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Canadian Economic Observer
March 2003

Feature article


by P. Cross*


The year 2002 was a stellar one for the Canadian economy, with GDP expanding 3.4% in volume and jobs growing by 2.2%. The advance is even more remarkable in comparison with the other G7 nations, which averaged just 1% growth in output. While the US rebounded from virtually no change in 2001 to post 2.4% growth last year, this was a far cry from the preceding five straight years of about 4% annual growth. Meanwhile, the first year of a common currency in the euro-zone saw growth slow further to less than 1%, pulled down by lingering weakness in Germany and France. Japan continued to lag behind with only 0.3% growth in volume: after allowing for its continued deflation, this left current dollar GDP shrinking for the second year in a row.

Canada’s superior economic performance is not a recent phenomenon. Since 1995, no major OECD country has exceeded Canada’s cumulative growth of 28% in quarterly GDP1, with the US at 26%, the UK at 20% and the euro-zone and Japan far behind at 16% and 8%. While Canada’s ability to shrug off the woes of our major trading partner and continue to grow surprised forecasters repeatedly last year, our growth rate has actually surpassed the American for four straight years. In fact, last year’s 1.0 percentage point gap in growth rates was no more remarkable than the 1.3 point differential in 1999 and the 1.2 points in 2001 (there was a 0.7 point gap in 2000) 2. The contrast is even greater in per capita terms overall (5 points since 1997), reflecting faster population growth in the US.

Every business cycle, like every year, has its unique characteristics. During the recent downturn in the US, for example, productivity posted its best performance ever during a recession. In Canada, the economy continued to grow despite slumping business investment, which normally triggers a steep downturn. Still, many recent developments can be understood only in the context of the driving force of the recent cycle–the boom and bust of the stock market–so we begin this year’s review with an overview of recent developments in global financial markets. But these cyclical events are overlaid against longer-term trends in our society, notably an aging population and the increasing education of women, and these events are discussed in more detail in the review of labour market developments.

Figure 1

Financial Markets

The stock market boom originating in the US in the late 1990s set the stage for many of the economic trends of that era. Savings, investment and borrowing decisions were distorted by unrealistic expectations about future demand and profits (the proof was the subsequent bust in share prices and record bankruptcies). The bubble made capital artificially cheap, encouraging firms to over-invest. This was especially true of new start-ups in the technology field, as venture capitalists poured money into IPOs (Initial Public Offerings) that “went into useless software, mindless dot-coms, and unused fiber-optic lines” instead of productive investment.3

The distortion was so exaggerated that it encouraged a belief the business cycle was dead. Whenever problems did appear, such as in East Asia in 1997 and the LTCM crisis in 19984, investors were bailed out. This helped foster the notion that the old economic rules no longer held in the New Economy, reminiscent of the “new era” and “new world” slogans used to justify market bubbles earlier in the century.5 Unfortunately, innovation extended beyond technology to increasingly creative bookkeeping.

One by-product of the bubble mentality was to create a corporate culture of “infectious greed” in the words of Alan Greenspan, chairman of the US Federal Reserve Board. The run-up in stock prices encouraged speculative trading, the extensive use of stock options and problems in corporate governance. The mania in the stock market for technology reached its peak at the turn of the millennium, with the Nasdaq exchange doubling again in less than five months between November 1999 and February 2000, after nearly doubling in the previous year.

The subsequent bursting of the bubble triggered a vicious cycle. As stock prices fell and economic growth slowed, the temptation rose in some firms to mislead markets about their faltering performance. Triumphant talk of a New Economy was replaced by new records for bankruptcies in the US, including Worldcom, Enron, Global Crossing and Adelphia. A common feature of these scandals was their concentration in areas recently deregulated in the US (notably finance, telecommunications and electricity trading).

The litany of corporate governance problems exposed in 2002 led to a worsening slump in stock prices. The US market (measured by the S&P 500) fell 23.4% in the year, its largest drop since 1974 and the first time it had fallen for three straight years since the 1930s. Overall, the market at year-end had lost 40% from December 31, 1999. Technology was hardest-hit over these three years, with the Nasdaq exchange down 70%. Just as the stock market crash in the 1930s led to the Securities Act of 1933 and the creation of the SEC, Congress reacted with the Sarbanes-Oxley Act, setting new rules for corporate governance.

