The New Brunswick labour market time bomb

Believe it or not I continue to have a hard time convincing some influential people that we have a serious and growing labour shortage problem.  They will say what about the 10 percent unemployment rate?  What about the fact we are still losing people to other provinces through interprovincial migration?  How about the crippling youth unemployment rate?

The youth unemployment is a concern to be sure but even that needs to be put into perspective. The unemployment rate is highest among the 15-19 age cohort and those young people are either in school and/or living at home.  Further, as shown below the absolute number of unemployed young people aged 15-19 continues to fall.  It was an estimated 4,700 in 2010 and now it is 4,300.  That is across the province.  If we had that data by region there would likely be under a 1,000 unemployed in the entire Greater Moncton region, for example.  Not the labour market apocalypse that some might tell you.

Even among the 20-24 age group, the unemployment rate (14.5% in 2014) is still below what it was throughout the 1990s and early 2000s.  In 2003, it was 14.9%.  And again, on an absolute basis it is in decline.  In 2003, there were 5,500 persons aged 20-24 that were unemployed and in 2014 it was 5,000 across the province.  Again, I have to reiterate that a large share of those are likely in some form of post-secondary education too.  My concern is that this number (and the correlating outward migration) is a red herring causing dangerous policy moves.

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If we step back from the short term challenge (and the new one relating to returning migrant workers from Alberta) and look at the ‘big picture’ we see a fundamental shift in the labour market.  If you look at the following chart and overlaid a real GDP growth chart you would see GDP growth starts to collapse right about the same time as the lines cross in this chart.  Yes there was considerable government stimulus funding that gave GDP a little shot in the arm and yes we still had the hangover from a few of the major investment projects but strip that out and there seems to be a correlation between the tightening labour market and GDP stagnation.

In the early 1970s there were in the 140,000+ range of people aged 10-19.  The bulk of these people would be heading into the labour market over the coming 10 years.  At the same time there were only 50,000+ aged 55-64 and presumably mostly leaving the labour market over the coming ten years.  Even in the late 1980s there was a surplus of more than 55,000 using this measure.  The lines crossed in 2007 and by 2014 there only 700 people aged 10-19 for every 1000 people aged 55-64.  In other words, without inward migration we don’t have enough people even to replace existing jobs.  Now, of course, labour markets are organic and adjust in many ways.  Some people may retire late.  Some employers may not replace workers as they retire.  Some young people will continue to leave.  But the underlying trend is a ticking time bomb holding back GDP growth and stagnating the tax base on which government extracts the money it needs to pay for public services.

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I think this and the calcifying attitudes towards economic development are the two biggest challenges facing New Brunswick – even more than the public finances.

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A closer look at labour market availability and economic growth

It must be frustrating to be working for the provincial government and trying to convince the federal government of the need for a step change in the number of immigrants to New Brunswick. They are haggling over “a few hundred more” of Canada’s 280,000 (or whatever the number is) when we really need is thousands more.

Take a look at the following chart.  The size of the labour market in New Brunswick expanded steadily in the post WW2 period even though a lot of NBers moved way.  The chart shows the growth in the labour market after the effects of any outward migration.  Between 1976 and 1984, the labour market expanded by more than 39,000 people (either working or looking for work).  Between 1984 and 1994, it expanded by 42,600 and the next decade saw a 44,900 person rise.  In the last 10 years the total labour market – employed and looking for work – grew by only 4,000.  Even this is showing a rosier picture than it should.  Between 2009 and 2014 the size of the labour market declined by 3,900.

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If you look at the younger labour market, it has been in steep decline.  Between 1994 and 2014, the total number of people aged 25-44 in the labour market declined to the point that the gains between 1984 and 1994 were wiped out.   In other words, in 1984 there were 154,100 people aged 25-44 in the NB workforce. In 2014 there were 154,600.

