In a very forthright speech this week the Governor of the Bank of Canada (BoC), Stephen Poloz, make it clear that the Canadian economy needs to fill a large gap created by the dramatic decline in the energy industry¹. The Governor goes on to identify two major developments that have hit the economy.

First, in the wake of the of the global financial crisis, Canada’s export capacity has shrunk by about $30 billion a year ---the crisis left an indelible mark on manufacturing and the resource extraction industries. Secondly, the sudden and dramatic collapse in energy prices resulted in a significant loss, something in the range of $60 billion a year. The hole is both deep ($90 billion) and wide when we consider that the goods-producing industry makes up a huge part of our exports which, in turn, account for about a quarter of national output.

Governor Poloz, however, argues that since the onset of the global financial crisis, growth in Canada’s service sector has been stronger on average than the goods-producing sector. Moreover, he argues that important service subsectors, such as finance, real estate and transportation, generate higher incomes than the goods- producing sector. The Bank estimates that for every job lost in the goods-producing sector since 2001, the service sector has added 30 new jobs. He looks to the rapid growth in the service sector to contribute to filling the large hole over time. In other words, national income will not suffer as the economy continues to transition towards a larger service component.

Just how robust is the service sector? Can services fill the hole?

One way to answer those questions is to examine the quality of Canada’s labour market in terms of skills and compensation. A recent study by Benjamin Tal of the CIBC examines the issue of labour market quality². Much of the growth in employment is made up of part-time workers (Chart 1). Since the Great Recession there has been a huge jump in part-time employment, currently it is 19.5 per cent of total employment. More significantly, part-time employment accounted for 90 per cent of the new jobs created last month alone. Part time work is both low–paid, generally low -skilled and without benefits. Part time workers tend to have a weaker attachment to the labour market than full-time workers. Part-time is centered in the service sector--- the very sector that the BoC is relying upon to fill the economic hole.

Chart 1.

Another disquieting development pointed out by Tal is that “the compensation distribution of full-time paid employment has worsen over the past decade with the number of lower–paying industries rising faster” (Chart 2)

Chart 2 Growth in Employment

Tal stresses that there has been a higher concentration of job growth in the low pay occupations. He concludes that the labour market is fragile and not well prepared should there be another economic shock. Given this quality jobs in the service sector, it is hard to imagine how Canada is going to fill the hole in its economy.

1^ From Hewers of Wood to Hewers of Code: Canada’s Expanding Service Economy, Nov 26,2016

2^ On the Quality of Employment in Canada, CIBC, Nov.28, 2016