Report April Key Economic and Labour Force Issues Facing Canada s Manufacturing Sector. economic performance and trends

Transcription

1 Report April 2008 Key Economic and Labour Force Issues Facing Canada s Manufacturing Sector economic performance and trends

2 Key Economic and Labour Force Issues Facing Canada s Manufacturing Sector by Michael Burt and Valérie Poulin About The Conference Board of Canada We are: The foremost, independent, not-for-profit applied research organization in Canada. Objective and non-partisan. We do not lobby for specific interests. Funded exclusively through the fees we charge for services to the private and public sectors. Experts in running conferences but also at conducting, publishing, and disseminating research; helping people network; developing individual leadership skills; and building organizational capacity. Specialists in economic trends, as well as organizational performance and public policy issues. Not a government department or agency, although we are often hired to provide services for all levels of government. Independent from, but affiliated with, The Conference Board, Inc. of New York, which serves nearly 2,000 companies in 60 nations and has offices in Brussels and Hong Kong. Preface In this report, The Conference Board of Canada examines how factors such as globalization and the aging workforce are affecting the performance of the manufacturing sector, as well as its labour force. The sector s recent performance and that of its subsectors are examined, and the factors that are influencing the sector s growth are discussed in detail. In addition, the characteristics of the sector s labour force are discussed. The report ends with a discussion of the major human resources challenges that the sector will face in the coming years and how the sector might respond to the various challenges it faces The Conference Board of Canada* Printed in Canada All rights reserved ISSN ISBN Agreement No Publié également en français *Incorporated as AERIC Inc. Forecasts and research often involve numerous assumptions and data sources, and are subject to inherent risks and uncertainties. This information is not intended as specific investment, accounting, legal, or tax advice.

3 Contents Executive Summary Key Economic and Labour Force Issues Facing Canada s Manufacturing Sector....i Introduction... 1 An Overview of Canada s Manufacturing Sector... 2 An Overview of Canada s Manufacturing Labour Force... 5 Impacts of Productivity Gains in the Manufacturing Sector Advanced Technology Use in the Manufacturing Sector... 9 Impact of Shifting Global Trade Patterns on Investment Flows The Human Resources Challenges Facing the Canadian Manufacturing Sector Conclusion Appendix A Bibliography Appendix B Canadian Manufacturing Industries... 18

4 This project is funded by the Government of Canada s Sector Council Program. The opinions and interpretations in this publication are those of the author and do not necessarily reflect those of the Government of Canada.

5 Executive Summary Key Economic and Labour Force Issues Facing Canada s Manufacturing Sector At a Glance Canada s manufacturing sector is undergoing significant changes as a result of multiple external stresses, including globalization, the pace of technological change, and the recent strength of the Canadian dollar. The sector faces human resources challenges, including early retirements, a below-average level of workforce education, a reduced ability to attract young workers, and changing skills requirements. Manufacturers will need to respond by increasing their use of imported inputs, undertaking more investment and research and development, and making better use of their existing workforce. Canada s manufacturing sector is an important part of the economy, but its importance is waning. At its peak in 2000, manufacturing accounted for 18.4 per cent of gross domestic product (GDP). By 2007, that figure had fallen to 15.2 per cent. While the rest of the economy has continued to expand, manufacturing growth has stalled. A variety of factors have contributed to this recent slowdown, including the tech bust and mild U.S. recession at the beginning of the decade, the recent rise of the Canadian dollar, and the growing role of emerging economies in global production and supply chains. The recent performance of the manufacturing sector s subindustries (e.g., apparel, wood manufacturing, plastics, and textiles) has been varied, with some continuing to expand while others are contracting. But all of them regardless of size, geography, or make-up will be influenced by three key trends in the coming years: the continued increase in globalization, the rapid pace of technological change, and Canada s aging population. To remain productive and competitive, Canada s manufacturing sector must continue to invest in the skills and knowledge of its current and future workers; invest in new technologies, equipment, and machinery; and develop new and improved processes and products. Opportunities for Growth and Competitiveness Globalization represents an increase in the competitive forces affecting the industry, but it also represents opportunities. For example, manufacturers are extending their supply chains into lower-cost countries, thus reducing the cost of many inputs for the sector. Emerging economies also represent massive new markets for a variety of manufactured products. In response to globalization, Canadian manufacturers will need to increase investment in machinery and equipment and boost research