As bad as the US stock market was in 2002, many European and Asian markets fared even worse. The collapse of demand and revelations of scandals led to the total shutdown of technology-based markets in Germany and Japan. Overall, Morgan Stanley’s World Stock Market Index fell 20% last year, its worst showing since 1974, bringing the total drop since 2000, the peak for technology, media and telecom stocks, to 43%. The only worse drop on record was 59% in 1929-31. By comparison, the Toronto market, while posting its first back-to-back losses since 1973-74, performed relatively well, with a drop of 26% over the last two years, including 14% last year. This is consistent with Canada’s ranking at the top of economic growth in the G7.

The distress in corporate finances can also be measured by corporate bond yields and their spread over government bonds. Worldwide, defaults on corporate bonds rose to record levels.6 In Canada, the spread between government and corporate bond yields hit a record 160 basis points last year, up from its most recent low of 50 points in 1997 (just before the Asian and LTCM crises). Effectively, this meant that firms did not feel the benefit of lower long-term interest rates in recent years (unlike governments and households), reinforcing their newly found aversion to debt. In the US, a record number of investment grade companies were demoted to “junk” status, while another 45% were rated only one level above, at BBB, the most since 1988. Such firms are likely to be pre-occupied with repairing balance sheets to avoid their de facto exclusion from credit markets (if downgraded to junk). Another consequence of the weakness in stocks was an increase in underfunded pensions in large companies with defined benefit plans. As with stocks, downgrades of European corporate bonds were even worse last year.

Figure 2

Finally, the supremacy of the US dollar began to erode. The trade-weighted value of the dollar fell slightly against other major currencies. The dollar had soared 28% over the previous six years on the strength of surging foreign investment in US capital markets. (Interestingly, the US maintained its surplus in investment income into 2002 despite rapidly-rising external debt, reflecting a higher rate of return on its assets abroad than foreigners earned on investments in the US.)

The crash of the stock market has had important economic effects, such as choking off capital for new ventures. But as noted before, every cycle is unique, and one of the most notable features of the bust in this stock market is that it has not precipitated a crisis in the financial system.

The ability of the financial system to cope with rising bond defaults and falling stock markets, according to the Bank of Canada, reflects the efficient redistribution of risk (Financial System Review, p.6-7). Banks have much less direct exposure, with investors more often on the front line to absorb losses, especially in IPOs. Average loan loss provisions by chartered banks rose from 0.2% of assets in 1997 to a still-low 0.6% in 2002, while a high coverage ratio of bad loans reflected good asset quality.


The boom-bust cycle in business investment was most severe in the US. There, business outlays for plant and equipment fell steadily for 8 quarters between 2000 and 2002, its longest (but, at 12%, not severest) slump since the Depression of the 1930s. This followed six years of growth averaging 10%. The drop began in equipment as the drying-up of new capital and slumping demand quelled the frenzy for computers and telecoms. Cutbacks soon spread to structures like factories and office buildings, which continued to plummet in 2002 as the classic cyclical phenomenon of over-capacity took hold. This was reflected in the shift in investment cuts from equipment and software to non-residential construction, both here and in the US.

The swing in investment was less pronounced in Canada, just as it was in our stock market. Of course, the two are inter-related. Canadian firms did not over-invest in the technology embedded in machinery and equipment as much as Americans did, hence the subsequent drop-off was less severe, totalling 5% in volume between 2000 and 2002. Firms reined in spending the most for technological goods. Telecom equipment users remained the most depressed by over-capacity, tumbling 22% in volume in 2002 after a 10% drop the year before. But demand for computers also levelled off for a second straight year, after rising an average 40% per year from 1994 to 2000. Even software spending slowed to below 10% growth for the first time since 1995. Meanwhile, non-residential structures fell 6% after slowing to a crawl in 2001. A surplus of plant and office space pushed new building down 11%, while engineering was dampened by cuts in the oilpatch. (The energy sector alone accounts for almost half of non-residential structures in Canada.)