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And just about everyone is focused on the short term mobility and unemployment data in New Brunswick.  We are missing the forest for the trees.  The expanding labour market in New Brunswick for decades drove at least a moderate employment and GDP growth rate.  Sure there was a surplus and those folks moved away to other provinces and beyond but net of that there were still tens of thousands more coming into the workforce  boosting export-oriented industries and local, consumer spending-based industries.

In my opinion, the provincial and federal government should look to foster labour market expansion by similar levels as past decades.  This would rebalance our demographic situation and allow for employment expansion, GDP growth and the boosting of tax revenues.

Sure we will continue to see some outward migration to other provinces but you could bake that into your planning.

I’m not suggesting this will be easy but unless we start talking about the forest, our focus on the trees will keep us locked in a long term period of economic stagnation.

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PS: Michael Horgan, don’t forget the other reason

I see the province has retained Michael Horgan, who helped design the federal government’s budget deficit reduction strategy in the early 1990s, to assist in helping the NB government slay what they are now calling a $400 million ‘structural’ deficit.

Not to sound too Paul Krugman-esque but Horgan, Boudreau and Melanson need to remember it wasn’t all cuts that beat back the Canadian government’s deficit.  The Canadian economy grew, on average, four times faster from 1994 to 2000 than it did between 1989 and 1993.  Four times.  Federal government revenue growth went from negative in 1993 and 1994 to robust growth from 1995 to 2001.

For me it is still an open question if you can cut a $400 million structural deficit without at least a moderate level of GDP growth.  They are already talking about raising the HST, possibly tolls, etc. to increase revenue but that just takes money out of the private economy and doesn’t do anything to boost growth (some may say it will reduce growth).

Nova Scotia raised its HST by two points and is still running a fairly significant deficit. Average annual NS government revenue grew by only 1.21 percent between 2008-2009 and 2013-2014 according to RBC Economics – the worst growth rate among the ten provinces (but only slightly worse than NB’s 1.33 percent). Now, it is true there is a lot more going on in the NS economy – such as the decline in offshore royalties – but the general point that an HST rise didn’t fix the structural deficit  is still valid.

Actions have consequences.  IMO, New Brunswick needs a growth agenda more than it needs a provincial fiscal austerity agenda.  We need a step change in GDP growth complemented by prudent fiscal management.

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Should government decide which industries win or lose?

 

I had a good conversation with a policy guy before Christmas who advocates in favour of the feds tightening TFW and immigration to New Brunswick.  In his view, in conjunction with tightening EI access, this will force more seasonal workers into year round work and bring down the overall unemployment rate.

My counter-narrative is that the changes will lead to less business investment and eventual downsizing and/or closure of a number of export-oriented businesses that rely on production wage levels under $16/hour.

His response was “good riddance”.  We have spent too much time propping up low wage industries in New Brunswick.

I really struggle with this issue.  Should the government be clamping down on firm efforts to bring in workers from outside New Brunswick if it hurts their ability to survive in the province?  Politicians always talk about not picking winners and losers but are they not doing the same thing with immigration policy?

Over 50% of all workers in the Toronto manufacturing sector are first generation immigrants.  In New Brunswick it is less than 4%.  If firms cannot recruit locally, why not let them bring in foreign workers?

The policy guy told me that manufacturers will have to up their wage rates to attract NBers to work in the jobs and that “is a very good thing”.  Again, fine for the petri dish but wrong in the real world.  A guy who owns a manufacturing facility in New Brunswick and one in Ontario recently told me it is easier to recruit workers in Ontario than NB – at the exact same wage level and so they are ramping up Ontario.  The kicker?  The Ontario workers are mostly new immigrants.

We live in a world where borders matter less and less for trade, capital and knowledge flows.  If we decide to tighten up even more on the inward labour flow – how does that benefit New Brunswick?  We certainly are not tightening up on the outward labour flow…..

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I’ll take ‘labour market distortions’ if it means saving our communities

If you want another reason why individual provinces need more flexibility around who they can bring in as temporary foreign workers (or immigrants) take a look at this Calgary Herald letter to the editor penned by Alexis Conrad, director general, Temporary Foreign Worker Program, Employment and Social Development Canada.

