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Archived — Working Paper Number 14: Employment Performance in the Knowledge-Based Economy

by Surendra Gera, Industry Canada, and Philippe Massé, Human Resources Development Canada, December 1996


There is a growing consensus among academics and policy-makers that most industrialized economies are increasingly becoming "knowledge-based." Knowledge, both as an input and an output, is seen a key source of long-term growth and job creation. Recent evidence shows that the Canadian economy is dynamic and increasingly becoming innovative — i.e., knowledge-based, technology-intensive, and skill-intensive. A major focus of this study is whether structural change towards knowledge-based industries has led to more and better jobs.

The study examines the relationship between structural change and the employment performance of the Canadian economy over the period 1971 to 1991, using Statistics Canada's input/output model. Though largely based on previous work by the OECD (1992), the study employs more timely data and a finer industrial disaggregation (111 industries as opposed to 33), and explores more closely the employment implications of the emergence of the knowledge-based economy. Three policy-related issues are addressed in the paper:

  1. Is the employment structure in Canada shifting towards innovative industries — i.e., knowledge-intensive, technology-intensive, science-based, skill-intensive, or high-wage industries?
  2. What are the factors driving these shifts? What have been the respective roles of domestic demand, trade, technology, and productivity?
  3. How are labour markets adjusting to the new demands of the knowledge-based economy?

Major Findings

As in other OECD economies, Canada has seen progressively weaker overall employment growth in recent decades and a relative shift in employment away from the traditional sectors — the primary, manufacturing, and construction industries — to the service sector.

  • Annual employment growth in the business sector fell from 3.1 percent in the 1970s to about 1.3 percent between 1986 and 1991. The service sector was the only source of continuous, positive employment growth. In contrast, the relative importance of manufacturing has been severely eroded over the past 20 years.
  • Strong employment growth performances were most evident in industries within the service sector, with the fastest increases taking place in real estate and business services, community and personal services, the hotel and restaurant industry, and the finance and insurance industry. Despite the overall decline in manufacturing employment, four manufacturing industries are in the top 10 fastest growing industries — computers and office equipment, aircraft manufacturing, rubber and plastics, and pharmaceuticals.
  • At the other end of the scale, the adverse effects of structural change have forced severe adjustments in labour-intensive, traditional industries such as textiles, clothing, footwear and leather. About one quarter of the jobs in shipbuilding were lost.

Contrary to popular belief, the pace of structural change in Canada has not been quickening.

  • The pace of structural change may have accelerated somewhat during the early 1980s, but it has not increased — and if anything, it has decreased — in the late 1980s and early 1990s.

Employment growth in Canada is increasingly related to the use and production of knowIedge. This transformation has been evident since the early 1970s.

  • The structure of employment in all sectors is shifting towards knowledge— and technology-intensive industries. In addition, an increasing proportion of employment is accounted for by industries that require workers with more skills and that pay higher wages.
  • In manufacturing, knowledge- and technology-intensive industries experienced the highest employment growth, while low-knowledge and low-technology manufacturing industries have shed jobs. The main source of employment growth remains the service sector, with gains in employment coming from both high- and low-knowledge service industries.

Although the direction of change has been towards knowledge- and technology-intensive industries, they still account for only a small share of over all employment in Canada.

  • The majority of jobs are still concentrated in the low- to medium-knowledge and technology-intensive industrial system.
  • In part, this may reflect the fact that the Canadian manufacturing sector is suffering from an "innovation gap" as Canada's high-tech sector has grown at a much slower pace than that of other major industrialized countries over the past 20 years.

Employment in high-knowledge industries is less sensitive to cyclical downturns than that in medium- and low-knowledge sectors.

While domestic demand and labour productivity growth have always been important determinants of employment growth, the role played by trade and technology increased during the 1980s and early 1990s.

  • Exports have become a dominant factor in employment growth, particularly in high-knowledge and high-technology manufacturing, and in high-wage industries.
  • Conversely, import penetration has adversely affected employment growth in low-knowledge, low-technology, low-wage, low-skill, and labour-intensive manufacturing industries.
  • The importance of trade and technology has been increasing in the Canadian service sector, in particular in high- and medium-knowledge services such as business services and the finance, insurance, and real estate group.

These demand-driven forces are accompanied by a shift in the structure of labour demand towards skilled workers.

  • Shifts in the occupational structure of employment indicate that the structure of labour demand has shifted in favour of skilled workers in both the manufacturing and service sectors. This phenomenon appears to be widespread, occurring within all industrial sectors, and is not merely the result of employment shifts towards industries that tend to employ more skilled workers.
  • The increased demand for high-skilled workers has been reflected in higher relative returns to education and experience (age). In addition, the evidence available on changes in the composition of labour force activity by educational level and by experience indicates that workers with higher skills enjoy higher employment rates and lower unemployment rates.
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