Economy Lab: Why Canada's manufacturing sector is dwindling

That's the title of my latest post on the Globe and Mail's Economy Lab site.

Comments

[Robert McClelland]

How could you fail to mention that free trade has been the major factor for our declining manufacturing sector?

[Adam P]

Stephen: " output per worker in the manufacturing sector has been increasing more than three times as fast as the economy as a whole. If productivity growth is the key to sustained prosperity, then shouldn’t manufacturing be increasing in importance?"

Isn't the anwer obviously no? This just says that manufactured goods and "other goods" are, on average, compliments does it not?

Also, you're a bit reserved in the piece saying "This decline isn’t necessarily a bad thing...". In fact it is a very, very good thing. I for one want to live in the society that has many manufactured goods and doesn't need to work too hard for them. In Chine they put a lot of work into manufacturing, so much so that workers were committing suicide for want of better conditions and higher real wages!

[Patrick]

I'm with Adam P. As someone who works in industrial automation, I can vouch for the fact that while there may be fewer and fewer people slaving away on an assembly line to make 'stuff', there are LOTS and LOTS of people who install, sell, service, maintain, train other people to use, etc the equipment. And all of the work is WAY more interesting than mindlessly assembling electronic components. I don't have the brains the prove it, but I'd bet that for every job automated away there are multiple new, better paying, and more interesting jobs created elsewhere in the economy.

[Frances Woolley]

What strikes me about the comments on your post on the G&M site is how personal so many of them are (I don't read the comments on my posts). But at least you're generating good comment numbers which is great - someone out there is reading.

[Stephen Gordon]

Adam P: I keep meaning to do a post on the economics of Star Trek: what happens when we develop duplicator technology?

[Adam P]

surely you've noticed that the people on Star Trek have found something to do.

In any event, not sure if you're agreeing with me or not. Is it not obvious that manufactured goods are, on average, compliments to everything else and thus if productivity growth is faster in manufacturing then in everything else we should expect a relative decline in manufacturing employment? (I am ignoring international trade here.)

[Stephen Gordon]

Oh yes, that's what I meant. By the 26th century, no-one seems to work in manufacturing anymore, and no-one seems to miss it.

[Adam P]

yep, and some have a really cool job!

[Stephen Gordon]

Me, I practice steering the Enterprise into dry dock every time I try to park my damn minivan. I'm all set to be a Starfleet officer.

[K]

When we create duplicators the only thing that will matter is land and who owns it.

[Rob]

"How could you fail to mention that free trade has been the major factor for our declining manufacturing sector?"

This. Access to new supplies of cheap labour is not the same as increasing productivity, and both are at work here. The article could probably at least have used a caveat about the role of trade in the short to medium term, if only to avoid flaming in the comments.

[Todd Kuipers]

Stephen, do you have access to stats that show the market value of output from manufacturing (and agriculture) within Canada over the past 100ish years (have I missed them in a past post)? Don Boudreaux (GMU/Cafe Hayek) trots out a set of US manufacturing output growth statistics on a regular basis, and that information has made me very skeptical of articles that bemoan the "decline" of manufacturing. What a lot of the commenters on the G&M site don't get is that employment within is not an indication of health of an industry (though the loss of a job or a factory hits them personally.) In the States, value of output of manufacturing has grown significantly over the past 40 years, and I suspect that Canada is likely similar - though given our higher proportion of primary industries here than in the US, I can't be sure. On top of that the cost of an average car (the stereotypical manufactured item) compared to average income has likely dropped significantly, and the average car now is significantly better equipped than in the past.

As Robert asks in his comment about free trade - free trade has not destroyed manufacturing in Canada, but it has prompted the move of employment from manufacturing to information based industries. I believe you'll see the same changes affecting information as home on-demand manufacturing expands over the next few years, and eventually reaches the duplicator technology concept. (you already see a lot of micro manufacturing in spades on sites like Etsy.com - they might look like crafts but a lot of the use serious technology behind the scenes. Desktop 3D "printers" and shop robots are already becoming very cheap, helping increase employment in mass-customization manufacturing.)

Thanks for the post!

[Just visiting from Macleans]

Patrick writes: "As someone who works in industrial automation, I can vouch for the fact that while there may be fewer and fewer people slaving away on an assembly line to make 'stuff', there are LOTS and LOTS of people who install, sell, service, maintain, train other people to use, etc the equipment."