Conrad says the TFW program has led to a drag on wage growth in Alberta’s food services sector. This type of labour market ‘distortions’ is why the government had to make the changes to the program.

This proves my point to a tee.  In Alberta they are worried about low wage growth in the fast food sector. In New Brunswick I am worried about the very economic viability of many communities around the province.  If you design a program to address the former and it results in harming the latter – how’s that for good policy?

Now I know that all the think tanks are saying that if the government restricts TFWs in rural New Brunswick thousands of lazy, EI offenders will come out of the woodwork and rush into these manufacturing and processing jobs with gusto.  Or, like their counterparts in Alberta, the firms involved well jack up wages to attract them in.

It looks like many of them will downsize and may eventually close their NB operations – a fate that is unlikely in Lethbridge’s McDonald’s restaurant.

There is a lot of strange thinking around this file.  The only real solution, IMO, is to allow the provinces to determine what industries and workers are ‘strategic’ and allow them to bring in workers in support of their growth.  If the feds want to crack down on the burger flippers, fine.  But when they start to implement policies that hurt our export sectors such as manufacturing and tourism – that’s a problem.  I will remind the feds that immigrant workers are critical for manufacturing in places like Toronto, Vancouver and even Winnipeg – and I would wager the majority are earning below the median wage in these communities.  If you don’t want manufacturing workers coming to NB via the TFWP, then let them come in via PNP or some other stream.

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Is equalization a disincentive to growth?

AIMS and Fraser think so.

“Equalization makes it easier for political actors to turn their backs on national resource development even though it is a potential source of jobs, revenue and economic growth,” said Ben Eisen, director of research at the Atlantic institute. “Economic incentives to move forward are weakened by the fact that when you do so, a large chunk of the money is clawed back through reduced equalization payments. So that is one of the ways equalization creates a disincentive to pro-growth economic policies in recipient provinces.”

If you search this blog for the word ‘equalization’ you will find dozens of blogs dealing with the subject of equalization and I am not, in general, disagreeing with AIMS and Fraser on this.

But I think there is a lot more going on here than just equalization.  Saskatchewan was an equalization receiving province in the early to mid 1990s (remember that?) and that didn’t stop it from implementing the largest resources development expansion in the country – oil, potash, uranium, etc. Much of this expansion, by the way, was initiated under an NDP government.  Saskatchewan is now the leading fracking jurisdiction in Canada.

I haven’t read the full AIMS report so they may have already pointed this out but to hang the reluctance to pursue natural gas development on equalization would be too simplistic.

There is also the issue of age.  The median age in the area is now pushing 45 years compared to the early 20s in the 1970s.  Public interest in development of any kind looks different when you have a young population looking for careers and opportunities compared to when the majority are either retired or so to be.

The lobbying efforts – public opinion – are stronger now than even a decade ago.  It doesn’t seem to matter that virtually all of the anti-shale gas propaganda is coming out of the US and doesn’t reflect the Canadian experience.  It’s powerful stuff.  Take another look at Gasland – the slickly produced movie or search for ‘fracking’ on Amazon.ca – you will see multiple books on why fracking is going to destroy our world as we know it.

And I would say New Brunswickers – even more so than Nova Scotians – have a greater suspicion of big, evil corporations – particularly from the USA.  The protests I have seen focused on this fact – “they come here – destroy the land, leave us nothing and take all the economic benefits away – leaving us with nothing but an environmental mess to clean up”.

The question is how to get New Brunswickers to take a look at this issue afresh.  To study the experience in Saskatchewan and elsewhere in Canada. To think about practical development issues.  To study the set of rules which are among the most stringent in North America.

I don’t think the equalization argument will work.  It feeds long term stereotypes about lazy, entitled Maritimers sitting around sucking the hind teat.

