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JDI Roundtable on Manufacturing Competitiveness in New Brunswick

Inevitable decline of manufacturing a myth

Herb Emery

Saint John recently lost 158 call jobs, paying $15 dollars an hour, with the closure of a call centre that had been open for a year with support from the province. Meanwhile, manufacturing employment in Saint John – “good jobs” paying closer to $25 an hour – hasn’t really changed in over 20 years.

Given the global trends in manufacturing, this observation is remarkable in and of itself. And what we don’t pay enough attention to is that manufacturing employment and GDP in Saint John and New Brunswick still has potential to grow. 

Manufacturing as a sector has not had a lot of good press in Canada and the United States for at least 20 years given the immense disruptions it has faced from technological change and globalization. The dramatic reductions in manufacturing employment in the United States – which we assume have been shared by Canada and New Brunswick – arose with robotics and computer-based systems. These allowed for automation of production and responded to rising competition from imports. 

U.S. manufacturing employment fell by 12 per cent from 1979 to 2000, and it fell by a further 25 percent from 2000 to 2012. 

Remarkably, however, growth of U.S. GDP from manufacturing exceeded that from the rest of the economy as investment in manufacturing capital stocks resulted in higher labour productivity; in turn, the sector’s remaining workers saw wage increases. Since 2008, U.S. manufacturing employment, labour productivity and wages have been stable. By 2015 real value added in U.S. manufacturing had recovered to the previous peak in 2008.

Employment reductions in U.S. manufacturing resulted from large companies closing old, outmoded plants and opening new plants, as opposed to companies shutting down. Where companies did shut down, it was disproportionately in the northeast and mid-Atlantic states.

This part of the explanation for why the recovery in U.S. manufacturing by 2015 following the 2008 recession was not experienced in the states immediately neighbouring New Brunswick.

As a province, and as a country, we have uncritically accepted the narrative of a long-term manufacturing sector decline based on the belief that the long-standing trend decline in U.S. manufacturing is shared by all high-income economies.

It turns out that this narrative for manufacturing is “not wrong” when it comes to New Brunswick, but it’s “not right” either.

New Brunswick employment in manufacturing has fallen from 32,000 in 2001 to around 31,000 in 2018, which represents around 11.5 per cent of business section (non-government) employment in 2018 compared to 12.5 per cent in 2001. Most of the losses in the number employed in manufacturing in the province were between 2004 and 2012, and most were in the north of the province with the permanent closure of pulp and paper mills.

However, those job losses in the north of the province disguised what was, overall, a remarkably robust level of employment in manufacturing, especially given the collapse in the northeast of the U.S.

Manufacturing in New Brunswick has shown some other differences from manufacturing in the U.S. – differences that point to an opportunity for how the manufacturing sector can grow in our province.

Where U.S. manufacturers have used investment to substitute machines for workers to drive productivity advance, New Brunswick has seen little investment in manufacturing, a lack of growth in labour productivity, and changes in manufacturing output driven by changes in employment.

What was driving employment in the sector in New Brunswick was the Canada-U.S. dollar exchange rate. When our dollar is low like it is today, our older machines and plants are brought online or plants with unused capacity expand production. In New Brunswick, the way to do this is by adding workers. But with no labour productivity growth, and a transitory influence on profitability like the exchange rate, wages can’t rise to draw more workers into the labour market. This contributes to labour shortages in New Brunswick.

Logically, the opportunity for New Brunswickers to alleviate labour shortages and grow our GDP will be from spurring investment in manufacturing to drive increases in labour productivity. 

Martin Baily and Barry Bosworth, in their 2014 study of U.S. manufacturing, argue that the sector does not require special treatment such as preferential tax rates or subsidies; but because the sector’s exposure to global competition is high, government should ensure that existing policies support, or at least do not discriminate, against the sector. 

In New Brunswick an example of this advice in practice would be to not tax machinery and equipment through the business property tax. 

New Brunswick’s provincial corporate income tax rate is low, but the province’s business property tax results in manufacturers in the province having a high overall tax rate on capital. Adding machinery and equipment to this tax base will only serve to make this competitive disadvantage worse for this exporting sectors.

The passive reliance on the exchange rate to dictate the competitiveness of our exporting manufacturers has left the sector reliant on small plants, with older equipment than global competitors and too reliant on a declining labour supply. This situation has limited the sector’s employment and GDP potential.

New Brunswick has an opportunity to grow its economy with manufacturing exports, just like the U.S. As Baily and Bosworth explain: “The key to expanding U.S. exports and reaching manufacturing’s employment potential is to have companies, domestic and foreign, judge that it is profitable to manufacture here.”

This observation may seem obvious, but since I moved to New Brunswick in 2016, I have seen little evidence that it is even a consideration when governments in the province set their priorities. Changing that way of thinking in the province is a real chance for us to grow. 

Herb Emery is a Brunswick News columnist and the Vaughan Chair in Regional Economics at the University of New Brunswick.

This article first appeared in Brunswick News publications – April 3, 2019

The JDI Roundtable on Manufacturing Competitiveness in New Brunswick is an independent research program made possible through the generosity of J.D. Irving, Ltd. The funding supports arms-length research conducted at UNB.