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Impacts of Structural Changes in the Canadian Economy

By Ronald Hirshhorn.

In Canada, as in many industrialized countries, a combination of factors, including stronger productivity growth among goods than services producers, competition from low-cost foreign producers of clothing, textiles and other goods and strong growth in demand for intermediate and final services, have led, over time, to a major change in the structure of the economy. The shift of labour from manufacturing to services has followed a more gradual trend in Canada than the United Kingdom the United States and many other OECD (Organisation for Economic Cooperation and Development) countries and, over the 1976–79 to 2001–05 period examined in the paper, output in Canadian manufacturing still increased at a significant pace – suggesting the Canadian economy does not meet the more restrictive criteria of de-industrialization. The structural changes that have taken place and continue to occur, however, have potentially important implications for the nature of work and for productivity and income growth in the Canadian economy.

A decomposition of productivity growth over 1976–79 to 2001–05 indicates that the largest contribution, by far, came from within industry productivity increases rather than structural change. However, slower productivity growth in industries that were gaining labour share than in industries losing labour share was a significant drag on productivity growth in the commercial sector. The weak performance of services reduced "within industry" productivity growth and was the prime cause of the negative contribution of structural change to productivity growth over the1976–79 to 2001–05 period. Previous studies have documented the significant service sector improvements that occurred after 1995, largely as a result of the incorporation of IT –enabled technologies, and an analysis of the 1995–2000 to 2001–05 period does result in a very different picture. But, while the improved performance of services in the post-1995 period is encouraging, it does not dispel the concern that the Canadian economy now has a dominant sector with a weak capacity for innovation and multifactor productivity growth.

The service sector jobs that have increased in importance differ in some significant respects from traditional manufacturing jobs. Service industries have a higher incidence of part-time and temporary workers, rely more on unpaid overtime and make greater use of flexible work arrangements. At the same time, the proportion of workers with at least a university degree is, on average, higher in services than in manufacturing, suggesting that work is becoming more knowledge-intensive. An examination of labour shifts alongside a previous analysis that used Census data to determine the knowledge intensity of different industries indicates that structural change is indeed supporting Canada's evolution towards a knowledge-based economy

A decomposition of labour compensation growth over 1976–79 to 2001–05 resulted in findings that were generally similar to those derived from the shift-share analysis of productivity growth. The within-industry component was the main contributor and structural change again had a negative, although smaller, impact. The latter, which was due to the slower growth in compensation among industries gaining than among industries losing labour share, largely reflects the comparatively weak productivity growth in services over the 1976–79 to 2001–05 period. Workers in industries gaining labour share tend to be relatively well compensated, with a high proportion benefiting from a significant educational premium, but their compensation has been increasing more slowly than workers in industries that are losing labour share.

A number of issues merit further attention. More research is needed into the nature of innovation in services. There is a need to understand how investments in intangible assets are impacting on firms in different service industries. The impediments to the expansion of service producers in Canada and in foreign markets, which may partly underlie their difficulties in innovating, warrant study. There is also a need to push ahead in addressing the problems of service output measurement, which may possibly account for some of the measured gap in productivity growth between goods and services industries. In addition, the adjustment problems associated with the reallocation of labour from declining to growing industries are likely to require increased attention in coming years. Jobs in the growing service sector have quite different characteristics than traditional manufacturing jobs and the challenges in filling these jobs are likely to become more significant in future years of much slower labour force growth.

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