6 ii The Conference Board of Canada and development expenditures (which they have already begun to do). This will increase the rate of technological change in the sector, as well as gradually alter the business functions that are conducted here. In Canada, manufacturers are expected to increase their involvement in the provision of services that are part of the production process or that accompany a finished product (e.g., value-added management, consulting, maintenance, and technical support services), while proportionately less of the assembly work will take place here. As a result, the skills requirements of manufacturing workers in Canada will continue to rise, and manufacturers will increasingly be in direct competition with other sectors of the economy in their efforts to attract and retain workers with the skills they require. This will also force manufacturers to make better use of their existing workforce, as well as to look beyond their traditional labour force in order to find the skilled and knowledgeable workers needed to succeed. The manufacturing sector is not taking full advantage of its workforce, and more needs to be done to tap into this underutilized capacity. One way to make better use of the current pool of workers is to enhance current and future skills and knowledge through the provision of quality workplace training and learning programs. Another is to enact policies that encourage manufacturing workers to stay in the workforce longer, as early retirements are a growing issue for a number of manufacturing subsectors. Implementing greater flexibility in work arrangements (e.g., shorter shifts, improved scheduling, or the redefining of occupations) is one strategy that Canadian manufacturing companies could consider. One other issue that is affecting the capacity of the manufacturing sector is its relatively poor record in recent years of attracting younger workers. The image of the sector, coupled with media reports of job losses in various industries, is discouraging young workers from seeking employment in the sector even though some industries are expanding. This reduced recruiting ability will have, over the longer term, a significant negative impact on the ability of companies to grow and will also negatively affect the entire manufacturing sector as it attempts to adapt to the stresses of globalization, technological change, and a maturing workforce. Nevertheless, there are many examples within Canada s manufacturing sector of organizations working closely with Canada s Sector Council Program to develop innovative human resources programs to address and overcome the sector s productivity and performance issues in order to compete locally, regionally, and globally. Examples include: Wood Manufacturing Council s WoodLINKS program an education-to-work transition and certification program to develop skilled and knowledgeable entry-level employees. Apparel Human Resources Council s Apparel Strategic Planning program a suite of strategic planning tools, including HR planning tools, to help apparel companies implement effective strategic plans. Textiles Human Resources Council s Skills and Learning Sites and Portal program a learning infrastructure that provides access to cost-effective training to address organizational learning needs. Canadian Plastics Sector Council s Virtual Human Resources Development program an online tool to help small and medium-sized manufacturers address critical human resources issues and challenges.

7 Key Economic and Labour Force Issues Facing Canada s Manufacturing Sector Introduction Canada s manufacturing sector is undergoing dramatic changes. After experiencing strong growth in the 1990s, total production and exports have stalled, while employment has fallen since the beginning of this decade. Driving this change in performance are several factors, including the tech bust and mild U.S. recession at the beginning of the decade, the stronger Canadian dollar in recent years, and the growing role of emerging economies in global production and supply chains. The increased global competition and pace of technological change that has resulted (along with other factors, such as the aging population and the changing character of manufacturing within Canada) have resulted in significant human resources challenges for manufacturing companies. In an era of tight labour markets, issues such as worker retention, the ability to attract new workers to replace maturing and retiring workers, and the need to train and develop the skills and knowledge of existing staff are of growing concern. The fact that different subsectors and industries within the Canadian manufacturing sector are experiencing very different market conditions (growth and expansion or tightening and reduction) is complicating the situation further, as workers in one manufacturing subsector may need to be retrained for a similar occupation in different subsectors, or move to different regions of the country, in order to better match their skills with the need for labour. This report begins with an overview of Canada s manufacturing sector, as well as its recent economic performance. It then discusses the major trends that have influenced the manufacturing sector s performance in recent years, compares the experiences of Canada s manufacturers to those of other developed economies, and addresses the challenges and issues that the sector will most likely face in the coming years. The report goes on to relate these broader economic trends and issues to the growing human resources challenges that the sector is facing. In an era of tight labour markets, issues such as worker retention, the ability to attract new workers to replace maturing and retiring workers, and the need to train and develop the skills and knowledge of existing staff are of growing concern. This manufacturing overview is part of a larger research project commissioned by Human Resources and Social Development Canada (HRSDC), which also features case studies that focus on how different sector councils within four manufacturing subsectors plastics, advanced wood manufacturing, textiles, and apparel are addressing their labour market challenges by implementing effective human resources development programs. 1 1 The four manufacturing sector case studies are available on The Conference Board of Canada s website. See ca/sector/en/default.htm.

