'Dutch disease' builds healthier economy, economist says

The concept behind "Dutch disease" — the idea that a resource boom is bad for the manufacturing sector — is entirely wrong, economist Stephen Gordon argues in a new report.

Federal politicians have argued over Dutch disease as part of the debate surrounding Canada's oilsands and whether development should be slowed.

The argument says that a resource boom — like the one seen in the oilsands — drives up the value of the currency, making exports more expensive for customers outside of Canada and costing manufacturers some of their business.

That can in turn cause layoffs in the manufacturing sector, the theory holds.

But Gordon argues in a report released today by the University of Calgary's School of Public Policy that job and wage numbers from 2002 to 2008 tell a different story.

Job losses in the manufacturing sector were mainly due to attrition, he says. Workers quit and weren't replaced, but the jobs that were lost — mainly through attrition — were lower-paying jobs. And layoffs were in fact down compared to the 1990s, he writes. The companies were able to invest in more equipment and research and development, because most of the equipment comes from outside of Canada and cost less with the higher exchange rate.

"The question becomes why are we calling it a disease," Gordon said in an interview with CBC News.

"Losing employment isn't a bad thing if the jobs that were lost were low-paying and the jobs that replaced them elsewhere were higher-paying and more of them."

In his report, Gordon writes the number of jobs paying $35 per hour or more was largely unchanged between 2002 and 2008. More than 60 per cent of the manufacturing jobs lost paid less than $19.05/hour — the median wage in 2002, the report said.

"The shift out of manufacturing was also accompanied by an increase in real wages, both in the economy as a whole and in the manufacturing sector.... The term 'Dutch disease' is a misnomer; the Canadian manufacturing sector was arguably healthier in 2008 than it was in 2002," Gordon wrote in the report.

Gordon said the years he looked at, from when commodity prices started rising in 2002 until the 2008 recession, weren't a time when Canada had an employment problem. In 2008, Canada's employment rate was at an all-time high, he says.

"This is not a period where jobs were being lost in manufacturing and not being recovered. They were being recovered and more than recovered.

"When you see a situation where layoffs are low, the quit-rates were actually increasing, people leaving manufacturing jobs were more confident in finding something else ... that's a situation where people are jumping, they weren't being pushed," Gordon added.

"There are people, yes, that lost well-paying jobs and weren't able to get better ones, but those stories are not representative of the data."

NDP Leader Tom Mulcair was one of the politicians who made the argument in 2012 that the increased value of the Canadian dollar, lifted because of the value of Canada's resource sector, was hurting the manufacturing sector.

Mulcair argues the impact of the resource sector is inflated, in part, he says, because the industry doesn't cover the full environmental costs of resource extraction. He said the government should enforce its environmental legislation so that the "polluter pays."

"Those statistics with regard to the overall losses of jobs in Canada are irrefutable," Mulcair said in May 2012. "And they are directly related to the fact that we're not enforcing federal [environmental] legislation."

Dutch disease is a notion former Bank of Canada governor Mark Carney also disputed.

Mulcair's spokesman declined to comment on Gordon's report.

Mulcair isn't the only person talking about the idea of Dutch disease, however, as Gordon points out.

"This notion of Dutch disease has been around for a very long time, so I'm just kind of hoping that this whole idea gets put to rest," Gordon said.

"When there's an increase in demand in one sector, it's good news for all of Canada. The gains do get passed along and not just in the one sector... People had better jobs. Maybe there were fewer people employed [in one sector], but employment is not the measure of the health of an industry. It's the capacity to generate high wages and incomes."