The Service Sector in Canada

A few years ago, we followed Statistics Canada’s monthly employment releases. They often showed net gains which the media always portrayed in a positive light. Looking at the breakdown, however, we noted a consistent monthly and likely multi-year trend in net losses of high-value manufacturing jobs. The popular spin (e.g. Canadian Services Sector: A New Success Story) was that Canada was transitioning from a manufacturing and knowledge-based economy to a service-based economy as if this were some wonderful natural progression on the road to a higher standard of living. Our intuition was that there was something fundamentally wrong with this view and we resolved to try and prove our suspicion at some point. A chance discovery of some work done by Jim Stanford (a great Canadian economist working for the CAW) motivated this post and confirmed our intuition.

What Are Services?

Generally we measure economic activity in terms of two categories, the production of goods and services. Western societies have gone through a series of major phases. The earliest was agrarian-based in which the dominant activity centered around the production of agricultural goods and services. The next phase was industrialization that lead to the foundation of our modern manufacturing-based economies. This in turn has moved to become knowledge-based with an increasingly dominant service sector.

The OECD  in their 2000 paper titled The Service Economy, defined services as (emphasis in quoted material is ours):

Simply defined, services are a diverse group of economic activities not directly associated with the manufacture of goods, mining or agriculture … They typically involve the provision of human value added in the form of labour, advice, managerial skill, entertainment, training, intermediation and the like.

They further note that services are not durable beyond the point at which they are rendered, unlike the production of goods which mostly have a quantifiable durability or lifespan. There is, however, a close and symbiotic relationship between services and the manufacture of goods. For example, a manufacturer may from time to time buy professional services such as accounting, design, engineering or architectural services that it does not have in-house. The manufacturing process would fail without the service and the service category might disappear without the manufacturing industry.

The knowledge-based economy is even more dependent on service inputs than manufacturing. While it may be possible to construct an orthogonal relationship among agrarian, manufacturing and knowledge economies, services transect all three.

There are a large number of services in the economy. The OECD report provides a high-level categorization of services (Table A1. Illustrative list of services) that the reader may wish to consult for more in-depth research.

The Rise of the Service-Based Economy

In 1996, Industry Canada published a working paper by Surendra Gera and Philippe Massé: No. 14: Employment Performance in the Knowledge-Based Economy. A few of the key points from the study that also confirm our opening observations are:

  • 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.
  • The main source of employment growth remains the service sector, with gains in employment coming from both high- and low-knowledge service 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. We

By 2000, the OECD noted that Services play a key role in OECD economies, accounting for over 60% of total economic activity in most OECD countries, and for more than 70% in ten countries. (The Service Economy)

The Service Sector in Canada

The online site RetailFX has published a general ovcerview of Canada’s economy. Of the service sector they say:

The Canadian service sector accounts for approximately two thirds of the national GDP. The retail sector is the largest employer and it’s concentrated in a relatively narrow group of chain stores that are bunched together in shopping malls. The second largest field in this sector is business services, which includes real estate, the financial services, and communications industries. Canada also has a significant high tech industry, and an entertainment industry that is flourishing both for locally and across the border. The Canadian tourism industry is experiencing consistent growth, despite the damage caused by the recent strengthening of the Canadian Dollar.

We note that they do not provide data or references to back up their claims. We assume that the description is reasonably accurate.

Turning to more reliable data, in 1997, Canada ranked third highest among OECD countries in terms of  value added to GDP by services, at 71.6 % (The Service Economy, Table A3.).

This figure is corroborated by the CIA World Fact Book at 71% for 2011 although they present a different ranking. Wikipedia takes the CIA data and provides a table of the 35 largest economies that shows Canada tied for twelfth place in terms of sector size relative to GDP. France at 79.8% is in first place. Greece is in second place at 78.9%.

The Canadian Services Coalition and The Canadian Chamber of Commerce published a paper in June 2006 titled Canadian Services Sector: A New Success Story. This paper makes a few points of note:

  • The Canadian economy is in the process of change, moving from its traditional base of commodities and manufacturing to one of services and ideas.
  • According to the World Bank Group’s World Development Indicators, in 1980, the output generated by the Canadian services industry was approximately 58 percent of Canada’s Gross Domestic Product (GDP) and by 2001 that number had increased to approximately 65 percent. [This is inaccurate. In Growth of the Service Sector, Figure 9.1, the average for high-income countries is 66% for 1995. In the 2000 publication, Beyond Economic Growth, the same graphic is presented with the same figure of 66%. Further, according to Map 9.1, there is no data from Canada.]
  • The services sector consists of not only the large companies that are household names with large presence (e.g. banks, insurance and accounting firms) but many small companies … [this statement is an example of how superficial the paper is]
  • According to Statistics Canada, 80 percent of all new jobs within Canada between 1992 and 2005 were in the services industry.

Unfortunately, this paper consists of a lot of verbiage and a paucity of data. It does not even attempt to justify the claim of “success”. The World Bank estimate of the contribution of services to Canadian GDP is valueless for reasons explained above.

Finally we turn to the blog post that sparked this post. In March 2008, Jim Stanford of the Canadian Auto Workers wrote a post: The Pitfalls of the “Service Economy”. It is based on a larger study Building a Diversified, Value-Added, Productive Economy. Jim notes in his blog:

  • I did confirm that the major structural shift occurring in the economy is NOT, surprisingly, from manufacturing into resources.
  • The oil sands developments in Alberta are obviously huge and epochal.  But they are still not big enough to single-handedly shift the composition of our entire national output.
  • What IS happening is a relative shift in production and employment into services production, especially private services.
  • I was surprised to find that services production as a whole is becoming LESS tradeable [ie. subject to be rendered at a future time and place] over time, not MORE … causing a DISENGAGEMENT of Canada’s GDP from export and import markets.
  • It is well-known that services jobs on average are poorer quality than jobs in the rest of the labour market.  Average services wages and salaries are about 15% lower than in the goods-producing side of the economy (and 7% lower than the weighted average for the whole economy).
  • the average relative quality of services employment is actually deteriorating. [service jobs are often categorized by quality into high, medium, and low paying jobs.]
  • Since 2002 (which is when my analysis suggests that Canada’s deindustrialization began in earnest), high-wage private services employment has grown 5%.  But low-wage private services employment has grown twice as fast (over 10%).  Public services employment has grown by a quite decent 9%.

Tradable Services

These are services that can be bought and sold independent of time and location. The OECD has a figure for Canada’s trade in services for 2009, the latest available. More importantly they publish figures spanning the 4 years leading up to 2009.

Table 1. Canada’s Trade in Services (millions of dollars)

2005 2006 2007 2008 2009
Exports 57,786 60,286 64,984 67,582 58,739
Imports 65,734 72,747 82,481 88,499 78,564
E/I % 87.9 82.9 78.8 76.4 74.8

Source: OECD Statistics on International Trade in Services, Volume 2011 Issue 1;The POOG.

What is critical to note is that although the value of Canada’s exports were increasing annually up to the fiscal crisis, the value of services exports have been steadily falling relative to imports, even in the crisis. Canada’s balance of trade in services is steadily deteriorating.

Summary

The Canadian economy is fast converting to a service-based economy. At the same time, as Stanford notes: On the whole, then, lousy services jobs are being created much faster than better services jobs, and the overall quality of that work is deteriorating. In addition, Canada’s trade in services is deteriorating creating a negative impact on Canada’s balance of payments. This motivates another study, an analysis of the structure of the service sector in Canada, to see where the loss in value is coming from (our bet is the increasing size of the civil service  in Canada).

Our opening intuition is confirmed.

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