8 2 The Conference Board of Canada An Overview of Canada s Manufacturing Sector The Canadian manufacturing sector is comprised of 21 industries, or subsectors. (See Appendix B, Canadian Manufacturing Industries, ) The transportation equipment manufacturing industry (which includes both aerospace and motor vehicle manufacturing) is the largest manufacturing industry in Canada, in terms of gross domestic product (GDP), accounting for 18.6 per cent of the sector in Other large industries in the manufacturing sector include food manufacturing and chemical products, which accounted for 10.2 per cent and 8.7 per cent of the sector respectively in Manufacturing s share of GDP has shrunk from 18.4 per cent in 2000 to 15.2 per cent in 2007 as manufacturing has stalled and the rest of the economy has grown. The manufacturing sector is best characterized as having an above-average number of large establishments. According to Statistics Canada, 53 per cent of the manufacturing workforce is in establishments with more than 100 employees, and 18 per cent is in establishments with more than 500. (For the Canadian workforce as a whole, these figures are respectively 35 per cent and 13 per cent.) The workers who are in large establishments are highly concentrated in a handful of operations. According to the Canadian Business Patterns database, among the more than 60,000 manufacturing establishments in Canada, only 412 have more than 500 employees. Therefore, 18 per cent of the manufacturing workforce works at 0.7 per cent of the sector s overall number of plants. Furthermore, these large plants are concentrated in a handful of industries within the manufacturing sector. Four industries transportation equipment, food products, paper products, and primary metals account for 225 (or more than half) of the large establishments in the sector. All of these industries can be characterized as being highly capital intensive and dominated by a few large companies. Manufacturing s Contribution to Gross Domestic Product Broadly speaking, the Canadian manufacturing sector accounted for 15.2 per cent of GDP in That is down from a peak of 18.4 per cent reached in While this decline in the sector s share of the economy marks a break from much of the 1990s (a time when its share was increasing), it should be noted that Canada s experience is considered to be unusual among developed economies. 2 For example, between 1995 and 2000, Canada s manufacturing GDP rose by an average of 6.2 per cent per year, compared with 2.8 per cent for all developed economies. 3 The Impact of NAFTA and the Canadian Dollar The two primary reasons for this difference in terms of growth and performance was that Canadian manufacturers unlike their global counterparts were benefiting from the implementation of NAFTA (North American Free Trade Agreement) and the weakening of the Canadian dollar. 4 During the 1990s, for example, nominal manufacturing exports to the United States rose by more than 12 per cent per year on average, as Canadian manufacturers specialized and captured market share in the United States. 5 The original Canada U.S. Free Trade Agreement, and subsequently NAFTA, allowed for increased access to the U.S. market. Meanwhile, the Canadian dollar fell 27 per cent versus the U.S. dollar between 1990 and 2000, making Canadian products relatively cheaper in the U.S. market. More recently, the manufacturing sector has been oscillating between years of positive and negative growth. As a result, GDP growth for the sector has been much closer 2 The healthy performance of Canada s manufacturing sector was widespread during the 1990s, with only leather products and printing reporting declines in GDP during the decade. 3 See the United Nations Industrial Development Organization (UNIDO) table at 4 NAFTA came into effect on January 1, 1994, and it remains the largest trade bloc in the world in terms of combined GDP of its members. NAFTA eliminated the majority of tariffs on products traded among the United States, Canada, and Mexico, and gradually phased out other tariffs over a 15-year period. 5 In economics, a nominal value indicates the listed value of an item in a monetary currency as opposed to the real value in terms of purchasing power or after adjusting for inflation.

9 The Conference Board of Canada 3 to the average for all developed economies. This weak performance continued in 2007, with manufacturing GDP down 0.8 per cent. So what has changed? At first glance, the 60 per cent appreciation in the value of the Canadian dollar since it reached its ebb in 2002 is a major factor. However, a recent paper published by Statistics Canada found that the strong value of the Canadian dollar and high commodity prices are not the principal factors affecting the manufacturing sector s performance. 6 Instead, the paper found that the integration of emerging nations such as Brazil, Russia, India, and China (the so-called BRIC economies) into the global economy is the prime cause. In short, this integration is having an acceleration effect on the ongoing restructuring of Canada s economy, through shifts in prices, wages, industrial structure, and population. (See text box The Impact of the Rising Loonie on Canada s Manufacturing Sector. ) The increase in incomes and investment associated with the commodities boom has supported production in many durable manufacturing industries here in Canada. The Emergence of the BRIC Economies The integration of emerging nations such as Brazil, China, India, and Russia into the global economy is accelerating the ongoing restructuring of Canada s economy, through shifts in prices, wages, industrial structure, and population. For the Canadian manufacturing sector, the primary influence of these emerging economies integrating into the local economy has been lower prices for many manufactured goods. Increased international competition has also contributed to declining production and employment in many non-durable goods industries. At the same time, however, the rapid economic growth in nations like China has driven a boom in global commodity prices from which Canada has benefited. The resultant increase in incomes and investment associated with this commodities boom has supported production in many durable manufacturing industries here in Canada. The Impact of the Rising Loonie on Canada s Manufacturing Sector The export-intensive Canadian manufacturing sector is very sensitive to the Canadian dollar s fluctuations, and the last few years have been a big test for the sector. During the autumn of 2007, the Canadian dollar reached parity with the U.S. dollar for the first time in 31 years. This spectacular run-up from the low of US$0.62 reached in early 2002 is having negative impacts on exporters. The dollar s rise is being blamed for sagging economic performance and lost jobs. It offers, nevertheless, a great opportunity for Canadian firms to invest in new machinery and equipment to boost their productivity and international competitiveness, which has been challenged by emerging low-cost competition this decade. Despite the rise of the dollar, manufacturing exports to the U.S. have held up well. Nominal exports to the U.S. are down only 3.4 per cent compared with five years ago despite the loonie being more than 50 per cent higher against the U.S. dollar. Some export sectors have been shocked forestry exports for instance. Other sectors are coping well with the dollar s rise. The rising Canadian dollar has the negative effect of directly decreasing the prices received by Canadian manufacturers. However, under the Canada U.S. Free Trade Agreement and NAFTA (North American Free Trade Agreement), the North American economy has become more deeply integrated. Despite a high Canadian dollar then, trade between those partners persists. Also, regional supply chains have formed as firms reposition their production. This more integrative trade, by which many Canadian firms shift to foreign sources of inputs, is resulting in a rise of the foreign content and foreign costs of production, bypassing the strength of the dollar. Moreover, the Canadian manufacturing sector has the greatest integration among all sectors of the economy. A soaring loonie may mean less Canadian-dollar revenue from exports, but it also means lower costs for imported inputs used by Canada s manufacturers and exporters. This creates a natural hedge to exchange rate movements for firms that have significant foreign inputs. 1 This is especially true for the auto and the aerospace industries. Industries with limited foreign inputs are hurt more by the strength of the Canadian dollar. 1 Hodgson, Dollar Parity and Productivity. 6 Macdonald, Not Dutch Disease.