Last year’s weakness in business investment by industry was concentrated in ICT industries and in resources, off about $3 billion and $2 billion respectively, both the product of a sharp downturn in worldwide demand. The slump in high-tech investment accelerated after the initial slowdown in 2001. Hardest-hit was manufacturing of computers and electronic products, which slashed investment outlays 43%. Almost all of this cut originated in the communications equipment industry, which plunged 74%. In the professional, scientific and technical group, computer systems design retrenched by 15%, while spending by the scientific research industry tumbled 44% to erase most of the previous year’s gain. Slumping demand for telecom services also played a role in the 17% (or $2 billion) drop by the broadcasting and communications industry.

All industries in the resource sector cut back sharply on investment spending. The most severe drops were for metal mining, smelting and refining, lumber and paper. While falling prices clearly played a role in these declines, rising prices elsewhere did not stop other sectors from taking the axe to outlays. This was particularly true of oil and gas, where declines for conventional projects in the oilpatch outweighed increases for offshore projects and the tar sands. Strong demand for non-metallic mines also did not induce more capital spending.

Investment was sluggish in many of our other most capital-intensive industries. The auto industry reined in investment after a sharp gain the year before, while retailers and finance held down spending for a second straight year. Two notable exceptions were air transport and utilities. As well, there were large increases in the public sector, notably for education and health care.

The obvious motive for firms to pare capital outlays was to repair their finances. As a result, the corporate sector swung from its traditional position of being a net borrower to a large net lender in each of the last two years. Nor were Canadian firms alone in pursuing this goal, with a similar trend away from corporate borrowing in both the US and UK.7

One of the interesting features of the recent gyrations of the stock market is how their effect on spending has been concentrated directly in investment itself rather than household spending. Equity issues by firms soared to $ 54 billion in Canada in 2000, the equivalent of almost 40% of on total new investment, before falling to $31 billion last year. The absence of a noticeable wealth effect on household consumption is partly attributable to the buoyancy in housing prices.

Labour Markets

While the recent course of the real economy has played out against the backdrop of the boom-bust cycle of financial markets, labour market developments have additionally been over-laid against the fundamental trend of an aging population. Within the overall gain of 330,000 people in Canada over 15 years old last year there was a marked redistribution towards those 45 and over, where the rate of increase accelerated slightly to 310,000. A fourth consecutive decrease in prime-aged people between 25 and 44 largely offset a small gain in youths (age 15 to 24). The largest increase among older workers was for those aged 55 to 59 (up 114,000, the most of any of the 5-year age groups between 15 and 64 years), followed by people between 45 to 49 (up 95,000). Both reflect the steady progress of the baby-boom through the population pyramid. The number of people actually past the traditional retirement age of 65 has not yet begun to increase rapidly, held down in part by a fourth straight decline in people aged 65 to 69.

Figure 3

The labour market behaviour of older workers has already begun to show significant breaks with decade-long trends, a development that can be expected to continue as the labour market adjusts to the reality of an aging workforce. The average retirement age edged up over the last four years, from a low of 60.9 in 1998 to 61.2 last year, ending a steady decrease from 65 in the late 1970s (when the current data series began). A drop in investment income as interest rates fell and stock markets tumbled may have made it necessary for some older workers to work longer. The upturn appears to be driven more by the supply of labour offered by workers than a spontaneous change in demand by employers, since it occurred simultaneously in the private sector, the public sector and the self-employed. 8

A further examination of labour force participation rates by age supports this. The largest increases last year were among people over 54 years old, up 1.9 percentage points to exceed its cumulative gain over the previous four years (which already represented a sharp break from two decades of steady decline). The hike was especially pronounced for people in the 60 to 64 age group, where the rate surged 3.4 points to its highest in nearly 20 years, and the 65 to 69 group, up 1.6 points to a post-1982 peak. These increases almost exactly matched higher employment rates among these groups, suggesting that the certainty of a job was important, thus avoiding any prolonged spell of unemployment during job search. The greater availability of part-time work does not appear to be a major factor, as full-time jobs rose faster (although workers over 65 increasingly favoured part-time, reversing their trend in the 1990s).

Figure 4

Still, it is interesting that the small number of older people who were unemployed had the longest duration of unemployment of any age group at almost 31 weeks versus an overall average of about 18 weeks. This suggests that older workers may be more selective in accepting the positions they want, enabled by a better financial position due to a larger cushion of savings or pension benefits (alternatively, it could be harder for older people to get a job).9 This has important implications if employers look to older workers to keep the labour supply growing as the boomers reach retirement age.

