For years now, U.S. companies have looked to far-flung countries to outsource work in a bid to cut costs. It was a business practice that became all the rage around the turn of the century.
Today, there is a movement in the other direction, a recent phenomenon known variously as re-shoring or on-shoring. In 2012, for instance, more U.S. operations were on-shored than in any previous year in which these records have been maintained. Apple announced that it was spending more than $100-million to bring some of its manufacturing back to the States. Other corporate giants, including General Electric, Lenovo, Caterpillar and Boeing, have begun domesticating some of their overseas operations as well.
There are a few reasons for this. One is that wages at the Chinese factories where this work had been previously outsourced have increased substantially. Chinese energy prices have also risen, as have the rates of line items such as industrial space. There has also been another factor: Stagnant American wages have suddenly made the country’s labour force competitive against the competition, including Canada.
The notion that Canadians are paid too much compared to workers in other countries has been a hotly discussed topic among economists and business leaders for the past few years. Not surprisingly, there are plenty of those who say the idea is nonsense. Regardless, corporate Canada takes up the issue with the federal government at almost every opportunity. And there is certainly evidence to substantiate its claims.
Take manufacturing, for instance. According to statistics kept by the U.S. Bureau of Labour Statistics, Canadian unit labour costs rose by 67.6 per cent in U.S. dollar terms between 2002 and 2010, while south of the border, they fell by 10.8 per cent. Needless to say, this puts Canada at a huge competitive disadvantage and illustrates the dilemma our country is facing.
Business leaders aren’t the only ones sounding the alarm over wage costs. The Bank of Canada has also suggested they could hamper long-term economic growth. And now David Watt, chief economist for HSBC Bank Canada, is making the case that labour’s footprint on Canada’s corporate revenue and expenditures continues to grow and put future economic expansion at risk.
Mr. Watt says that the global financial recession did not have the deleterious impact on wages in Canada that many suspect. In fact, except for a short period in the immediate shadow of the market collapse, real wages here continued to grow. That was not the case in the United States, opening up even more of a wage gap between the two countries. Since 2009, per-unit labour costs in Canada have increased 16.9 per cent over those in the States, according to Statistics Canada. Indeed, this might be an underlying factor in recent analysis showing that Canada’s middle class is now richer than its U.S. counterpart.
If a country is going to pay its workers more than the competition, it needs to find other ways to remain a viable business proposition. The usual remedy is to be more productive, but poor productivity has been Canada’s Achilles heel for years. And in productivity’s absence, a high-wage regime is bound to spell trouble in future, especially in a global environment where even more trade barriers are falling and even more lower-wage countries are looking to compete with Canadian businesses.
A weakening Canadian dollar is helping to offset our competitive disadvantage with the United States and others, to some degree, but it doesn’t look to be a long-term answer. And we know wage cuts aren’t likely to happen. “So it’s an issue,” Mr. Watt says, “especially when you look at where the economic opportunities are going to be in the next 15 to 20 years, that being the emerging world.”
Where, it goes without saying, per-unit labour costs are much lower than here.
“I go back to productivity,” Mr. Watt says. “Germany is able to compete and is able to have high wages and high living standards by being more productive. I think the question for Canada is: How do we become Germany with oil?”
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