10 4 The Conference Board of Canada Canada s overall manufacturing production growth has been weak this decade, averaging declines of 0.4 per cent per year since This number, however, hides the widely varying performances of the sector s component industries. (See Chart 1.) Some industries (such as nonmetallic minerals, food products, and machinery) have actually expanded in recent years. Meanwhile, industries such as textiles and clothing, electrical equipment, and paper products have experienced large declines. Manufacturing output and employment as a share of the economy in developed countries is declining, and this trend is likely to continue. The changes going on in Canada s manufacturing sector have also been occurring in other Organisation for Economic Co-operation and Development (OECD) countries. According to the recent OECD paper The Changing Nature of Manufacturing in OECD Economies, manufacturing output and employment (as a share of the economy) in developed countries are declining, and this trend is likely to continue. 7 Even in locales where manufacturing employment and output are rising, their share of the economy is expected to shrink, as growth in other sectors will exceed that of the manufacturing sector. Other significant findings from the OECD paper: The character of manufacturing is changing, and the manufacturing sector is becoming more globally integrated. The distinction between manufacturing and services is increasingly blurring, as functions like design and customer service become more and more important relative to assembly work. A good example of this is found in the Waterloo, Ontario-based company, Research in Motion Limited, a company that is considered to be a manufacturer even though a large Chart 1 Average Annual Production Growth, (per cent) Food Beverage and tobacco Textile mills Textile products Clothing Leather and allied products Wood Paper Printing Petroleum and coal Chemicals Plastics and rubber Non-metallic mineral products Primary metal Fabricated metal Machinery Computer and electronic products Electrical equipment Transportation equipment Furniture Miscellaneous All manufacturing Sources: The Conference Board of Canada; Statistics Canada. 7 OECD, The Changing Nature of Manufacturing.

11 The Conference Board of Canada 5 portion of its revenues come from the service contracts that are required to use its devices. Innovation in the manufacturing sector is still dominated by developed countries, like Canada and the U.S.; and because high value-added manufacturing activities are proving to be the most resilient in these developed economies, there is an increasing emphasis on research and development (R&D) and innovation. An Overview of Canada s Manufacturing Labour Force In 2007, the Canadian manufacturing sector employed 2.05 million people. The largest employers included the transportation equipment industry (278,000 employees), the food products industry (259,000), and the fabricated metal products industry (177,000). However, in 2000, the manufacturing sector employed 2.25 million people, marking a decline of 8.8 per cent in the past seven years. With manufacturing employment falling and total employment in Canada rising, manufacturing s share of employment has fallen from 15.2 per cent in 2000 to 12.1 per cent today. Although total manufacturing employment is declining in Canada, the situation varies considerably between manufacturing industries or subsectors. (See Chart 2.) Among the most-affected manufacturing subsectors are the apparel and textiles industries, which have lost more than a third of their 2000 employment levels in the past seven years. Innovation in the manufacturing sector is still dominated by developed countries like Canada and the U.S. Regional Variations Manufacturing employees are principally concentrated in the provinces of Ontario, Quebec, and British Columbia. (See Chart 3.) Ontario has been the most affected by the broad decline in manufacturing employment. Last year, Chart 2 Change in Employment, (per cent) Food Beverage and tobacco Textile mills Textile products Clothing Leather and allied products Wood Paper Printing Petroleum and coal Chemicals Plastics and rubber Non-metallic mineral products Primary metal Fabricated metal Machinery Computer and electronic products Electrical equipment Transportation equipment Furniture Miscellaneous Sources: The Conference Board of Canada; Statistics Canada

