Canada’s Manufacturing and Service Industry: Progressions, Regressions and The Real Picture

There are several things studied in this empirical analysis (with data taken from literature). First of all, this essay is looking at two regions, the US and Canada, as the home country. The differences and similarities will be noted and analyzed in order to see where we are now and where we may be going as an economy. This paper is analyzing multinational companies and their labour patterns in order to infer an effect on the home country. The purpose of this paper is to investigate about service and manufacturing industries; importing and exporting patterns; low-labour intensity countries and low-wage intensity countries, and more. This paper argues that Canada is reducing its manufacturing activity within, becoming dependent on import and not increasing its wages enough.

According to Kravis and Lipsey (1993), there are some inferences to studying the US economic patterns in relation to its service and manufacturing industries. The paper The Effect of Multinational Firms’ Foreign Operations on their Domestic Employment highlights, through statistical evidence, that there is an effect to the level of foreign production to labour intensity in the US and that manufacturing patterns are similar across the industry. The authors alternatively admit that the effect could be the difference in intensity in labour and production that determines the capital value of a country, in this case of the US, which is noted as a more “wage-intensive” country in comparison to say, Malaysia that is considered a “labour-intensive” country (Kravis & Lipsey 1). The authors highlight that the lower the wages in a country, the higher the intensity of the labour; in contrast, the higher the wages, the least intensity there is to the production processes.

PEM = -1.491 + .011 PS – 0.096 MAJS + .020 MINs -2R = .86 (r=0.01 [1%])

[1]

According to this equation, the reader is informed that companies with Majority ownership affiliates (MAJs) then, as they increase their income, the workforce is reduced in value. Further, when MINs, those with Minority ownership affiliates, increase their sales, works are created.

PEM = 1.219 + .010 PS - .0028 MAJs - .0037 MINs -2R = .918 (r=0.01 [1%])

[2]

According to this equation, the reader is informed that as employment services in manufacturing (or level of production) is “negatively related to sales” of MAJs (Kravis & Lipsey 4). But, the impact is smaller in the service industry; employment in the manufacturing industry is then “negatively correlated” to MINs (Kravis & Lipsey 5). The authors conclude that the causation could be based on the “level of foreign production to labour intensity” in the US, but also, they concluded that in the manufacturing industry, the less the labour intensity is, the more they produce, then, abroad (outside the US). Thus, while multinational firms produce more labour-intensive manner abroad, they lower the costs of labour in the producing country (i.e., Malaysia) while increasing the prices for production in the home country (US). Similarly, low-wage countries would have more intensive labour regulations (i.e., assembly) while high-wage countries would have less intense labour regulations concentrating more on the intensity of capital and technology (5).

[3]

[4]

All Services:

PEM = -.575 + .011 PS - .010 MAJs + 0.18 MINs - .026M -2R = .893 @ 1%

(.7) (56.5) (11.1) (6.0) (2.0)

Manufacturing:

PEM = .939 + 0.11 PS - .0025 MAJs - .0022 MINs - .12M -2R = .923 @ 1%

[5]

Next, we are examining all service and manufacturing industries in Canada and will compare it to the US as per standard deviations portrayed above. The purpose is to understand if there are differences or similarities in matters of import/export, low-wages, capital-intensity and more. Is there a similar pattern going in Canada where manufacturing companies produce outside the country and increase importing in order to save money? Are there any Canadian companies in Canada manufacturing in Canada and if so, how much of a percentage is manufactured in Canada and how much of it is manufactured outside of Canada? With this in mind, this writer also wants to understand if the service industry is affected by the MAJs or MINs more so than the US and, this can be further understood by analyzing the wage system, capital-intensity, labour market and labour market effects.

Appendix A[6], retrieved directly from Statistics Canada, shows that the labour ratio in Canada in the manufacturing sector has increased by 1.9% over the last 4 years. According to our equations, then, this would means that if production is increasing in Canada, its wages are decreasing because the manufacturing companies are not saving money by producing abroad, instead they are using Canadian labour for its production. This means that Canada is closer, 1.9% closer, to being a labour-intensive country and not a capital-intensive country. However, this percentage is also small enough to also demonstrate the opposite. While Canada may be lowering its manufacturing procedures overseas (or across the border), this increase in wages could only signify a small percentage of manufacturing being stopped abroad. Thus, while labour productivity may be showing signs of decrease, it also shows signs of recovery, which also infers that Canada continues to increase its manufacturing above, allowing us to conclude that Canada is not as labour-intensive as this graph may be implying, in fact, it may be more technology and capital driven than we think, much like our neighbour and mother countries, the US and Britain.

