It’s Worse Than You Think

The Fraser Institute came out with a new report today titled Ontario vs. the US Rust Belt: Coping With a Changing Economic World. The report challenges the political narrative that a high dollar and deindutrialization due to global forces are the main factors driving the deficit in Ontario. It does so by comparing the economies of the US “Rust Belt” states to Ontario’s.

In terms of the Canadian dollar vs. the US dollar, the repot notes that:

… the appreciation of the Canadian dollar versus the USD of the 2000s was a reversal of the unusual weakness of the 1990s.

and

… the exchange rate is currently near its long-term average,
so Ontario policymakers cannot continue to cite this as an excuse for
chronic budget deficits.

In other words, exchange rates are not a major factor in Ontario’s deteriorating fiscal position and industrial decline. So let’s look at the issue of the deindustrialization of Ontario.

The Real Data

Using data from Statistics Canada, we examine Ontario labour market changes over the last decade. Table 1 shows the changes in total employment and average wages for this period, by market sector and selected sub-sectors. As a reference point, Ontario’s population grew by 13.5% over the decade.

Table 1. Percentage changes in the Ontario labour market over the decade ending in March, 2015.

Data by market sector Percent change
Total employment: goods-producing sector -16.2
     Total employment: manufacturing -46.6
Total employment: service-producing sector 17.0
     Total employment: education 27.9
     Total employment: healthcare 26.9
     Total employment: public administration 9.4
Total employment: all sectors 8.6
Average wage: goods-producing sector 23.4
     Average wage: manufacturing 18.4
Average wage: service-producing sector 30.0
     Average wage: education 29.7
     Average wage: healthcare 36.5
     Average wage: public administration 28.0

Data source: CANSIM Tables 282-0087, 282-0088, and 281-0026.

The importance of the goods-producing sector is that, at the end of the day, wealth may be measured by the net quantity of goods produced either for consumption or export.

The Shift from the Manufacturing to the Service Economy

This is a much discussed topic that affects all of North America (for example read: Charting The Incredible Shift From Manufacturing To Services In America).

Our data shows that over the last decade, there has been a drastic loss of goods-producing jobs with almost half of all manufacturing jobs gone. This is offset in part by the increase in service-producing jobs. This sounds good until we look at the average wage differential between goods-producing and service-producing sectors. In March 2005, goods-producing jobs paid 34.8% more than service-producing jobs on the average. In March 2015, the differential still stood at 28.2%.

The Changing Service Economy

The public sector has grown the most of any sector over our study period. Adding lines 4-6 of Table 1 together we find the aggregate public sector growth was 23.2%. In other words, the size of the public sector has grown by 172% compared to the population growth.

Not only has the public sector seen extraordinary growth in jobs but the growth of wages has outpaced the growth of the goods-producing sector, narrowing the differential. The goods-producing sector, however pays 28% better than the service sector on the average.

Summary

In the last decade, the Ontario economy has made a notable shift from higher paying goods-producing jobs to lower paying service producing jobs, and from productive private sector employment to unproductive public sector employment, an argument left for another essay.

The report notes that Indiana [saw] a surge in manufacturing while Ontario along with other states saw a decline. This counters the premise that global restructuring is the major cause of deindustrialization. There must be other factors at work. The report continues:

Our most alarming finding was that Ontario and Quebec have grown
faster economically (in aggregate) than their Rust Belt counterparts, yet they have been much more irresponsible fiscally.

Fiscal irresponsibility on the government’s part is responsible for Ontario’s deteriorating economic and employment pictures. Global restructuring of labour markets has had some effect, but the case of Indiana demonstrates that it can be overcome leading to manufacturing growth.

Additional Reading

Past related essays that may be of interest:

 

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