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CURRENT ANALYSIS
February 2017
The Decline in Manufacturing’s Share of Total Canadian Output — A
Source of Concern?
The manufacturing sector remains (and will remain) an integral component of the Canadian economy even
though its direct share of economic output has declined substantially over time. Manufacturing currently directly accounts for about 10% of Canadian GDP, down from close to 20% in the year 2000 and as high as 30% in
the early 1950s. The reason for the sector’s decline in relative importance is often misunderstood as having occurred because Canadian companies have moved production offshore, in particular to countries with lower labour costs; however, other factors have also long been expected to contribute to a smaller (relative) manufacturing sector. For one, productivity growth has been much stronger in the manufacturing sector than in other industries. As a result, less ‘effort’ (in terms of number of hours worked) is needed to produce a given amount of
manufactured goods. That boosts income levels and also frees up a larger proportion of the economy’s workers
to produce other goods or services. At the same time, it has been argued that higher income levels lead to greater propensity to purchase services rather than goods. More than half of Canadian consumer spending is on services, for example, up from 40% in the 1960s. Taken together, those two forces (ie. increased efficiency in
goods production alongside rising relative demand for services as incomes increase) provide a strong reason to
expect that the manufacturing sector would be declining as a share of economic output, even without any net
shift in activity to a foreign producer.
The distinction is increasingly important in the current environment given increasing anti-trade rhetoric, most
recently and importantly for Canada in the aftermath of November’s U.S. election. Often, the intent of trade
restrictions is to ‘bring back jobs and production’ to the domestic economy. If, however, the ‘cause’ of a
shrinking manufacturing sector is not globalization, then trying to reverse globalization will not help and indeed
would very likely do more harm than good.
%
25
20
15
10
Source: Statistics Canada, RBC Economics Research
Canada is not alone in having a smaller relative manufacturing sector
One of the clearest pieces of evidence that the longer-run decline in the relative importance of the manufacturNathan Janzen
Senior Economist | 416-974-0579 | [email protected]
2015
2013
2011
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1995
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1991
1989
1987
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1979
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1963
To be sure, the Canadian manufacturing sector has also
been sensitive to shorter-run fluctuations in competitiveness relative to other jurisdictions. Just as the weaker Canadian dollar and increased trade liberalization boosted
manufacturing in the 1990s, a stronger currency combined
with increased integration of emerging market economies
in the global economy (including the entrance of China into the WTO) sapped some of the sector’s strength. Nonetheless, those shorter-run factors do not explain the more
persistent longer-run downtrend in the sector (Chart 1).
Chart 1: Canadian Manufacturing Sector Share of GDP
1961
The impact of short-run ‘competitiveness’ factors
Current Analysis | February 2017
ing sector reflects factors other than ‘offshoring’ is that
Chart 2: Manufacturing's Share of GDP by Country
the Canadian decline is consistent with developments in 40Average % of GDP per time-period
1970-79
1980-89
other countries. As shown in Chart 2, most (if not all) ad- 35
1990-99
2000-09
vanced economies have seen substantial declines in the
30
2010-15
sector’s share of GDP over a longer time period. Perhaps 25
more surprising, however, is that emerging market econo- 20
15
mies have also seen substantial declines including both
10
China and Mexico. The share has been declining more
5
slowly in the emerging than advanced economies but is
nonetheless also on a downward long-run trajectory. AcCanada
U.S.
Germany
UK
France
Low &
middle
cording to World Bank estimates, the share of manufacincome total
turing output in GDP globally declined from 21% in 1995
to 15% in 2014. The share in Canada declined from 17%
to 10% over that period and in the U.S. by a slightly smaller 5 percentage points to 12% from 17%.
China
Mexico
Source: Haver, RBC Economics Research
Off-shoring can explain a shift in the share of global manufacturing activity to one jurisdiction or another (and
it is quite likely that manufacturing’s share of GDP in advanced economies, including Canada, has declined
more quickly than in emerging markets due to competitive pressures.) That doesn’t, however, explain a broadly based decline in the size of the sector relative to GDP globally.
Does Canada actually produce less manufactured goods?
It is also worth noting that, although the manufacturing sector makes up a significantly smaller share of the
Canadian economy than in the past, the amount of manufactured goods produced per person is still much higher than it used to be. Manufacturing sector productivity (ie. production per hour worked) growth easily outpaced that of the business sector as a whole, particularly in the 1970s, 1980s, and 1990s (Chart 3). Productivity growth in the sector has averaged 2.8% a year since 1961 compared to 1.9% for the business sector. The
result is that increasingly fewer production resources (eg. workers) are needed to produce the same or more
manufactured output (a trend often referred to as the automation of industrial output). That has allowed other
sectors of the economy to grow in relative size while still producing, in an absolute sense, significantly more
manufactured output. The level of manufacturing output per-person in Canada in 2015, for example, was still
~70% higher than in the 1960s (Chart 4) despite the sector’s share of total GDP shrinking by about half.