Moreover, if we view the Appendix B[7] graph, then we see that there is less labour in Canada, which can only infer that production is happening more abroad and less in Canada with Canadian labourers. Again, we are seeing a decline in the number of employees hired from 2004 to 2011, with administrative services staying stable throughout time. Thus, while manufacturing companies are taking elsewhere, the administration of these companies seems stable at its home country. Production in Canada is obviously in the decrease, inferring only one thing: it is happening abroad. If this is not the case, then the only viable alternative would have to be that Canada is importing more than its exporting and its spending its tax dollars on buying manufactured items from another country (i.e., US).

Appendix C[8] graph is depicting the amount of capital investment that Canada has contributed to the manufacturing industry and, as noted, it has been on the decrease for the last few years, slippery slope all the way to the bottom. The graph shows the accumulated capital invested by Canada on machinery and equipment, and construction and engineering. The levels started extremely high as of 2003, but it can be noted that their decrease is not only sudden, but also, progressive across time. While machinery and equipment continue to get stock in Canada, their existence is very limited. Construction and engineering projects have steadily decreased as well.

Remember the inference from earlier, the less the wage/compensation per employee in a country, the more manufacturing becomes the center of its economic system. The higher the wage/compensations, the more the investment is on capital accumulation (business-to-business B2B, etc.) and the more the emphasis is on technology (as was observed in Appendix C, the levels of administrative positions have stayed relatively proportionate during an entire economic decade).

In the service industry, we are getting different numbers but similar patterns. According to Appendix D[9], the service industry is increasing, which gives us more reason to believe that the products are being manufactured outside of Canada. However, the industry still holds stable throughout a long period of time, which can only mean that Canadians are spending big bucks on services. It is important to recognize the essence of consumerism in this graph. It depicts that Canada may have decreased in its spending habits during a short period of time, but it, nevertheless, never lost sight of its importance. The good-producing industries continued to become rich, accumulate wealth (as per the GDP share margin shown here), making money constantly from 1964 to 2004 while its relative manufacturing margins were dropping and while the wage/compensation per employee range was also decreasing. Nevertheless, the service-producing sector made even more money as the culture began to change from producing to consuming. Appendix E will give a clearer picture of this (Gaston & Treffler 1997).

Appendix E[10] notes the difference between 1964 and 2004 in terms of the service industries. As can be seen in the area of Ontario, the increase in service companies increased dramatically, leaving the manufacturing sector behind by almost 15%. According to Statistics Canada, the service sector also gained more profit than the manufacturing sector, accelerating its profit margins with speed and overpowering the manufacturing sector decidedly (Culem). Another great statistics found in Canada’s Industries Database was on Earnings, average weekly, by province and territory. This chart notes the difference from 2009 to 2013 in terms of income – remember, the higher the wages, the less the manufacturing is being done in that country, the more they are using international land to manufacture at cheaper rates – in Ontario, which increased from $848.85 (M) in 2009 to $920.12 (M) in 2012. Can we see a pattern forming here?

Last chart for this analysis can be found in Appendix H[11]. The chart notes the difference, clearly, between the manufacturing and the service sector in relation to growth. Look at the Manufacturing (E) and the Service sectors, which may be the majority of them, clearly there was almost no growth in the manufacturing sector from 1992 to 1994, while an economic recession was at its peak. All other industries continued to float above the margins, positively affecting the economy and the country. The manufacturing sector, however, not so much; it stayed behind, at a minus at that, leaving workers without employment, low wages expected and an economy without production tools (Wheeler & Mody 1992).

This paper started by arguing that in Canada there is an evident increase in dependence on multinational firms to stabilize its economy. As Statistics Canada presented, it is evident that this is what is happening as it concentrates on administrative duties and handles little manufacturing and/or production activities. The decrease in manufacturing is affecting Canada in that it has led to a co-dependence on goods brought from another country. This country could be anywhere where there are low-wages because this is where most of the production will be centered. Canada continues to increase its minimum wage in order to substantiate for the expenses on importing goods and products. Yet, the increase in wages is not enough because it does not balance out with all the jobs lost as a result of the translocation of manufacturing and production industries, companies, factories, and so on.

