Reforging Ontario

Given manufacturing’s collapse, can the province spark an economic renaissance?

As an economist, I am trained to look at the changing economic landscape through a cold, calculating lens. But as someone who was born and raised in the industrial heartland of London, Ontario, I see the issue of manufacturing job loss as a personal one.

Londoners have always had a love-hate relationship with our factories. We loved being able to leave high school and get stable full-time jobs, with good pay and benefits. Those jobs, however, came at a cost. The work was often repetitive and soulless. I had more than one guidance counsellor admonish me for not trying harder in school, suggesting that “it would be a shame if a smart boy like you ended up working on an assembly line.” And those not working in a factory were not spared from the damage. I grew up across the street from Pottersburg Creek, made famous for high levels of toxic PCB pollution from a transformer factory. To this day I still have friends who, rightly or wrongly, blame the plant for a variety of health ailments.

Londoners used to endlessly discuss whether our factory jobs were worth the cost. That debate has gone away, as employment in manufacturing is rapidly disappearing and cities and towns in Southwestern Ontario are grappling with the need to transform their economies.

Manufacturing was the engine of Ontario’s post-war economy. The Southwestern Ontario rust belt can be thought of as a triangle centred on London extending from Windsor to Owen Sound to St. Catharines. With close proximity to the U.S. manufacturing powerhouses of Detroit, Cleveland, Pittsburgh and Chicago, an abundant labour force, and the Great Lakes providing both clean water and shipping routes for products, the region was a natural fit for Canada’s manufacturing industry. Large-scale investment in rail along with the creation of the 400-series highway system allowed Canadian manufacturers to integrate their supply chains with U.S. factories and enabled our producers to get products to key U.S. markets quickly.

Ontario’s factories provided both prosperity and employment. In 1980, one million Ontarians worked in the sector, which represented 24 percent of all of Ontario’s jobs. That percentage was much higher through our rust belt, where all the communities had a heavy presence in the automotive industry. Manufacturing has traditionally been a male-dominated business, so it was a great era to be a working-aged man. At the beginning of the 1980s, 88 percent of Ontario men between the ages of 25 and 54 had a full-time job and less than 2 percent worked part-time.

As Ontario’s population increased, the province became less reliant on manufacturing as a source of employment. The number of manufacturing workers fell and rose with the economy, but in 1998 there were the same number of manufacturing workers as there were in 1980. The percentage of Ontarians working in manufacturing, however, fell to below 19 percent due to population growth. When a late 1990s manufacturing boom fuelled by a falling loonie ended, the province shed 377,000 industry positions in under twelve years. The percentage of Ontarians working in the industry is now under 11 percent, half of what it was in 1980.

Male employment in Ontario followed a similar trajectory as manufacturing job declines, with only 80 percent of 25- to 54-year-old men holding a full-time job today, a full eight points lower than in 1980. The percentage of these men with a part-time job has doubled, to nearly 5 percent. There has been a polarization of the labour force in the province, with university–educated men making tremendous gains. But men without a diploma were pushed into lower-paid work, often precarious and part-time in nature, with fewer benefits.

Manufacturing job losses were felt all through Southwestern Ontario. Hamilton alone lost 30,000 manufacturing jobs between 2004 and 2013, an almost 40 percent employment decline in the sector. London and Windsor lost more than 30 percent of their manufacturing jobs in the last decade. Had there been job gains in other areas, the Southwest might have been able to weather the storm, but outside of some success stories such as Waterloo, that did not happen. In Windsor, 9,000 fewer people had jobs in 2013 than in 2004. In London, the working-age population rose by more than 40,000 during the decade, yet there were nearly 6,000 fewer employed persons.

So what killed off all the jobs? And are they coming back?