Chart 3: Manufacturing vs Business Sector Productivity Growth
Average annual percent change
4.0
3.8 3.790686
3.5
Chart 4: Canada Per-Capita Agriculture and Manufacturing GDP
Index = 100 in 1946
450.0
3.7
400.0
3.2
Agriculture/forestry/fishing (real GDP)
350.0
3.0
2.6
2.5
2.1
2.0
2.0
1.5
Business sector labour productivity
300.0
Manufacturing labour productivity
250.0
1.5
1.4
1.1
Manufacturing (real GDP)
200.0
150.0
1.2
0.9
1.0
100.0
0.5
50.0
0.0
1961 - 1970
1970 - 1980
1980 - 1990
Source: Statistics Canada, RBC Economics Research
1990 - 2000
2000 - 2007
2007 - 2014
0.0
1946 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014
Source: Statistics Canada, RBC Economics Research
As Bank of Canada Governor Poloz noted in a recent speech, the downtrend in manufacturing’s share of GDP
in Canada mirrors an earlier long-run decline in the agricultural sector. In the early 1920s, agricultural production accounted for almost 20% of total Canadian economic output and a third of total employment. Today,
agriculture directly accounts for just 1½% of both output and jobs. Nonetheless, Canadian agricultural producers continue to produce more food, on balance, than is needed to feed domestic customers. Canadian agriculECONOMICS | RESEARCH
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Current Analysis| February 2017
tural output per person has been relatively steady over time (Chart 4) and Canada remains a significant net exporter of food products, amounting to almost $16 billion on net in 2015.
Is goods production ‘better’ than services production?
Chart 5: Service Sector's Share of GDP by Country
A decline in manufacturing’s share of the economy imAverage % of GDP per time-period
90
plies that other sectors have become more important on a
1970-79
1980-89
80
1990-99
2000-09
relative basis. To-date, both in Canada and abroad
70
2010-15
(including in emerging markets), that has generally meant 60
a rise in the contribution from the service sector (Chart 5). 50
The stigma often attached to the production of services as 40
30
opposed to more tangible goods production is, in our
20
view, misplaced. In terms of household incomes, there is 10
no particular reason to think that a service-sector job is
Canada
U.S.
Germany
UK
France
Low &
China
Mexico
less ‘valuable’ than in the goods-producing sector. Medimiddle
income total
an wages in the Canadian transportation & warehousing,
professional services, finance, education services and
healthcare, for example, are all as high or higher than the median wage in the manufacturing sector (Chart 6).
Neither does services production mean providing services for only domestic customers. Services account for
17% of Canadian exports. That is up from about 12% 20 years ago with the bulk of the increase accounted for
by exports of finance and professional services (which also pay above-average wages).
Source: Haver, RBC Economics Research
Certainly, the fact that the service sector has been increasing in relative importance for decades has not prevented growth in overall incomes with the level of real per-capita GDP 140% above its average in the 1960s.
Of course the distribution of that income matters but there is not any obvious problem in terms of the size of
the income ‘pie’ from having a larger services sector. Indeed, from an income distribution perspective, the
relatively labour-intensive service sector also tends to pay a larger share of its earnings to workers. About
60% of the total value of service-sector production is ultimately paid to labour. That is similar to the manufacturing sector but well-above the 50% share in the goods-producing sector as a whole (Chart 7).
Chart 6: Median Hourly Wage Rate by Industry
Chart 7: Canada Industry Productivity and Labour Compensation
$/hr, 12mth moving average as of Jan/17
40
Both full- and part-time employees,15 years and over,Both sexes
$C, 2012
500
450
400
350
300
250
200
150
100
50
Source: Statistics Canada, RBC Economics Research
Other priv. svc
Arts/ent/rec
Accomm/Food svc
Prof/Sci/Tech svc
Admin support/wst mgt
Fin/Ins/Real-est. svc
Transp/Whsing
Info/cult studies
Retail
Wholesale
Construction
Manufacturing
Public admin
Other services
Accom/Food svc
Info/cult/rec
Healthcare
Ed services
Business admin
Professional serv.
Finance
Transportation
Wholesale
Construction
Manufacturing
Utilities
Natural resources*
Agriculture
5
Utilities
10
Mining ex-o&g
15
Labour compensation per hour
worked
Mining support
20
Services
Nominal GDP per hour worked
Mining
25
Oil & gas prod
30
Goods
Ag/For/Fish
Goods
Services
35
Source: Statistics Canada, RBC Economics Research
The cost of ‘deindustrialization’
That is not to say that there are no costs associated with longer-run structural shifts in the economy. Although
there are many jobs in the services sector that pay as much or more than the median manufacturing sector position, skills are not always transferrable and workers who have been, essentially, innovated out of a job can be
left behind. That can have a pronounced effect on, not only individuals, but entire communities that have been
heavily reliant on one particular industry. This was, and continues to be, a consequence of the earlier downtrend in agriculture’s share of GDP in the 20th century that resulted in a dramatic transformation in agricultureECONOMICS | RESEARCH
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Current Analysis | February 2017
dependent regions, for example in the rural communities of the Canadian Prairies.
Policymakers still need to take into account short-run competitiveness factors; however, it is also important to
acknowledge and address longer-run trends that have more to do with structural demand and supply factors at
the global level (over which Canada directly has little if any control). Rewards to education/experience (in
terms of wages) tend to be higher in the services sector than in goods production. That argues both for support
and retraining services for displaced workers as well as improving access to education to ensure that all future
workers have access to the same future job opportunities. In an era of increasingly protectionist trade rhetoric
both at home and abroad, it is worth remembering that the economy, both global and domestic, has adjusted to
change before and can do so again. A more appropriate response to these longer-run challenges is to better
identify where the economy is evolving, and ensure that segments of the population are not left behind, rather
than trying to revert back to an economic model that no longer reflects underlying contemporary conditions.
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