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Alton Joseph, a production worker at Acrylon Plastics (John Woods/John Woods for The Globe and Mai)
Alton Joseph, a production worker at Acrylon Plastics (John Woods/John Woods for The Globe and Mai)

Economy Lab

Is 'Dutch Disease' getting a bad rap? Add to ...

It’s called the ‘Dutch Disease’: rising commodity prices lead to a currency appreciation, and the higher exchange rate reduces employment in other export sectors, most notably in manufacturing. This mechanism is reasonably well understood. What’s not clear to me is why it deserves a pejorative label.

The last two expansions offer an instructive comparison. The Canadian dollar depreciated by 20 per cent in 1993-2000, and it appreciated by 60 per cent during 2002-2008. The effect on manufacturing employment was consistent with what you would expect: an increase of about 300,000 jobs during the 1990s, and a decrease of a roughly similar amount in the 2000’s; see the accompanying graph.

Outsourcing low-wage jobs to low-cost countries – see here for how this works in practice – is a two-way street. Those jobs came to Canada in the 1990s, and the flow went the other way in the 2000s. But those job losses in the manufacturing sector were more than offset by gains elsewhere; total employment growth averaged about 1.9 per cent per year in both expansions.

Aside from the sectoral composition of the sources of employment growth, the main feature that distinguishes the two expansions is what happened to wages. Since so much of what we purchase is either imported or uses imports as intermediate inputs, a falling Canadian dollar reduces workers’ purchasing power. As was widely remarked at the time, real wages stagnated during the 1990s: it’s difficult to produce sustained wage gains if your growth model is based on cheap labour. Average real weekly earnings at the end of the expansion were only 0.5 per cent higher than at the beginning. In contrast, the increased buying power produced by the 2002-08 appreciation contributed to a 5.8-per-cent increase in average real weekly earnings.

After seeing both sorts of expansion in action, I don’t know why the type that produces real wage gains is the one that gets called a ‘disease’.

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