government policy effort expended – as the forces of creative destruction wipe out some jobs while creating others.

Yet it surely makes sense to pause and reflect on what measures might make a difference before condemning much of industrial Canada to the scrapheap of history. We must seriously think through what industrial and trade policies are needed to sustain and expand our productive base in a rapidly changing world economic environment. We need targeted government supports to new investments in capital, innovation and training within an overall national plan for the continued development of key sectors. Sectoral plans must draw on the capacities of the labour movement and communities. A marginal cut in the overall corporate income-tax rate as supported by the Liberals and Conservatives will not make a difference. Indeed, most of the benefits will be swallowed up by the already highly profitable firms of the resource and financial sectors.

It is a measure of the depth of the crisis we face that debate over industrial policy has been so muted despite massive ongoing job losses, with many more to come.


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