The decline in the value of the Canadian dollar relative to the US dollar is expected to provide a boost to the manufacturing sector. There is certainly no shortage of commentary on whether the fall in the dollar is the result of economic fundamentals or an engineered conspiracy designed to boost Conservative re-election prospects in the short-term. Check out some of the commentary by Coyne, Corcoran or Babad. Yet what I find more interesting is the belief that somehow a lower dollar will resurrect Canadian manufacturing and provide the antidote to a decade of “Dutch Disease”. If that is indeed the hope, good luck with that.
Three quick exhibits for your contemplation. Figure 1 plots the monthly value of the Canadian dollar (CAD per USD) and the manufacturing share (%) of total employment from 1987 to the present. The data is from Statistics Canada (v2085317; v2085353; v37426). This suggests that there is a relationship over time between an appreciating Canadian dollar and a decline in manufacturing. Over a 25 year periof, the share of manufacturing employment dropped from about 17 percent to 10 percent while the Canadian dollar goes from about 1.40 CAD per USD to parity. Yet, on closer inspection, you will note that there are short periods where the dollar depreciates and the manufacturing share of employment continues to decline.
Figure 2 plots the manufacturing share of employment against the value of the exchange rate and the relationship here gets quite a bit muddier. There seem to be a relationship between the two variables comprised of several arms and a torso. For lack of a better term, lets call it a Y-curve. Why the Y-curve exists is a good question. This suggests to me that there are forces other than just the exchange rate at work. There are different effects of the currency in the short term on the manufacturing share of employment as a result of other economic factors that may be at work.
So, to deal with the distinct possibility that short and long term factors are at work here as well as the possibility of spurious correlations, Figure 3 plots the first difference of the two variables against each other. Needless to say, the result is a pretty wide scatter plot. There is not a strong relationship between a depreciating Canadian dollar and the manufacturing share of total employment that I can pull out of that scatterplot. If there is indeed any effect of a deprecating currency on Canadian manufacturing, it is entirely a short-term effect. In the long run, structural factors such as technological change and basic productivity are the main drivers of what has happened to manufacturing. Any conspiracy to drive down the dollar to boost exports in manufacturing and revive our manufacturing sector should have done a bit more homework. It is not going to work. But what do I know? I'm just a country economist who harvests data and reaps simple results.
January 24th Update
Figure 3 was first differences based on immediate month to month changes. I've also done the figure with the first difference based on 12 months (eg. Jan1989 minus Jan1988, etc...). Here is the result. Again, not a very strong relationship but the r-squared on a linear fit this time was 0.044.