12 6 The Conference Board of Canada Chart 3 Provincial Share of Canada s Manufacturing Employment, 2007 (per cent) Ontario Sources: The Conference Board of Canada; Statistics Canada. the province accounted for almost 46 per cent of total Canadian manufacturing employment, and its manufacturing sector accounted for 14 per cent of the 6.5 million jobs in the provincial economy. However, this is down from a share of 18.5 per cent in In 2007, about 27 per cent of Canadian manufacturing employment was located in Quebec where it represented 14.1 per cent of the province s total employment. However, that is down from 18.6 per cent in British Columbia, which accounts for about 10 per cent of Canadian manufacturing employment, has also seen its manufacturers share of employment decline. In terms of employment share, the manufacturing sector has declined over the past seven years from 10.5 per cent to 9.1 per cent. Lower Value-Added Manufacturing Industries Are Feeling the Pinch Many of the manufacturing industries in Canada that have experienced declines in employment are characterized as low value-added. These industries are facing intense competition from low-cost countries, and their decline is generally attributed to the reallocation of global production. However, in some cases, their decline is due in part to cyclical market conditions or changing consumer tastes. For example, the Canadian wood products industry is shrinking as a result of the collapse in homebuilding activity in the U.S. over the past two years. In the case of the transportation equipment industry, a shift in North 46 Quebec British Colombia Alberta Manitoba Nova Scotia Others American consumer tastes away from vehicles produced by Ford, General Motors, and Chrysler the primary producers in Canada is having a negative impact on the employment levels within this manufacturing subsector. Other Manufacturing Industries Are Experiencing Growth Nevertheless, employment in some Canadian manufacturing industries has risen in recent years. Examples of industries that have experienced job gains include food products, fabricated metal products, and medical equipment (a part of miscellaneous manufacturing). And although employment in some industries is down since 2000, many of these industries are now on the upswing. A good example of this is Canada s computer and electronic products industry, which experienced large declines in employment during the tech bust but is now recovering. Low value-added industries are facing intense competition from low-cost countries, and their decline is generally attributed to the reallocation of global production. Industries with rising employment generally fall into one of several categories: industries with a below-average degree of trade exposure (such as food manufacturing); industries that have strong ties to the booming oil and gas sector (such as fabricated metal products and machinery); and skill-intensive industries (such as aerospace products) where competitive threats from emerging economies are limited. A Shrinking, Maturing, and Predominately Male Workforce Population and labour force growth are vital to economic growth. Canada s manufacturing industry can be characterized as being made up of a predominately aging male workforce. Indeed, men filled 72 per cent of the manufacturing sector s employment in This has changed little from where the industry stood 20 years ago (73 per cent). Nationally, men account for only 56 per cent of the workforce.

13 The Conference Board of Canada 7 The predominance of men in the manufacturing workforce and the absence of inroads by women over the past 20 years pose challenges for the sector. In recent years, women have accounted for the majority of labour force growth within the overall economy, and they will continue to do so since the employment rate for women continues to lag that of men. With this in mind, engaging more women (as well as members of minority and immigrant groups) should be an important goal for any business grappling with labour shortages. Canadian employers across all sectors need to make better use of various approaches to attract workers from under-represented populations. 8 years. However, a reduced ability to attract young workers into the manufacturing sector may exacerbate labour shortage problems in the future. At the other end of the spectrum, only 12.9 per cent of the Canadian manufacturing workforce is 55 or over, compared with 14.1 per cent for the economy as a whole. While this share has been rising for both the broad economy and manufacturing, the gap between the two is widening. Possible reasons for this include the more demanding physical requirements found in manufacturing jobs relative to other sectors and early retirements within the sector, as a result of recent layoffs. Another important characteristic of manufacturing workers is their age profile. Like the rest of the workforce, the average age of manufacturing workers is rising. For example, the 15-to-24-year-old cohort now accounts for only 9.6 per cent of the manufacturing workforce, compared with 13.5 per cent in 1990 and 23.9 per cent in What stands out is that fewer manufacturing workers than the average for the Canadian economy are under the age of 25 or over the age of 54. Another potential cause for early retirements in the manufacturing sector is that many workers entered the workforce at an early age. Thus, many manufacturing employees maximize their pensions after 30 years of service when they are still in their late 40s or early 50s, allowing them to retire early. Whatever the cause, it is imperative that the manufacturing industry encourage older workers to stay in the workforce longer to address the problems associated with an aging workforce. Currently, the sector is underperforming in this regard. Canadian employers across all sectors need to make better use of various approaches to attract workers from under-represented populations. For the economy as a whole, 15.4 per cent of workers are under the age of 25. This means that the manufacturing sector is attracting a disproportionately small share of young workers and this gap is increasing. As recently as 2000, the share of workers under the age of 25 stood at 15.5 per cent for the overall economy and 11.8 per cent for manufacturing a gap of 3.7 percentage points. Since then, the gap has widened to 5.8 percentage points. This partially reflects the manufacturing sector s poor performance relative to the rest of the economy in recent 8 Roughly two-thirds of Canada s population growth now comes from net international migration; and according to population projections, net immigration may become the only source of population growth by about In just three years by 2011 immigration is expected to account for all of Canada s net labour force growth. The Conference Board of Canada, Securing our Future. The other demographic characteristic that stands out in the manufacturing sector is the average level of educational attainment of the workforce, which is below the national average. (See Chart 4.) For example, 27 per cent of Canadian manufacturing workers have less than a Chart 4 Education Levels of the Labour Force (per cent) Less than grade 9 All sectors Some high school High school graduate Sources: The Conference Board of Canada; Statistics Canada. Manufacturing Some postsecondary Postsecondary diploma University graduate