If Maritimers could be convinced that natural gas development will not destroy the environment or despoil the water and will bring economic benefits they might come around to the idea.  If they are convinced the industry can be properly managed and that gas wells at the end of their lives will be properly sealed and brought back to the land’s original state they may be convinced. If they can be assured their quality of life will not be significantly impacted (negatively) beyond the normal impacts of natural resources development (i.e trucks on the roads,   etc.), they may come around.  If they can be convinced we need the gas – and if we don’t develop it New Brunswick homes and firms will face big increases in costs – they might come around.

As John Herron used to say, “You can’t address an environmental question with an economic response”.  This axiom will hold, IMO, until people’s basic living standards come into question – which in a country such as Canada is not likely at least in the next 20 year time frame.

 

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The myth of corporate welfare in New Brunswick?

From a recent column in the Telegraph-Journal.
Kevin Lacey, protector of the sacred taxpayer, recently intoned in a Telegraph-Journal commentary that instead of setting up a new model for economic development, the New Brunswick government should “chart a new path” without “government-led regional development schemes”.

Lacey, the Atlantic Director for the Canadian Taxpayers Federation, uses just about every opportunity to rail against the widespread use of government subsidies to business, or corporate welfare, in New Brunswick.

He will be happy to see the latest data from Statistics Canada on provincial government subsidization of private industry. The statistics agency released provisional data for 2008 to 2012 on the amount of money that was provided to private enterprises by provincial governments across the country.

Guess which province had the lowest amount of business subsidization in the country in 2012? I’ll give you a hint. It’s known for maple syrup, rolling hills and untapped shale gas resources.

In fact, New Brunswick had the second lowest rate of business subsidization as a percentage of gross domestic product (GDP) of any province across Canada over the five-year period except Ontario. In an average year, the New Brunswick government transferred $72 million as “subsidies to private enterprises” or $2.75 per $1,000 worth of real GDP.

Prince Edward Island, Quebec and Saskatchewan had the highest rates of subsidization with over $15 worth of subsidies for every $1,000 worth of GDP. Even that bastion of private enterprise, Alberta, doled out nearly twice as much business subsidies as a percentage of GDP compared to New Brunswick.

The astute reader will remark that the bulk of subsidies in western Canada go to the agriculture sector. This is true but agriculture is a ‘sector’ just like any other. It has profit-seeking private enterprises that face a variety of competitive and technical challenges. Just like most other industries.

But even removing subsidies to the agriculture sector, New Brunswick doles less money than all other provinces except Alberta.

A decade ago, I looked at this issue and found the same trend. New Brunswick just doesn’t dole out as much money to industry as we are told.

So how come the corporate welfare reputation continues to stick?

Firstly, there are a few high profile cases that continue to surface in the media. Opponents of government-led economic development will reach back into ancient history and dust of Bricklin or point to the more recent Atcon as egregious examples of corporate welfare.
Second, while the total amount of money doled out by government is relatively small, the total number of firms receiving government support is much higher than the national average.

A 2009 study published by Industry Canada found that 13.6 per cent of small and medium-sized enterprises (SMEs) in Atlantic Canada received funding from government lending agencies compared to seven per cent among SMEs across the country.

This would seem to indicate New Brunswick gives out less money overall but spreads it around in smaller chunks to to a broader base of smaller and medium-sized firms.

Unlike Kevin Lacey, for me the issue is not ideological. It is more pragmatic. Under what circumstances should the government be a bank for industry and how do we determine if this is a good use of taxpayer dollars?

This is why I fully endorse the government’s move to an ‘opportunities-based’ approach to economic development. New Brunswick has specific assets, infrastructure and competitive strengths that should be catalysts for private sector investment and new entrepreneurial activity.

There is a role for government, working with community and business leaders, to determine what these opportunities are and how we can best exploit them to strengthen the economic foundation under communities across the province.

This doesn’t necessarily require a lot of ‘corporate welfare’ but it does require identifying and bolstering the value proposition for investment into those opportunities. If there is a good case for investment, private industry will come.

There is a public interest in economic development. I reject the idea that government should just stand back and hope for the best.