The most common narrative is that free trade killed manufacturing in Canada, particularly the Canada-United States Free Trade Agreement of 1988. The facts, however, tell a different story. After the agreement was signed, many North American plants did consolidate operations. However, many of them did so by shutting U.S. plants and expanding operations in Canada. The Electro-Motive Diesel plant in London was one such beneficiary, as its (then) parent company, General Motors, closed a plant in La Grange, Illinois, and increased production at the London plant. Employment in the sector barely budged the decade after the agreement was signed.

If Canadian manufacturing jobs were moving en masse to the United States, you would expect that traditional U.S. manufacturing areas would be doing well. But the opposite is happening as the United States is going through the same deindustrialization as Canada, in many cases even faster. Towns from Gary, Indiana, to Youngstown, Ohio, are shedding jobs and seeing their populations migrate away. Johnstown, Pennsylvania, has lost more than four fifths of its jobs and two thirds of its population since the 1950s. Flint and Detroit, in Michigan, have declined to such a level that they are now home to a burgeoning “ruin porn” tourism industry.

Manufacturing employment declines in Ontario are not a made-in-Canada phenomenon. The twin pressures of automation and globalization are causing assembly-line jobs in the developed world to become extinct.

The largest integrated steel mill in North America is the Gary Works in Gary, which has been producing high-quality steel for over a century. In 1950, the plant employed 30,000 workers and could produce six million tons of steel per year when running at full capacity. Today, the plant houses only 5,000 workers and has a maximum capacity of more than seven million tons. Automation has brought forth extraordinary increases in productivity and product quality. It has also ended the career of many a manufacturing worker.

The days of the large-scale manufacturing plant are coming to an end. In the mid 1970s, the United States had nearly 200 plants that employed 5,000 or more people. By 2007, this number had fallen to just 49. The economics of large, labour-intensive plants no longer work in the United States or Canada in an era of robots and inexpensive shipping from Asian countries, most of which have no free trade agreement with either the U.S. or Canada. Labour-intensive manufacturers that could automate did so, and firms that could not moved their operations to countries with much lower wage costs.

Our fluctuating dollar masked many of these long-term trends. When the loonie was falling two to three cents per year, every year, in the late 1990s, there was a temporary rise in manufacturing employment as manufacturing costs (as measured in U.S. dollars) fell in Canada. The falling loonie also made it more expensive to import machinery and equipment, so Canadian firms avoided making investments in automation and instead increased production by adding more labour. When the dollar started to rise two to three cents per year, every year, thanks to a rise in oil prices, the reverse happened. It is easy to blame the oil sands for declines in manufacturing employment, but it is not entirely fair. My University of Alberta colleague Andrew Leach is fond of pointing out that exports of manufactured products from Southwestern Ontario push up the value of the Canadian dollar, making life more difficult for oil sands producers. Yet no one would suggest reducing automotive production in Oakville to assist the oil producers of Fort McMurray.

The ups and downs of the dollar have simply sped up and slowed down the processes of automation and globalization that are occurring all over the developed world. In 1980, more than 19 million Americans were employed in manufacturing; today that number is under 12 million. The United Kingdom shed 40 percent of its manufacturing jobs in the 2000s. Even the manufacturing powerhouse of Germany has seen a steady decline in industry employment.

Examining manufacturing solely through the lens of employment provides a distorted view of the health of the sector. While it is true that employment in manufacturing fell by 30 percent in Ontario in the last decade, manufacturing output has risen slightly when measured in real dollars. Manufacturing will continue to exist in Southwestern Ontario, but it will look significantly different than it did in the past. A few years ago I visited a consumer chemical packaging facility just outside Atlanta, Georgia, and I was struck by how empty it was. In a plant the size of six football fields, I did not see more than ten employees on the production floor, while various machines whirred all around me. These plants still need workers, but those workers are in sales, marketing, regulatory compliance, and research and development, not on the assembly line.