Another change, often taken for granted by analysts, that is basic to recent trends in the labour force is the feminization of the workplace. Nearly half (46.1%) of the labour force is now female, and women’s participation rate continued to rise faster than men’s, notably among adults. In 1976, adult women participated in the labour force at only half the rate of men (41% versus 81%), and well below half for women 45 and over. Less than a generation later, the gap is consistently only about 10 points for women between 25 to 44 years (81.2% for women, 92.4% for men) and 15 points for older women. All these gains were driven by married women. Furthermore, the part-time job rate for adult women has fallen slightly since 1976, while it has risen 3.7 points for men.10

Not only are more women entering the labour force, but they are arriving with more education. Last year, for the first time ever, more women than men in the general population had at least some postsecondary education. In a little over a decade, the percentage of women having more than high school has risen from 39.7% to 53.3%. Since 1999, the number of women aged 25 to 44 with university degrees has exceeded men (growing to almost 100,000, or nearly 10%, more than men last year) reversing the advantage younger men historically had compared with women. This trend should accelerate in the near-term, judging by the preponderance of women currently graduating from university.

While demand for university grads continues to rise (though less than 5% average in the late 1990s), it has not kept up with supply. As a result, last year, for the first time on record, they were the only educational group whose employment rate fell, continuing a four-year reversal of a decade-long trend of higher employment. These four straight declines have cut the employment rate for people with university degrees from 79.1% in 1998 to 77.4% in 2001 and 77.1% last year, their lowest level on record back to 1990. (Even more surprising, the drop was led by people aged 25 to 54 and those with post-graduate degrees.) This was reflected in a jump of a full percentage point to an unemployment rate of 5% among those with a university degree.11 The increase in unemployment originated among both men and women, as job opportunities did not keep up with their growing numbers: their labour force expanded 19% in the last four years, while jobs rose 18%. Still, this latter gain was more than twice as fast as all other groups, which combined saw jobs rise 7% versus only a 6% gain in the labour force. The only other group that saw its employment rate fall in recent years was those with only an elementary school education, despite a slight rebound last year.

Figure 5

All other groups between those with the most and the least education have seen employment rates rise since 1997, a trend that continued in 2002. High school graduates led the way, with their employment rate up 1.9 points over the last five years, followed closely by people with a post-secondary certificate and those who did not finish high school. The persistence of this trend, through various stages of the business cycle and rapid changes in technology, remains one of the interesting shifts in labour markets. It is worth emphasizing that the trend towards convergence between different education groups should not obscure the reality that, in absolute terms, job opportunities grow, earnings rise, and unemployment falls as education levels increase. Still, it is noteworthy that in a more knowledge-oriented society employment gains are more evenly-distributed, after widening through most of the 1990s.

Dividing the labour force between those with only a high school education or less and those with at least some post-secondary education summarizes how these trends have evolved over the past decade. From 1993 to 1997, the less educated saw steady job losses (totalling almost half a million or 1% in terms of their employment rate), while more educated workers saw jobs grow 27%, keeping their employment rate steady. Since 1997, jobs for the high school or less group have risen, raising their employment rate 3.0 points. Meanwhile, employment for more educated people slowed, posting the smallest back-to-back increases on record in 2001 and 2002, presumably due in part to the slump in demand from high-tech industries. After all these gyrations, the unemployment rates for these two groups returned almost exactly to where they were in 1990, at 10.2% and 6.0%. This also reflects the shrinking number of people in the labour force with less education, and the acceleration of those with some post-secondary.

Some clues to the narrowing gap in employment rates by education level emerge from examining growth by industry. Fuelled by the housing boom, construction surged ahead by 5% last year, bringing its total increase since 1998 to 20%. Construction jobs are now the most numerous on record, cutting unemployment in the industry to below 10%, less than half the rate 10 years ago. Manufacturing has also seen a remarkable turnaround. Neither industry requires extensive formal education, as 46% of workers in each have only high school or less. The primary sector, which has the least schooling, remained an exception. Mining retrenched in the face of weak prices on world markets, while forestry trimmed jobs for the second year in a row. Farming levelled off, but only after shedding nearly one-quarter of its workers over the previous three years.

