The future will be difficult for many of us living in what we call the advanced economies, such as Canada and the United States.
At a recent conference organized by the International Monetary Fund, Nobel prize-winning economist Michael Spence argued that the United States could be facing a decade of economic growth but not employment growth, a development that would further exacerbate the already high level of income inequality.
While the Canadian economy is not identical to the U.S., but we face similar challenges of too few decent jobs and too much inequality.
Spence divided the U.S. economy into the tradable sector, where companies face import competition or need to export, and the non-tradable sector, which is the internal economy of government, schools, health care, shops, residential construction, restaurants, most banking and insurance, and many other kinds of services.
In the U.S., Spence said, the economy had generated 27.3 million new jobs in the roughly 20 years of 1990-2008, but only 625,000 of those were in the tradable sector — manufacturing, energy and minerals, agriculture and services such as finance, computer systems, transportation and investment banking.
Virtually all new jobs were in the non-tradable sector.
At the same time, total value-added in the U.S. economy grew by US$4.5 trillion. Yet while the tradable sector created almost no new jobs, it generated about 34 per cent of the growth in the economy.
Between 1990 and 2010, Canada added four million jobs, bringing the total number of jobs last year to just over 17 million. But like the U.S., that gain in jobs came from the non-tradable sector — health, education and public administration added 1.2 million jobs, and retail trade and accommodation and food services (restaurants) added another 776,000 jobs.
To be sure, there are some tradable services where Canadian firms do compete abroad, for example in computer systems and software, finance and insurance, management consulting, architecture, engineering and transportation. But the total number of such jobs is not significant even though the value-added per worker is.
More disturbing, we are not generating jobs in the tradable sector, though like the United States our tradable goods and services are generating a much higher share of money than they are of jobs.
In our tradable sector, jobs have been disappearing. Manufacturing, for example, lost 306,000 jobs between 1990 and 2010. Even the mining, quarrying and oil and gas extraction industries only added 79,000 jobs over the past 20 years — despite all the cheerleading for the oilsands — while agriculture and forestry lost jobs.
The growth of global value chains has meant that low-skill manufacturing jobs have migrated to low-wage countries, eliminating those jobs — and the job opportunities for low-skill workers.
Moreover, countries such as China and India are developing higher levels of skills and technology so this pressure will continue into higher-skill jobs in Canada and the U.S. In the most advanced industries, such as aviation, computer systems and investment finance, companies may enjoy growth without adding jobs. So as Spence put it, the tradable sector today is not an employment engine.
But can the non-tradable sector to continue to absorb the workforce? The public sector faces a squeeze due to budget deficits so health, education and public administration may not be a source of jobs. Consumers are trying to reduce debt or save more for retirement while small pay increases won’t offset rising prices, so retailers, restaurants and other consumer services may lose jobs as well.
It’s a worrying picture because, as Spence warns, we could face high levels of unemployment and greater income inequality.
The free market economy is not going to solve this.
Economist David Crane is a syndicated Toronto Star columnist. He can be reached at crane@interlog.com.