The Decline of Manufacturing in Canada: Resource Curse, Productivity Malaise or Natural Evolution?

Abstract

The state of Canadian manufacturing is a constant issue in current economic and public policy debates. Over the past 50 years, there has been a decline in the contribution of manufacturing to the overall Canadian economy. This decline is especially true for the economies of two provinces, Ontario and Quebec, which traditionally were the most manufacturing intensive. Ontario, in particular, is hit hard by the 2008 recession in terms of both employment and output share decline of its manufacturing sector. This paper explores the relative importance of three explanations for the decline of the Canadian manufacturing sector. Natural evolution offers the first explanation as the economies of most Western countries move away from manufacturing and toward the services. A second explanation for this decline is Dutch Disease. The period from 2003 to 2014 sees both a significant rise in commodity prices and the Canadian dollar. This period also saw a booming resource sector – in particular, the energy / commodity producing provinces of Alberta, Saskatchewan and Newfoundland and Labrador. Finally, Canada’s manufacturing productivity performance has been weak relative to other countries, which may also be a factor in its manufacturing decline. Our results show that most of the Canadian manufacturing sector decline occurs in Ontario and Quebec, while manufacturing’s contribution remains flat or slightly increases in most of the other provinces.