Growth in services returned to the average rate of increase of the late 1990s, after a brief slowdown in 2001, but the mix of jobs shifted away from industries associated with university education. Demand picked up for consumer services such as retail trade and accommodation and food, areas that require relatively less schooling, with nearly half of all workers having high school or less. Furthermore, the professional, scientific and technical group—which has the highest educational attainment in the private sector—saw growth stall, after a decade of uninterrupted gains averaging nearly 7% a year. This industry includes computer systems design, which slowed markedly after the bursting of the tech bubble. Information, culture and recreation services also suffered a setback after years of uninterrupted rapid growth.

Some services continued to thrive. Management and administrative services led all industries, with continuing double-digit growth in business services (which doubled from 1998 and tripled since 1994 as firms out-sourced work) reinforced by a pick-up for building and private security services. Public services saw the next-largest gains, with health and education bouncing back from a respite in 2001, while public administration posted its first significant increase since 1992. Government was the only area with a preponderance of knowledge workers that posted above-average growth (with nearly 70% women, it also helped boost their employment).

It is useful to put last year’s changes in industry employment in the context of long-term trends since 1989. Starting in that year and continuing into 1993, the economy lost jobs as it adjusted to recession and the restructuring related to a number of structural changes (including free trade, the GST, and tight monetary policy to reduce inflation). Manufacturers led the retrenchment, while losses in construction and resources compounded the weakness in goods-handling industries (notably transportation and wholesale trade). With the consumer and technology sectors also weak, this left public sector areas (health, education, public administration) to shoulder the burden of buttressing employment.

From 1993 to 1999, employment accelerated. Looking back, this period now appears to be a golden age for trade and technology: coincidentally, it was the peak in demand growth for more educated workers. Manufacturing revived, led by exports of telecom equipment and autos, while computer systems design alone contributed half of the 300,000 gain in professional, scientific and technical jobs. Transportation and wholesale trade both posted gains of over 100,000 as the flow of tradeable goods expanded rapidly. Information and recreation matched these increases, boosted by the spread of wireless communication, specialty TV and gambling. Public administration underwent a significant downsizing during the same period.

Table 1: Employment by Industry, 1989-2002 (change in 000s)*

  1989-1993 1993-1999 1999-2002
Total -129 1,674 881
  (-0.2%) (2.1%) (3.0%)
Primary1 -38 -66 -59
Construction -118 81 108
Manufacturing -344 431 109
Transportation -43 124 11
Wholesale -7 120 18
Retail -7 88 164
Information and recreation2 -3 212 69
Accommodation and food 40 140 79
Finance 25 22 33
Professional and technical 63 287 89
Management and business services 33 164 84
Education 76 74 33
Health 125 88 163
Public administration 68 -91 4
* Average annual percent change in brackets.
1 Includes utilities.
2 Includes other services.

Since the bursting of the tech bubble – and the concomitant slowing of trade with the world economy – job growth has been heavily dependent on industries related to household consumption. Of the total increase of nearly 900,000 jobs since 1999, nearly half were directly attributable to construction (largely housing), retail (led by housing-related items), accommodation and food, and gambling and other recreational services. This does not include increases in manufacturing, where growth shifted from the glamorous high-tech sector to more pedestrian areas like food and furniture. Other high-flying sectors such as transportation, wholesale trade and broadcasting and telecommunications also came back to earth, along with professional, scientific and technical services, where computer systems design in 2002 posted only its second annual job loss ever. Meanwhile, health and education underwent a significant revival, fuelled by a reinfusion of funding.

Only three sectors showed no change in their trend over these three periods. The primary sector (including utilities) posted unrelenting declines. Accelerating losses in agriculture accompanied moratoriums in fishing and cutbacks in logging. Low prices for mineral products left mining jobs (outside of oil and gas) at only half their 1989 level. The finance and real estate sector expanded only marginally: excluding a burst of growth in securities trading late last decade, there would have been no gain at all. Management and other business services recorded steady growth throughout. A sudden drop-off for temporary help and travel services in the last two years followed a decade of rapid growth, but demand for business services remained steady.