14 8 The Conference Board of Canada high school education, compared with 16 per cent for the workforce as a whole. At the opposite end of the spectrum, just 11 per cent of manufacturing workers have a university degree, compared with more than 20 per cent for the workforce as a whole. Impacts of Productivity Gains in the Manufacturing Sector According to the OECD, the broad decline in manufacturing employment in developed countries has not been accompanied by an increase in manufacturing employment in non-oecd countries. The chronic manufacturing decline is therefore not purely a displacement of production and manpower from high- to low-cost countries. 9 Just 11 per cent of manufacturing workers have a university degree, compared with more than 20 per cent for the workforce as a whole. Productivity growth has been a significant factor limiting manufacturing employment growth in developed and emerging economies. Productivity growth has been so strong in many emerging markets that despite large gains in production, manufacturing employment is declining. In developed economies, much of the manufacturing sector has been characterized by higher productivity growth compared with the overall economy. Indeed, in most OECD countries, average rates of productivity growth in manufacturing have been ranging between 2 per cent and 4 per cent, which is substantially higher than the economy-wide growth in productivity. 10 Canada s experience is similar. Over the past decade, Canada s manufacturing sector has experienced 2.2 per cent average annual growth in output per hour worked. This compares with an average increase of 1.5 per cent per year over the same period for the country as a whole. As a result, output per worker in the manufacturing sector is now 22 per cent above that of the entire workforce. Productivity Drivers in Canada s Manufacturing Sector It is difficult to identify the particular factors that have led to above-average productivity growth in the manufacturing sector. Factors like the skills of the workforce, the capital stock of the sector, the rate of innovation, and the competitive environment in which it operates are all possible drivers of productivity growth. However, given that the manufacturing sector s capital stock per employee has been steadily declining (until the last couple of years), coupled with the below-average level of educational attainment in the sector s workforce and general lack of industry-driven structured training activities in place, it is most likely that competitive pressures are the cause of the sector s productivity gains. Changes in the mix of the industries that make up the sector are also a likely factor, as lower-productivity industries are being gradually displaced by higher-productivity ones. The above-average level and growth of manufacturing productivity in Canada has translated into wage gains for manufacturing workers. Growth in average weekly earnings for manufacturing workers has only slightly outpaced the average for all workers 2.1 per cent versus 2 per cent over the past decade. However, manufacturing wages remain well above average. In 2007, the average weekly earnings for manufacturers stood at $937 versus $783 for all workers. Skills Shortages and Technological Change in Canada s Manufacturing Sector The productivity gains that are allowing the Canadian manufacturing sector to remain competitive also have their downside. Paradoxically, productivity gains have contributed both to declines in total employment and to occupational skills shortages. Actually, imbalances are such that excess supply of particular occupational skills coexists with excess demand for others at the national level. However, there is limited evidence of imbalances between the availability of qualified workers and the skills levels that employers seek OECD, Moving Up the Value Chain. 10 OECD, The Changing Nature of Manufacturing. 11 Human Resources and Social Development Canada (HRSDC), Looking-Ahead.

