Labor Market Aspects of Industrial Restructuring in Canada


Labor Market Aspects of Industrial
Restructuring in Canada by Eswar Prasad

This paper investigates the hypothesis that the relatively slow
recovery of output and employment in Canada after the last recession may be
attributable to the short-term negative effects of industrial restructuring
that have temporarily overwhelmed the longer-term positive effects and
dampened the typical cyclical upswing in the economy. Recent developments
in the Canadian labor market are examined to provide a partial assessment of
the nature and magnitude of industrial restructuring in Canada.

Measures of dispersion in employment growth at the broadly defined
(1-digit) sectoral level reveal little evidence of recent sectoral shifts
prompted by restructuring. Within the manufacturing sector, the dispersion
of employment growth has been relatively high since 1990, indicating that
large interindustry shifts may have occurred within manufacturing. Using
labor reallocation measures over a three-year horizon, this paper also finds
some evidence that long-term net flows of labor may be occurring across
broadly defined sectors of the economy.

The implications of industrial restructuring for the medium- and long-
term prospects for the Canadian economy are then examined. Although
productivity levels have increased at both the aggregate and sectoral levels
over the last few quarters, a large part of this increase may be
attributable to relatively low levels of labor hoarding by firms in
anticipation of prolonged weak aggregate demand conditions. Evidence of
permanent gains in productivity growth arising from restructuring remains

The rising employment shares of low productivity sectors such as trade
and services suggest that, even if the increase in the growth rate of
manufacturing productivity proves to be permanent, aggregate labor
productivity growth may not show substantial permanent improvement. The
evidence presented in this paper suggests that the recent increases in labor
productivity may represent a cyclical phenomenon rather than a permanent
increase in the rate of growth of productivity.