The decline of factory jobs, through both automation and globalization, has given manufacturers the upper hand in negotiations with workers and governments. Nowhere was this more evident than in the closure of the aforementioned Electro-Motive Diesel plant in London. During contract renegotiations at the end of 2011, Electro-Motive locked out its workers after they refused to take substantial cuts in benefits and pay, some as large as 50 percent. The workers, represented by the Canadian Auto Workers, naturally rejected such a proposal. A few weeks later, Caterpillar Inc., the parent company of Electro-Motive, announced that it would be closing the London plant, leaving 460 workers unemployed. Caterpillar’s production of diesel locomotives now takes place in Muncie, Indiana, in a Westinghouse transformer assembly plant that was abandoned in 1998 and retooled by Caterpillar with generous government support. Perhaps coincidentally, the announcement of the closure of the London plant happened less than 48 hours after the governor of Indiana, Mitch Daniels, signed a right-to-work law weakening the bargaining power of the state’s unions.

Governments now face a terrible dilemma. If they do not provide generous subsidies to manufacturing companies, they will lose jobs to other jurisdictions. If those workers could apply their skills elsewhere, these job losses would be no different than the kind of churn we experience in the labour market each month. However, the market for 48-year-old laid-off auto assembly line workers is small, so manufacturing job losses tend to lead to a rise in long-term unemployment. If governments provide subsidies to these companies, they will often end up paying money to a number of companies that would have come (or stayed) in the city anyway, a waste of taxpayer dollars. While the government dollars may save jobs for a while, eventually the same pressures will lead companies to ask for further concessions. By saving factory jobs today, we may just be creating a next generation of manufacturing workers who risk becoming structurally unemployed.

For Southwestern Ontario to flourish, new industries must emerge as sources of employment. While the private sector will be doing the hiring, governments have a vital role in creating the environment for success. This does not mean that governments must pick winners or losers. Rather, governments must have a set of tax, regulatory and infrastructure policies that support a region’s competitive advantages. The trend toward globalization is only going to continue, so companies in Sarnia and St. Thomas will be competing against companies from Toronto to Thailand.

It is typically easier to identify areas where a region has a competitive disadvantage. Southwestern Ontario certainly does not have a competitive advantage in wage costs for low-skilled labour, as manufacturers from China to Mexico can always significantly undercut the region. There has been some hope that a falling dollar might bring back clothing and shoe manufacturing jobs that have been lost over the last decade. We should not get our hopes up, however, as competing against China on wages is not a battle we are likely to win, nor would we want to.

If Southwestern Ontario cannot compete on labour costs, it can certainly compete on labour skills and product quality. The sources of our competitive advantages must be in areas that require highly skilled workers, or products where quality control is a primary issue. But the region is not just competing with Mexico and China. It must also compete with other regions of North America, from Toronto to San Diego, so simply having high-skilled workers is not enough.

Why would a firm perform better in Brantford rather than in Boston? Lower prices are an obvious competitive advantage, including more reasonable property values and an overall reduced cost of living. Between cheaper office costs and lower employee remuneration, firms located in large centres can get priced out of the market by their Southwestern Ontario competition, if geographic proximity is not vitally important. I own a chemical regulatory compliance firm and most of our competition is in places such as Pittsburgh, Pennsylvania, and College Park, Texas. Workers in our industry mostly work on documents and talk on the phone, so work can be performed virtually anywhere. Firms in expensive real-estate markets simply cannot compete, as they get undercut on cost by their competitors. Firms in developing countries cannot compete either, as they lack the skilled workforce needed to perform these tasks, as well as finding themselves up against issues around the protection of intellectual property.

The comparative advantage sweet-spot for Canada’s rust belt is the combination of a high-skilled labour force, significant quality controls and a low cost of living. There are all kinds of industries that benefit from this type of environment, from consulting firms to biomedical research, from video game design to advanced manufacturing. These are also industries that require a significant level of infrastructure. For instance, audio and video editing is an industry that can do quite well in a lower-cost city. Footage shot in Vancouver or Toronto can be sent digitally to Windsor or Chatham for editing and returned in the same fashion. For this model to work, cities must have sufficient internet bandwidth infrastructure.