These broad shifts in industry demand were reflected in detailed occupational data. Jobs in the last three years have proliferated the most for sales (including retail clerks and cashiers) and construction trades. Demand was also robust for teachers and health workers, where a growing scarcity last year drove their unemployment rates to the lowest of any group (as well, these were the only groups that saw their unemployment rate fall last year, apart from machine operators in manufacturing). Jobs in natural and social sciences posted steady gains.

Occupations unique to primary industries continued a decade-long decline, leaving them with the unenviable distinction of being the only occupational group with double-digit unemployment (10.5%). Not surprisingly, the labour force in this sector has been falling as people leave to look elsewhere for work or retire: after edging down by 4% from 1987 to 1998, the exodus became a flood, with the labour force plunging 12% in the next three years.12 The only other sector where the labour force contracted in recent years was management, off 4% since 2000, perhaps a reflection of buy-outs and early retirement. Nevertheless, unemployment among senior managers jumped the most of any group, to 3.5%, its highest rate since the 1991-1992 recession.

Both part-time and full-time jobs picked up last year. For part-time workers, the 5.6% increase was the largest in almost two decades. The source of growth in part-timers appeared to be about equally split between personal preference (including school) and business conditions reducing the opportunity for full-time work.

The increase in part-time work was one reason why average hours worked in the economy fell 0.4%, despite the gain in overall employment. As well, the number of people working long weeks of 50 hours or more fell for the second year in a row, to 12.3% of all employment, the lowest since 1986. Just two years ago, at the peak of the boom, this group represented a near-record high of 13.7% of everyone holding a job. More peculiar is that working long hours decreased despite a surge in people holding multiple jobs, up 10% after two years of decline. The increase in moon-lighting was concentrated in services, notably health care and education.

The widely-held notion of a loosening of the bond between employers and employees was not evident in the aggregate data on labour markets. While temporary jobs grew faster than permanent ones over the last five years, the gap last year was the smallest (3.4% versus 2.2%, with seasonal jobs leading the increase for temps). An overwhelming 87% of all jobs remained permanent, down only slightly from 88.7% in 1997. This stability was reflected in average job tenure, which after four straight declines, jumped to nearly equal the record high set in 1997. Of course, increases in job tenure often accompany anxious economic times, as people are reluctant to quit their job as hiring rates tumble (for example, tenure jumped a record 5 months in the 1990-92 recession).

Product Markets

Firms rebuilt inventories in 2002, after reducing them in 2001 when sales slowed. This swing in inventories accounted for almost all of the difference between 1.5% real growth in 2001 and 3.4% last year: excluding stocks, growth would have been 2.9% and 2.6%. Much of last year’s upturn in inventories originated among retailers, notably vehicle dealers where demand improved the most. Manufacturers kept a tight rein on stock levels.

The steadiness of GDP excluding inventories was reflected in final domestic demand, where real growth of 2.6% was virtually the same as the year before. While housing soared 16%, by far its fastest increase since 1987, this was largely offset by the steepening drop in business investment. Growth in consumer spending on goods and services was little changed at just under 3%, despite the surge in vehicle sales.

External trade remained sluggish for a second straight year, weighed down by falling demand for machinery and equipment on both sides of the border. Export volume recovered only a fraction of its drop the year before, while earnings fell for a second straight year as prices fell for a wide range of commodities. Imports fared slightly better, boosted by strong demand for autos and other consumer goods.

Unusual weather had a large effect on important sectors of the economy. A continuing warming trend accompanied a worsening drought in western Canada. This slashed the wheat harvest to just 15.45 million metric tons, one-quarter of 2001 and just over half of the 26.8 million harvested in 2000. Poor weather in central Canada also dampened the vegetable crop, notably corn. The impact on food prices was mixed, as increases for bread were offset by the accelerated slaughter of livestock (to avoid the cost of feed). Overall, food prices rose 2.6%, less than the year before.

Elsewhere, the trend to warmer weather produced variable results. For housing, where demand strained the industry’s capacity limits all year, the mildest winter ever at the start of the year probably boosted overall output. Utilities made up for low heating demand in the winter when record-breaking summer heat sent demand soaring.