Yeah, but you work in Alberta in O&G/oil sands related industries, no? What would your technicians be doing if not for that primary industry?

[Roland]

The problem is, the benefits of the more advanced, higher-productivity, post-industrial economy have gone into fewer hands.

Real median wages have stagnated. Lower quintiles have faced real wage declines. And even those figures are based on a CPI that underrates housing costs, which have skyrocketed in the main urban centres.

Therefore, from a working-class perspective, the loss of manufacturing jobs doesn't necessarily mean we get cool interesting high paying jobs. Some of us might, but many more of us get stuck with jobs in retail services that are every bit as boring as an assembly line, and less remunerative.

Few are nostalgaic over factories as such. Nevertheless the nostalgia over our more-industrialized past does have some logical foundation.

The Toffleresque enthusiasm over a post-industrial economy is very silly, and based on an ignorance of conditions in today's Canadian working class.

[Patrick]

JVFM: Doing what they do now: working on projects in the rest of the world. AB is dead for us currently.

[Just visiting from Macleans]

Patrick: So why would an Edmonton based company send its expertise overseas? Do you have something proprietary? Or is it just a matter of time until your fees are also undercut by cheaper foreign competition?

[Patrick]

JVFM: If I was still running my own little show I'd be terrified, but 800 pound gorilla's play by slightly different rules.

[Simon van Norden]

Nice post Stephen.

Makes me wish for an economic history perspective; something that shows our 20th century gains in agricultural productivity alongside the fall in real agricultural prices and our shift in employment out of agriculture. If I understand your analysis, you seem to be talking about the same process.

So here's my question. I've always understood the outcome of productivity gains in agriculture to be the one important example of "immerizing growth." This happens when you have big productivity gains producing something that has a relatively inelastic demand. The inelastic demand causes the price to plummet, so you wind up with a much smaller sector that produces slightly more goods than before at lower prices. Obviously, the key here is the inelastic demand (people will only eat so much food.) But who thought that the demand for manufactured goods was inelastic? Does it seem now like it is? or do we need a different model?

[Declan]

If we really wanted an answer to the question, wouldn't a good place to start be to compare what's happening in Canada with trends in the OECD and world as a whole.

I would have thought that determining whether this was a local or global phenomenon would have been the first step in determining a cause?

For example, if manufacturing is in decline in Canada but not overall, then that suggests Canada specific factors at work. But if manufacturing is dwindling globally, then something more universal is at play.

Is the answer to this question (is the manufacturing decline a local / OECD or global phenomenon?) well known?

It didn't seem like you really said much in your article that addressed the question, other than a brief comment on commodity prices and their effect on the dollar (again, knowing whether the manufacturing decline is a Canada specific trend would help in assessing this factor).

But since you digressed into the topic of relative wages between sectors, I wonder why you think that wages in manufacturing are down because producer prices are down - I would have thought the logical inference would have been the opposite - driving down wages through global arbitrage is what has led to slower growth in producer prices, while the harder to outsource / better protected by regulatory barriers service sector has seen more wage growth and hence more price increases.

[rick]

How is it that we forget that economics is not a fundamental study. Economics is not a law of nature, its the result of organizational behavior and is studied through observation. You can't talk about trade and the decline in manufacturing in qualitative terms as being just part of the theory, and not totally colored by your opinion. As for the decline in manufacturing, it is what it is, it may be progressive in "theory", but as I said there is no laws of nature that such a theory is derived from. The good or bad that comes from trade is directly related to policy; how we organize the priorities in our society. Recent trade arrangements have turned out to be both good and bad. Bad because, coupled with the resulting policy changes that have accompanied it over the last 20 years or so, the resulting redistribution of labor and income has hurt the average person in the, and is the cause of a quickly developing trend of importing the class structure from other countries.

Its easy to hide behind the text book, but its also pretty weak. Your view is biased. It's a complicated issue and your post is very misleading in its simplicity.

[Paul Tulloch]

Stephan- has anybody called you an irresponsible idiot lately- how can you suggest that losing 600,000 manufacturing jobs is even remotely acceptable. And by that way thanks for giving me credit for raising the whole issue of 600k jobs being lost.

Paul Tulloch