In The Media

The growing incompatibility between job creation and economic growth

by Neil Desai

The Globe and Mail
May 19, 2015

If you find yourself watching an Economic Action Plan advertisement or listening to a Justin Trudeau speech these days, there is a good chance you’re hearing about a foolproof plan to create jobs and economic growth.

It’s become a staple of rhetoric for modern politicians in the democratic West and even some leaders in the developing world. From right to left on the ideological spectrum, they all have the secret sauce to do it: In Canada, tax cuts, infrastructure spending, capital cost allowances for the manufacturing industry and subsidized daycare are the magic beans of choice.

While their rhyme is well-intentioned, their reason is fundamentally flawed. There is a growing modern dichotomy between quality job creation and economic growth – growth that can be sustained by demand-driven economics in the long run, to be precise.

Yes, if infrastructure investments and targeted tax measures were rolled out, some short-term job creation and economic growth would be spurred. Building new public transit and sprucing up dilapidated highways would lead to the hiring of construction workers. But would these investments lead to sustained increases in business investment and hiring? Would manufacturing jobs relocate to Canada as a result?

A more realistic result of infrastructure spending and reduced taxes coupled with an 80-cent dollar, vis-à-vis the greenback, would be maintaining our current stable of manufacturing jobs a while longer. Job protection is an understandable short-term political objective heading into an election, but it does not address the structural, long-term challenges facing Canada’s economy.

The reality is that we are not a competitive manufacturing economy. Boston Consulting Group’s 2014 Global Manufacturing Cost-Competitiveness Index states that “Canada’s relative cost competitiveness declined due to high wage growth and almost no growth in productivity.” This, despite our relatively low-cost market access to the United States and some costs, such as health care, being borne by all taxpayers.

Canada’s political leaders understand this. Successive federal governments, and some provincial governments, have tried to reverse the cost curve through various tax and grant incentives.

However, there has been less emphasis on addressing the other part of BCG’s conclusion – that our productivity has stagnated.

Our elected officials aren’t oblivious to this reality, either. Recent federal and provincial budgets have made targeted investments in postsecondary research partnerships with the private sector, grants for new sectors and even spent some tax dollars in the raucous world of venture capital. But these pale in comparison to the relief directed toward traditional industries and small businesses.

The part our political leaders feel they can’t tell us, the part that keeps them up at night and keeps finance ministers cutting cheques to industries that are on the decline, is that their ability to create a significant quantity of quality jobs and sustain economic growth in the new global economy is extremely limited.

A careful review of Bloomberg and PwC’s Global Top 100 Companies By Market Capitalization report subtly shows the growing incompatibility between economic growth and jobs. The report shows that technology companies are the top risers and that their market cap dwarfs high-employment industries such as industrial manufacturing and resources. No. 1 on that list is U.S.-headquartered Apple, with a market cap of $469-billion (U.S.) and 72,800 employees in 2014. However, only 43,000 of those jobs were in the United States, and 30,000 of those were at retail locations.

By contrast, the largest “industrial” company on the list, General Electric, with a market cap of $256-billion, employed 307,000 people in more than 170 countries. Seven thousand of those jobs are in Canada. Much of GE’s recent growth occurred in their non-manufacturing verticals.

Of the 13 companies that dropped out of the top 100, six were from high-employment sectors, including oil and gas, consumer goods, utilities and basic materials. Only one technology company, Nokia, fell off the list.

There is a global race to the bottom in manufacturing. Low-cost jurisdictions and new technologies have made the production of goods more competitive with less employment. That employment is precarious at best, since it’s dependent on maintaining a low cost profile. Similarly, economic growth and job creation in the resource sector has become scarce due to commodity price volatility and greater competition driven largely through the use of new technologies.

Most importantly, the commercialization of innovation has led in the creation of global economic growth in both traditional industries and new ones that have sprung up in the past decade, with minimal employment growth. A handful of brilliant engineers and managers with a protectable idea is the new model for springboarding a company to global significance. For example, technology company Uber received a market valuation of $44-billion in 2014, with just 500 employees scattered around the world.

The protection of Canadian jobs has largely become a social priority, standing next to our public pension and health-care systems for governments of all political stripes in Canada to preserve. This shift has come at the expense of sustainable, demand-driven economic growth, which would produce quality jobs not requiring constant protection.

This is understandable given our political cycles and demographics. But it may not be reversible unless we have courageous political leadership willing to level with us. Willing to see some traditional industries move offshore or fold. And willing to invest the bulk of our scarce resources in the future instead of protecting the past.

Neil Desai is an executive with Magnet Forensics, a Waterloo-based technology company. He also serves as a fellow of the Munk School of Global Affairs and the Canadian Defence and Foreign Affairs Institute. He formerly served in senior roles with the government of Canada.


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