Another important point of divergence between Canada and the US began with September 11. While the terrorist attacks triggered large declines on both sides of the border in industries ranging from air travel and accommodation to gambling, almost all recovered fully in Canada within three months. The only exception was same day visitors from the US, but this was partly offset by more overseas visitors, who shunned the US. The recovery of these industries in the US was almost non-existent, and layoffs in the airline, aerospace and travel industries remained an important source of their job loss in 2002.

Nowhere was the divergence between Canada and the US more pronounced than in manufacturing. Both countries suffered losses in 2001, due to the initial impact of the slump in technology investment and the terrorist attacks. But growth quickly resumed in Canada, with this sector raising payrolls 2.2% last year. This was the mirror image of the US, where manufacturers cut payrolls another 5% during 2002, tumbling to a 41-year low.

While a number of factors contributed to this growing gap, a leading explanation appears to be the exchange rate. While off slightly in value last year, the US dollar remained near record-high levels, fuelled by hefty capital inflows at the peak of the stock market surge. One of the casualties was the Canadian dollar, which fell to an all-time low of 63.7 cents against the US greenback, before rallying at year-end.


The fall-out from the worldwide slump in stock markets after the bursting of the tech bubble dominated global economic trends last year. Business investment in Canada fell for a second straight year, while spending cuts by firms around the world pulled down our exports. The cyclical slump in trade and technology has eroded the advantage held by more educated workers throughout most of the 1990s. Still, growth in Canada was sustained by rapid gains in household spending, buoyed by low interest rates, tax cuts and a healthy job market. Strong gains in consumer-related jobs supported overall growth, especially for women who increasingly have an advantage in education over men. Labour markets also were increasingly affected by the aging of the baby boomers, who appear to have different behavioural patters as retirement approaches than previous generations.


1 Further down the development scale, Mexico and South Korea were slightly faster at 32% and 39%. Source: OECD Main Economic Indicators, February 2003.
2 The actual growth rates for real GDP were 5.4%, 4.5%, 1.5% and 3.4% in Canada from 1999 to 2002, versus 4.1%, 3.8%, 0.3% and 2.4% in the US.
3 J. Stiglitz, “The Roaring Nineties”, p.82 in The Atlantic Monthly, Oct. 2002.

4 The East Asian crisis began with the collapse of the Thai currency in July 1997 and spread to Malaysia, Korea, the Philippines and Indonesia. The Long Term Capital Management crisis was triggered by the decline of the Russian ruble in July 1998. See J. Stiglitz, p. 83-84.
5 See p.101-105 in R. J. Shiller, “Irrational Exuberance”, Princeton Univ. Press, 2000.

6 The Bank of Canada, “Financial System Review”, Dec. 2002, p. 5.
7 In the UK, a £3.2 billion drop in investment between mid-2001 and 2002 accompanied a swing from net borrowing of £3.8 billion to net lending of £2.3 billion (p.5, Economic Trends, Office of National Statistics, February 2003). In the US, net corporate borrowing fell nearly $200 billion in 2001: data for 2002 are not yet available.

8 Each has its own distinct behaviour; public sector workers retire earlier, but have shown the largest rise in recent years, from 57.8 years in 1998 to 58.4. The self-employed retire the latest, remaining above 65 years throughout. The private sector has show the smallest increase in recent years, up only 0.2 points since 2000 to 61.3.
9 Both these trends were evident in the US, where the employment rate rose for those 55 to 64 years, the only group to post an increase: their duration of unemployment was 20.6 weeks, versus an average of 16.6.
10 The real surge in part-time work has been among youths, where it doubled from 21% of all jobs in 1976 to 45% in 2002. This was led by young women, consistent with their increasing emphasis on educational attainment.
11 The trend was even more marked in the US, where the employment rate for college grads tumbled 2 points and the unemployment rate rose 1.3 points in the last 8 quarters, although this was in line with the deterioration for other groups.
12 These are from the data on occupations in jobs unique to primary industries. The broader data on the labour force in all primary industries shows a drop of 16% since 1998, after a 4% dip in the previous decade. While large compared with the labour force in primary occupations, this exodus had little impact on other major aggregates, equivalent to less than 2% of the blue collar or less educated workforce.

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