But effective and accountable economic development has been elusive in New Brunswick.

Let’s hope this time things really will be different.

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Inspired by the NB Youth Orchestra

From a recent column in the Telegraph-Journal.

If you want an aspirational vision for our future as a province look no further than the New Brunswick Youth Orchestra.

I had the opportunity to watch the New Brunswick Youth Orchestra perform this weekend in Bathurst. My daughter is one of the four young musicians who play the clarinet so I get the chance to attend several performances during the course of the year. While analyzing the artists and the repertoire, I can’t help but think the youth orchestra represents a microcosm of a future prosperous and vibrant New Brunswick.

First, the orchestra represents where we will need to be demographically over the next 20 years. By my count, the orchestra is made up of about one-third new immigrants or the Canada-born children of first generation immigrants. This impressive cultural dynamic is a demonstration of how immigration will enrich our society and strengthen economic opportunity.

Second, even as it embraces multiculturalism the youth orchestra shows a strong commitment to New Brunswick’s two language heritage. The orchestra is made up of a good mix of young people with English or French as their mother tongue. During the performance the microphone was passed from one young person to another and each spoke in fluent French. This also should be our aspiration for the future.

Third, the youth orchestra is globally-oriented. The leadership brought in a rising star, Antonio Delgado, from Venezuela as Musical Director and Conductor. His unique style weaves a variety of influences including Latin American music which brings a little flair to the performance. As Delgado conducted Mexican composer Arturo Márquez’s Danzón No.2 in Bathurst, I glanced around the audience to see more than a few normally reserved New Brunswickers tapping their feet.

Fourth, the youth orchestra is focused on excellence. These young women and men are impressive. They individually work hard at their craft and come together under Delgado with beautiful and inspirational performances.

Fifth, the young musicians come from across the province. A prosperous future New Brunswick will similarly need to build on strengths and economic opportunities from one end of the province to the other.

Finally, the leadership is ambitious. The kind of ambition we need across our society in business and government. President and CEO Ken MacLeod wanted to project the youth orchestra on the world stage. They periodically tour through Europe and have played in world famous venues such as Carnegie Hall in New York City.

MacLeod’s ambition for the youth orchestra took a big leap forward several years ago when he brought the El Sistema program to the province. Sistema NB is an after school orchestral music program meant to “inspire children and youth to achieve their full potential and to acquire values that favour their growth and have a positive impact on their lives and society”. Sistema NB now operates four centres, in Moncton, Saint John, Richibucto and the Tobique First Nation, and engages more than 600 children daily.

Dynamic, ambitious, multicultural, focused on excellence, growth-oriented and globally connected. To me that sounds like the kind of New Brunswick I could get excited about.

If you get a chance to go see the New Brunswick Youth Orchestra you are in for a treat. They will be playing in Saint John on January 25th, Moncton and Sussex in February and the season finale will be held in Fredericton on March 29th.

You will witness young talent at its finest. You might also get a glimpse of the New Brunswick that could be waiting for us just over the horizon.

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Taking full advantage of our R&D assets

From a recent column in the Telegraph-Journal.

Why is research and development spending in New Brunswick on the decline?

Between 2001 and 2007 New Brunswick led the country among the 10 provinces in the growth of R&D spending (public and private). Between 2007 and 2012, total R&D spending in the province dropped by 19 per cent.

One reason has been the decline in government-funded research. Statistics Canada tracks annual spending on research and development by science, source of funding and by sector. Between 2001 and 2007 federal government spending on R&D in New Brunswick nearly doubled from $43 million to $84 million. Provincial spending increased from $5 million to $17 million.

However, since then government-funded R&D has dropped off the radar. Federal spending declined by eight per cent between 2007 and 2012 while provincial investment in R&D dropped back down to just $7 million in 2012.

I have asked a few people who should know why R&D spending has dropped since 2007 and I get a range of answers from “Statistics Canada isn’t properly tracking the spending” to “there just aren’t a lot of interesting R&D opportunities down here”.