There are significant parallels between water and electricity infrastructure in the 20th century and high bandwidth internet connectivity in the 21st century, with both exhibiting the type of network externality problems that lead to under-investment by the private sector. Five municipalities in Ontario’s cottage country have recognized this and banded together to offer high-speed fibre networking services to local businesses, administered by a division of the local power company. Lakeland Networks, owned by the municipalities of Bracebridge, Burk’s Falls, Huntsville, Magnetawan and Sundridge, offers 1 Gbps service (gigabits per second), which they market as “over 50 times faster than the average data transfer speed in Canada.” This opens up a world of possibilities to companies operating in these towns and helps leverage the region’s existing competitive advantages. The business models that Southwestern Ontario is counting on for its renaissance, from financial services to advanced manufacturing, require reliable high-speed internet connectivity that is currently unavailable in most of the region.

In any region with high-skilled labour, the “product” that employers are selling is the skills of their workers, particularly in consulting. While much business and consulting work can take place over the phone or over the internet, face-to-face communication is still essential, particularly when trying to land a new client or obtain sources of venture capital. Cities in Southwestern Ontario need to ensure they can get their workers quickly and easily to key markets. The Ontario government has proposed a high-speed rail link that will rapidly transport workers from Kitchener and London to Toronto’s Pearson airport. However, this project will likely not be complete for 15 years, so smart investments are needed to ensure that smaller regional airports can provide businesses with the market access they need to compete and win.

While low-skilled, labour-intensive manufacturing is at a decided disadvantage in the region, high-tech and advanced manufacturing can flourish. The domestic market for these products in Southwestern Ontario is simply too small to support firms of significant size, so if companies are to succeed, they must be export-oriented. Shipping goods by road is often the most cost-effective option for firms exporting to the United States, so investments in highway infrastructure and bridge crossings are vital. Since supply chains are increasingly global, the federal government has a role to play in ensuring foreign market access for our products, while also ensuring the domestic tariff system does not pose unnecessary hurdles on companies importing inputs or machinery.

The ability to produce high-quality products is another source of significant competitive advantage. On a recent trip to China I stopped at an upscale indoor market and was surprised by how much of the food was imported. There was an abundant supply of meats, vegetables and prepackaged food with English labelling originating from New Zealand to the United Kingdom. As I later learned, imported food items are highly sought out by many consumers in developing countries, due to a reputation for quality. As the Chinese and Indian middle classes continue to grow, there are large opportunities for Southwestern Ontario’s agri-food producers as the region has an abundant supply of class-one farmland. Governments need to ensure that we have the cargo airport infrastructure needed to get large quantities of product overseas in a timely fashion.

Too often we think of regulations as being a barrier to business success. However, in the agri-food industry smart but tough regulations can provide a source of competitive advantage. If overseas consumers believe that Canada has the highest standards when it comes to quality and safety, it acts as a differentiating feature for our products. Agri-food safety regulations must be tough and enforced, but they also must be created efficiently for our producers so as to alleviate unnecessary burdens for them. If our provincial and federal governments regulate in a tough but smart way, it can benefit local producers when marketing our products overseas.

Although manufacturing employment is dying in Southwestern Ontario, the future of the region is still bright. There is no one magic bullet that will transform our province. It will take a combination of regulatory changes, infrastructure investments and a continued focus on education and skills-development. Governments at all three levels need to be willing to try new ideas, to monitor the performance of public policies and to tweak or discard ones that are functioning poorly. All three levels of government need to work toward a common vision, and municipalities in the region need to avoid competing against each other for foreign investment. Through smart public policies and by leveraging our existing comparative advantages, governments at all levels can ensure that a child born in Goderich or Tilbury will not have to leave the region in order to get a well-paying job.