15 The Conference Board of Canada 9 Sector skills shortages appear to be closely related to technology usage. And according to Statistics Canada, the likelihood of skills shortages is positively related to technological intensity. 12 The fact that Canadian manufacturers are turning toward higher technology products and processes creates a greater demand for highly skilled and knowledgeable workers, especially professionals, to the detriment of lower-skilled workers. This suggests that technology adoption needs to be accompanied by an increase in the skills of the labour force. Furthermore, those firms that are research and development intensive are also more likely to experience important skills shortages. Indeed, R&D expenditures are a direct measure of scientific sophistication. Those companies and industries that undertake R&D frequently encounter shortages for professionals and managers. As a result, these new skills requirements from the Canadian manufacturing sector are increasing the competition for talent. These changes in skills requirements within the manufacturing sector are apparent in the occupation data for manufacturers, which is produced by Statistics Canada as part of its labour force survey. Over the past 20 years, the mix of occupations has changed significantly. For example, occupation groupings that have witnessed a significant increase in their share of the manufacturing workforce include technical and professional occupations in the natural and applied sciences, as well as management positions. Meanwhile, certain types of machine operators, secretaries and clerks, and drivers have all experienced declines in their share of manufacturing employment. Worker Retention Rates in Canada s Manufacturing Sector Remain Positive Broadly speaking, the manufacturing sector is successful at retaining its workers. Average tenure in the industry in 2006 was more than nine years. This is considerably above the economy-wide average of just over eight years. However, the performance among the different manufacturing industries varies considerably. Tenure is high among many of the industries that are shrinking, such as textiles, clothing, and paper. It is also high among those industries that have high rates of unionization. However, a major factor driving this is that workers with low tenure are often laid off first, which is biasing the tenure in shrinking industries upwards. Thus, the high tenures may be more the result of the stresses that those industries are facing rather than successful labour practices. Also of note are those industries that have below-average tenures. These are predominately in industries, such as pharmaceuticals and computer and electronic product manufacturing, that have higher skill and educational needs. This may be an indication of the competitive environment that manufacturers are facing when they try to attract and retain skilled workers. As such, the high tenure rate for the sector as a whole may also be a reflection of the low levels of average education for the sector. In short, workers with low levels of education may not move very often because they have fewer opportunities to do so. Employee tenure is high among many of the industries that are shrinking, such as textiles, clothing, and paper, and among those industries that have high rates of unionization. Advanced Technology Use in the Manufacturing Sector Research and Development (R&D) Expenditure in the Manufacturing Sector According to Statistics Canada, the use and adoption of advanced technology in the manufacturing sector increased dramatically in the years following the recession of the early 1990s doubling from 1993 to Expenditures on R&D also surged, rising by 89 per cent between 1994 and 2001 to reach $4,143 per employee a level eight times higher than in the services sector and five times the average for the overall economy. 12 Sabourin, Skill Shortages, p Sabourin, Skill Shortages.

16 10 The Conference Board of Canada However, more recently, R&D expenditure growth has been less robust. The tech bust, for example, led to an 11 per cent drop in manufacturing R&D expenditures in Although most of this decline can be attributed to R&D expenditures on communications equipment, overall manufacturing R&D expenditures have averaged growth of only 2.2 per cent per year since 2001, compared with 8.7 per cent in the previous seven years. Other sources of decreased R&D spending are found in the paper products industry, non-pharmaceutical chemicals manufacturing, and the electrical equipment industry, where they have collectively cut their annual R&D expenditures by nearly $350 million over the past five years the equivalent to 4 per cent of the manufacturing sector s total R&D expenditures. On a positive note, more industries have been increasing their R&D expenditures than cutting them, despite the stresses that the manufacturing sector has experienced. As a result, the manufacturing sector s share of total business R&D expenditures has stabilized. (See Chart 5.) Major sources of increased R&D spending, over the past decade, can be found in the pharmaceuticals, motor vehicles and parts, and machinery industries. for the manufacturing sector. (See Chart 6.) Moreover, this gap is growing, having risen from just under 3 per cent in Most of the increase in this gap can be attributed to a decline in the ratio of investments as a share of manufacturing revenues over time moving from 5.7 per cent in 1990 to just over 3.1 per cent today. Capital Formation and Intensity in the Manufacturing Sector Over the long term, the laxity in investment spending directly affects the sector s capital formation and intensity. After rising steadily, the real capital stock per employee reached a peak of $72,500 in 1992 and then began to fall back, dropping to a low of $52,800 in Since 2004, Chart 5 Manufacturing R&D as Share of Total Private Expenditures (per cent) Investment in the Manufacturing Sector In recent years, investment in the manufacturing sector has followed a similar pattern to that of R&D expenditures. Total real manufacturing investments on buildings, machinery, and equipment actually declined by 26 per cent between 2001 and A drop in investment in the computers and electronic products industry contributed to this decline, but large decreases in investment in the paper products and chemicals industries were the primary cause for the decrease. More recently, investment spending has improved, with real investment growth in the sector averaging 6 per cent per year between 2003 and Industries driving the increase include petroleum and coal products, wood products, and primary metals. Nevertheless, this is still below the average for all industries of 7.6 per cent over the same period. The ratio of investment, as a share of revenues, tells a similar story. Dollar investments, as a share of revenues, are 4.9 percentage points higher for all industries than Sources: The Conference Board of Canada; Statistics Canada. Chart 6 Investment as a Share of Revenues (per cent) All industries Manufacturing Sources: The Conference Board of Canada; Statistics Canada.

