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Thursday, October 21, 2004 Study: Renewing Canada's Manufacturing Economy1961 to 1999The process of job renewal has been hard at work in the Canadian manufacturing sector according to a new research paper that examines job renewal from 1973 to 1996. The driving force behind job renewal in manufacturing in Canada has not been the decisions of incumbent firms to expand employment within existing plants, or their decision to establish new plants, the paper found. Rather, job renewal results from the decisions of new firms to establish new manufacturing plants. Renewal occurs when old plants are supplanted by new plants. It also occurs when some plants decline and others grow. In both cases, resources and production are being shifted from less productive to more productive plants. The paper's underlying premise is that economies are dynamic. That is, they experience a high degree of job turnover driven by competition and continuously changing tastes and technologies. Canadian manufacturers operate within a dynamic environment of job loss and renewal. The process reflects the concept of "creative destruction," a term coined in 1942 by American economist Joseph Schumpeter, who reasoned that innovation and competition create new processes and technologies that render old industries, skills and equipment obsolete. New firms most important source of job renewalThe study found that new firms, rather than incumbent firms, have played the most significant role in the job renewal process. Between 1973 and 1996, employment in manufacturing grew from 1.66 million to 1.70 million, a 2% gain. Although aggregate employment levels changed little, manufacturers experienced high rates of job losses and renewal during this period.
Just over 1 million factory jobs that existed in 1973 were eliminated by 1996. However, by 1996, these 1 million positions that were lost had been replaced by new jobs. These new jobs effectively renewed two-thirds of the employment in Canadian manufacturing. Of the factory jobs present in 1996 and new since 1973, just over 55% were created by new businesses. Renewal was closely linked to the energy, ideas and capital possessed by new businesses. Jobs created in new plants built by incumbent firms accounted for about 19% of new jobs, while new employment from expanding existing plants represented about one out of every four new jobs. In the long-run, the renewal process was not primarily the result of older, incumbent firms expanding their employment or building new plants. Rather, it resulted principally from the establishment of new businesses. Renewal rates varied across industriesRenewal rates differed substantially across industries. Among the lowest rates were found in primary metals, and paper and allied products where economies of scale and concentrated market structures exist. Their rates were in the 30% range over the 1973 to 1996 period. At the other end of the spectrum, industries with the highest renewal rates included plastic products, furniture and fixtures, and fabricated metal products. Their renewal rates were largely in the 75% and over range, while rates for most other industries fell in the 50% to 60% range. Renewal rates lowest in Atlantic CanadaThe study found considerable variation in renewal rates across regions. The Atlantic provinces had relatively low renewal rates, while Western provinces had high rates. For example, about 53% of manufacturing jobs in Newfoundland and Labrador and the three Maritime provinces in 1996 had been created since 1973. This compares with 79% of factory jobs in Alberta and 73% of those in Saskatchewan. The average for the remaining provinces was near the national average of 63%. The relatively low rates for the Atlantic provinces were the result primarily of the type of industries found there. The industrial structures of these provinces are heavily weighted toward industries that have inherently low rates of renewal. In contrast, Saskatchewan's and Alberta's high renewal rates cannot be explained by differences in industrial structures. Their high rates of renewal relate to "other factors" that have stimulated growth in these economies. Both economies have proven to be highly attractive places for both incumbent and/or new firms to establish and expand new manufacturing plants. Cumulative effect of job losses and job gains are extensiveAccording to a second research paper, job turnover in the manufacturing sector has a substantial long-term component. The paper measured job turnover at the end of each decade between 1961 and 1999. It found that almost 40% of jobs on average were renewed during any given decade. A similar proportion of jobs were lost over the same time frame. Therefore, over a relatively short period of time, about two in every five jobs were eliminated, either because of plant closures or downsizing and, in turn, were renewed. Increasing the time frame resulted in a larger proportion of jobs that were renewed. For example, using a 20-year time frame, over 65% of the economy was renewed; over a 30-year period, renewal amounts to just over 75%. After 40 years, just over 86% of jobs were new. In other words, a very large proportion of Canada's manufacturing economy has effectively turned over, and the economy was almost completely new. Relationship between job turnover and growthLooking across industries, there was only a weak negative relationship between job loss rates and growth, while there was a strong positive relationship between job renewal and growth. Industries did not decline because of high rates of failure among their businesses. The failure rate was relatively constant across industries over long periods. Rather it was a lack of investment in new establishments that differentiated the more dynamic industries from the declining ones. Regardless of whether the direction of causation goes from renewal to growth or from growth to renewal, renewal was associated with growth. And that was the reason for the widespread interest in the amount of renewal taking place. The research papers Four Decades of Creative Destruction: Renewing Canada's Manufacturing Base from 1961 and 1999, no. 8 (11-624-MIE2004008, free) and Renewing Canada's Manufacturing Economy: A Regional Comparison, 1973 to 1996, no. 23 (11F0027MIE2004023, free) are now available online. From the Our products and services page, under Browse our Internet publications, choose Free, then National accounts. Additional information on related papers that describe the importance of turnover and competition can be found at our economic analysis site on the page Industrial competition dynamics. For more information, or to enquire about the concepts, methods or data quality of this release, contact John Baldwin (613-951-8588) or Mark Brown (613-951-7292), Micro-economic Analysis Division. |
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