Canada continues to note an increase in its manufacturing sector, in many of the graphs and charts studied in this paper, the manufacturing industry barely increased, but it did. However, this increase is only notable in that it shows a drastic contrast with the service industry. The consumer-like economy we are living in today demonstrates that the service industry has become priority, that production is no longer the focus, the emphasis is now on consumption. With this in mind, it can be said that most firms in Canada are not Canadian, their taxes are not serving Canada, but Canadians continue to pay for the mistakes of its own government. By using Canadians as consumers yet not being able to use income taxes to better the country, what is left for the local Canadian? If the money spent in these multinational firms - such as Wal-Mart and Target, Victoria Secret, Starbucks, McDonald’s, and so many more – is not going towards the betterment of our country, our government, the public, as a welfare state would proudly accomplish, then we are at a loss. By continuing to allow the service sector to increase and forgetting about the manufacturing one, Canada may end up completely dependent upon imports and not sustain itself when, and if, that is not a viable solution (i.e., economic crash, depression, recession, bubble bursting, etc.).

Bibliography

Culem, Claudy G. "The locational determinants of direct investments among industrialized countries." European Economic Review 32.4 (1988): 885-904.

Gaston, Noel, and Daniel Trefler. "The labour market consequences of the Canada-US Free Trade Agreement." Canadian Journal of Economics (1997): 18-41.

Kravis, Irving, and Robert E. Lipsey. "The effect of multinational firms' operations on their domestic employment." (1993).

Statistics Canada (2014). Manufacturing (NAICS – 31-33). Retrieved from https://www.ic.gc.ca/app/scr/sbms/sbb/cis/employment.html?code=31-33&lang=eng

Statistics Canada (2014). Employment Changes Across Industries. Retrieved from http://www.statcan.gc.ca/pub/75-006-x/2013001/article/11775-eng.pdf

Statistics Canada (2014). 2002-2012: A Decade of Change in Canadian Manufacturing Exports. Retrieved from http://www.statcan.gc.ca/pub/11-621-m/11-621-m2014092-eng.pdf

Wheeler, David, and Ashoka Mody. "International investment location decisions: The case of US firms." Journal of international economics 33.1 (1992): 57-76.

[1] *Where PS is Parent Sales (Ownership Affiliation); MAJS is Majority Owned; MINs is Half Owned, Parents own by 50%; and, where MAJs + MINs mean net sales (minus import from US). These regressions are completed with a significant level at 1%. Kravis, Irving, and Robert E. Lipsey (1993).

[2] *Where PS is Parent Sales (Ownership Affiliation); MAJS is Majority Owned; MINs is Half Owned, Parents own by 50%; and, where MAJs + MINs mean net sales (minus import from US).

These regressions are completed with a significant level at 1%. Kravis, Irving, and Robert E. Lipsey (1993).

[3] Figure 1: Kravis, Irving, and Robert E. Lipsey. "The effect of multinational firms' operations on their domestic employment." (1993).

[4] Figure 2: Kravis, Irving, and Robert E. Lipsey. "The effect of multinational firms' operations on their domestic employment." (1993).

[5] *Where M is now introduced, relating to Parent Import from all Affiliates (MAJs and MINs) and where the standard deviation will increase slightly from equation 1 to 4 is noticeable.

[6] Statistics Canada (2014). Manufacturing (NAICS – 31-33). Retrieved from https://www.ic.gc.ca/app/scr/sbms/sbb/cis/employment.html?code=31-33&lang=eng

[7] Statistics Canada (2014). Employment Changes Across Industries. Retrieved from http://www.statcan.gc.ca/pub/75-006-x/2013001/article/11775-eng.pdf

[8] Statistics Canada (2014). 2002-2012: A Decade of Change in Canadian Manufacturing Exports. Retrieved from http://www.statcan.gc.ca/pub/11-621-m/11-621-m2014092-eng.pdf

[9] Statistics Canada (2014). 2002-2012: A Decade of Change in Canadian Manufacturing Exports. Retrieved from http://www.statcan.gc.ca/pub/11-621-m/11-621-m2014092-eng.pdf

[10] Statistics Canada (2014). Manufacturing (NAICS – 31-33). Retrieved from https://www.ic.gc.ca/app/scr/sbms/sbb/cis/employment.html?code=31-33&lang=eng

[11] Statistics Canada (2014). Employment Changes Across Industries. Retrieved from http://www.statcan.gc.ca/pub/75-006-x/2013001/article/11775-eng.pdf