17 The Conference Board of Canada 11 capital intensity in the industry has begun to improve, rising by an average of 3.2 per cent per year over the past three years to stand at $58,100 in The decline in capital intensity in Canada s manufacturing sector has significant implications for the sector s performance. Countries with high rates of investment in machinery equipment also have, on average, higher productivity growth. It should come as no surprise then that a 2002 study published in the International Productivity Monitor calculates that the differences in capital stock per hour worked accounted for about 30 per cent of the difference in manufacturing productivity growth between Canada and the United States over the period 1994 to One reason why Canada s manufacturing capital intensity is lower than in the U.S. is that the price of labour, relative to capital, increased by 1.7 per cent per year between 1994 and 2000 in Canada, versus 4.6 per cent in the U.S. The U.S., therefore, had a greater incentive to substitute capital for labour. The weakness of the Canadian dollar in the late 1990s was another factor, as it increased the price of imported equipment. With the recent strength of the Canadian dollar, however, one would expect investment and capital intensity to rise something that has, in fact, begun to take place. Impact of Shifting Global Trade Patterns on Investment Flows The environment in which the Canadian manufacturing sector operates is transforming. Driving this change is the fact that the engine of global economic growth is shifting from aging industrial economies, such as Canada and the U.S., to emerging economies, such as China and India. Many factors are contributing to this shift with demographics and reforms to economic policy being at the forefront. In many industrialized countries, long-term growth potential is declining as aging populations reduce the effective growth rate of the labour force more workers are retiring and there are fewer new workers to replace them. Meanwhile, many emerging market countries have boosted their underlying economic growth potential by embracing market-oriented reforms and entering the global economy. With lower labour costs and a rising middle class with disposable incomes, their rates of economic growth are outstripping those of more mature economies. China s extraordinary rise leads the way, catalyzed by the country s entry into the World Trade Organization in It is joined by India, Russia, Brazil, and Mexico, as well as other countries in Asia, Central and Eastern Europe, Latin America, and even a few countries in Africa, all of which are on a strong upward growth trajectory. The engine of global economic growth is shifting from aging industrial economies, such as Canada and the U.S., to emerging economies, such as China and India. Exports The result of these changes has been a tectonic shift in global trade and investment flows. For example, manufacturing exports in Canada rose by 156 per cent between 1992 and 2000 rising from $125 billion to a peak of $320 billion. This was sufficient enough to drive the export share of production from 43 per cent in 1992 to 54 per cent in However, by 2001, the Canadian economy had shifted. Exports struggled and fell for three consecutive years. In 2007, manufacturing exports in Canada were valued at $322 billion. A variety of factors contributed to Canada s recent export weakness, including: the tech bust, and resulting drop in the export of telecommunications equipment; the strong Canadian dollar, which reduced the effective price of many exported goods meaning that more needed to be shipped in order for the same dollar value of exports to be recorded; and increased global competition, which has challenged the way in which Canadian manufacturers attempt to retain or increase market share. 14 Bernstein et al., The Widening Canada-U.S. Productivity Gap, p. 9.

18 12 The Conference Board of Canada Within the manufacturing sector, different industries have experienced widely varying growth in exports in recent years. (See Chart 7.) Many products such as primary metals, petroleum products, and chemicals have experienced large gains, while others such as wood products, clothing, and textiles have experienced declines. A variety of factors are influencing these results, including large swings in output prices for some of these products and variations in demand. For example, wood products exports have been depressed by both weaker prices and the large drop in residential construction activity in the United States. Increased international competition has also been a factor, particularly for lower value-added goods like clothing and textiles. It is also important to note that while globalization has increased international competition, it has also created new opportunities. While the United States and the United Kingdom remain Canada s top destinations for manufactured goods, China overtook Japan in 2007 to become Canada s third most important importer of Canadian goods. China was the destination for $6.8 billion worth of Canadian manufactured products in 2007, up from $2.4 billion in 2000 and $853 million in Other countries where Canada has enjoyed significant gains in manufacturing exports in recent years include other emerging economies (such as Mexico, Brazil, and Russia) as well as developed economies (like the United Kingdom, Norway, and the Netherlands). Imports Canadian imports of manufactured goods have followed a similar pattern to that of exports. Between 1992 and 2000, imports of manufactured goods jumped by 145 per cent reaching a high of $321 billion. After weakening briefly in the opening years of this decade, imports have increased consistently since 2004 and reached a record high of $351 billion in There are two structural factors driving the increase of imports. First, globalization has led to the development of global supply chains in which production is distributed Chart 7 Manufacturing Industries: Average Annual Exports Growth, (per cent) All manufacturing Food Beverage and tobacco Textile mills Textile products Clothing Leather and allied products Wood Paper Printing Petroleum and coal Chemicals Plastics and rubber Non-metallic mineral products Primary metal Fabricated metal Machinery Computer and electronic products Electrical equipment and appliances Transportation equipment Furniture Miscellaneous Sources: The Conference Board of Canada; Statistics Canada.