One thing most people agree on is that we don’t have many public or privately funded research organizations that have the scale to compete for big national and international R&D projects.

One of the province’s long standing marine-related research organizations, the Huntsman Marine Science Centre in St. Andrews, has been involved in a variety of important research efforts over the years including an important role in the development of the aquaculture industry.

If we were ever going to be a world leader in some area of research it should naturally have something to do with the Bay of Fundy.

Jamey Smith, the Executive Director at the Huntsman, believes there are a wide variety of opportunities for more research that leverages both the physical and research ecosystems in the area.

He believes the expertise they have built working with the aquaculture industry could be used to tap international markets.

He also believes there is considerable opportunity to conduct more research into the medicinal properties of the fish and plants in the Bay of Fundy. The Huntsman already has one pharmaceutical industry client and is in discussions with another.

Smith says the Huntsman should be able to expand its research activities into the energy industry including the oil and gas development sector.

In recent years, entrepreneur incubation centres have been popping up all over the province. Beyond providing generic business support for start-ups, it would be interesting to align our entrepreneur incubation efforts with research and development opportunities.

For example, the Huntsman could become a global centre for marine-related research-based entrepreneurship. Entrepreneurs with interesting research ideas could be attracted from around the world to conduct their research in New Brunswick and also start their new business ventures here. We could match the researchers with capital and the business skills needed to effectively turn new ideas into business opportunities.

But this brings the conversation back to scale. There are few research organizations in New Brunswick, if any, with the scale to promote themselves in any serious way beyond the borders of the province.

We need to go back to the drawing board and think about how small provinces can effectively compete for research and innovation spending.

I would like to see us focus on the research organization that have enough scale or could build enough scale in short order to compete for global research opportunities. We need to focus in areas where we have an advantage although I am not necessarily making the case for research into the medicinal properties of dulse or periwinkles.

Finally, we need to think about how we can effectively collaborate to simulate scale. Maybe we should think about aligning all the federal and provincial trade development resources in New Brunswick with our research organizations to promote R&D opportunities far and wide.

We spend a lot of time and effort promoting New Brunswick seafood and other industries. R&D opportunities should be treated in the same way.

Former Premier Bernard Lord’s goal of becoming one of the top provinces in Canada for R&D spending per capita has long since been relegated to the dustbin. As of 2012, we are still dead last among the 10 provinces.

If we are going to make any real headway, we will need our research organizations such as the Huntsman Marine Science Centre to lead the way.

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Federal transfer payments to NB: Declining influence

Shawn Graham was in the news last week waxing about a variety of subjects but silent on maybe the most prescient aspect of the self-sufficiency agenda – the need to wean the province off its relatively high dependency on federal transfers.

Turns out Stephen Harper has the same vision for New Brunswick.  Between the 2005-2006 budget years per capita federal transfers to NB as a percentage of per capita program spending dropped from 37.2% to 32.8% in 2013-2014.  To put that in perspective if NB was still receiving 37.2% of its revenue needs from the feds – it would almost wipe out the current year deficit.

Between the 2009-2010 ad 2014-2015 fiscal years per capita federal transfers to all provinces rose by 17%.  To NB they rose by 4% – or an amount well below the rate of inflation.  As shown in the chart, Alberta and Ontario have run away with the lion’s share of increases.  Ontario is up nearly $5 billion and Alberta is up over $2 billion.

We have talked about the reasons for this before. The two big issues have been Ontario falling into the need for Equalization and the per capita funding formulas themselves which heavily favour Alberta, SK, etc. which are rapidly growing.

The bottom line is that Graham was right to worry about dependency on federal transfers.  He had an ally in Ottawa.  The big difference, of course, was that Graham wanted to reduce dependency as a consequence of economic growth.


 

Percentage change in per capita federal support 2009-2010 to 2014-2015

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Source: http://www.fin.gc.ca/fedprov/mtp-eng.asp. Includes Equalization CHT and CST.

 

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