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Livio Di Matteo: The outsized economic effects of Canada’s cratering self-employment

Commentary

Unlike our moribund real per capita GDP performance, the end of the pandemic and the associated economic rebound has seen Canadian unemployment rates return to pre-pandemic lows. Indeed, in early 2023, the unemployment rate had dropped as low as 5 percent, and even with the economic slowdown brought about by higher interest rates and robust population growth, at 6.1 percent, Canada’s unemployment rate in March 2024 remains historically low. 

Over the last thirty years our unemployment rate has averaged closer to 8 percent. A factor in low unemployment rates is of course employment growth and while total employment is growing there are compositional features of that employment that are of concern. Public-sector employment is expanding faster than private-sector employment and self-employment.  

Figure 1 plots seasonally adjusted total monthly employment in Canada. Since January 2014, total employment has expanded by 15 percent, but the pandemic period was an important shock. In February 2020, total Canadian employment was 19.2 million people and dropped to 16.1 million in April 2020 as the economy shut down. Total employment then recovered as the economy gradually reopened and employment reached the pre-pandemic total of 19.2 million in September 2021 and stands at 20.4 million in March 2024. However, when the numbers are examined by class of worker, that is, public sector, private sector and self-employed, the story of growth is not uniform.  

Graphic credit: Janice Nelson

A decade ago, the private sector accounted for 65 percent of total employment, the public sector 20 percent, and self-employment 15 percent. At present, the private sector remains the largest employment class in Canada still accounting for 65 percent of employment, but the public sector is now at 22 percent and self-employment 13 percent. Indeed, since January 2014, public sector employment in Canada has expanded from 3.5 to 4.4 million workers—a 27 percent increase—private sector employment grew from 11.6 to 13.4 million—a 15 percent increase—and self-employment shrank by approximately half a percent.

Figure 2 plots public, private, and self-employment since January 2014 as an index setting employment for all three series equal to 100 in January 2014 to see trends over the 2014 to 2024 period. The picture is remarkable. From 2014 to the eve of the pandemic, all three sectors appear to have been growing pretty much in tandem. Indeed, from January 2014 to January 2020, public sector and private employment each expanded by approximately 9 percent while self-employment expanded by 7 percent. However, the period of the pandemic marks a shock to the economy with subsequent differential employment growth by sector. 

Graphic credit: Janice Nelson

From January 2020 to the present, public-sector employment expanded nearly 17 percent going from 3.8 to 4.4 million. Private sector employment grew from 12.6 to 13.4 million, an increase of 6 percent. Self-employment fell from 2.8 to 2.6 million—a drop of 7 percent. In just the last year alone, the March-to-March increase in public sector employment was 202,000 jobs while the private sector added 141,000 and self-employment saw the loss of nearly 19,000 jobs. Overall, there has been a pronounced shift in employment growth towards the public sector.

And the increase in public sector employment has occurred across the country, though with some variation as Figure 3 illustrates. Public sector employment growth over the last decade was the highest in British Columbia at 36 percent and the lowest in Newfoundland and Labrador at 5 percent. Along with Newfoundland and Labrador, Alberta, Quebec, Saskatchewan, and Manitoba saw their employment grow more slowly than the national rate.

As a share of total employment, public sector employment declined from a high of nearly 24 percent in the mid-1970s to a low of 19 percent by the early 21st century. It then resumed a gradual upward climb reaching nearly 20 percent by the eve of the pandemic and has since settled in at 22 percent. Private sector employment shares since the mid-1970s, pandemic notwithstanding, are more erratic fluctuating between 62 and 66 percent but averaging 65 percent. Self-employment rose from a 12 percent share in the mid-1970s to reach a peak in the late 1990s of just over 17 percent and then declined bringing the share to 15 percent by the pandemic’s eve and is now 13 percent.

So, what is going on here? The drop in self-employment means a drop in small businesses and entrepreneurship. The shock and restrictions of the pandemic were invariably a factor as many smaller and family or individually-run businesses decided to pack up shop for good. Some of these individuals may have gravitated towards public sector employment in a reverse flow to that of the mid-1990s when public sector retrenchment led to many former public servants becoming self-employed as independent contractors. More likely, given the aging labour force, they simply have decided to retire from the labour force permanently.

Are there implications for economic performance? It is probably not entirely coincidental that our expanding public sector in terms of both employment and GDP share is being accompanied by poor real per capita GDP growth. Indeed, this expansion of the public sector at the same time as rapid population growth and lagging business investment is a further drag on economic performance given evidence of the effects of public sector size on both economic growth and productivity. What may be underway is an example of the Baumol’s cost disease effect that explains how wages and employment in labour-intensive sectors increase relative to capital-intensive ones. To attract employment even in the absence of productivity gains, wages in low productivity sectors rise to compete workers away from capital-intensive higher productivity sectors. Government spending, detached from a profit motive and with its focus on labour-intensive services, is often disproportionately affected by Baumol’s cost disease.  

As the spring 2024 federal budget approaches, an important signal will be whether the federal government will begin to address this issue within its own public service. In 2014, there were 257,138 federal public servants (both core public administration and separate agencies). By 2023, there were 357,247 federal public servants representing a decade increase of 39 percent eclipsing both national and provincial public sector employment growth rates. Given that the federal government does not provide either health or education services, nor has it been interested in funding a larger defence establishment, it begs the question: what is the actual demand for this employment, and what is its value-add? 

Geoff Russ: The next election will hinge on affordability issues. Pierre Poilievre is poised to capitalize

Commentary

This week’s Conservative Strong and Free Networking Conference will feature Pierre Poilievre giving a keynote speech on Thursday morning before a gathering of conservative activists, thinkers, politicians, and party members from across Canada. It represents the perfect opportunity for Poilievre to emphatically hammer one of the key issues fueling his remarkable rise and the Conservative Party’s resurgence: affordability. 

Affordability is currently Poilievre’s greatest political advantage and Justin Trudeau’s most glaring weakness. But it shouldn’t be understood as merely a transitory issue. Addressing the country’s arduous cost of living—particularly for working-class Canadians—will be one of the country’s key policy challenges over the coming decade. It therefore represents an opportunity for Poilievre not just to become prime minister, but to reforge his party’s coalition to include working-class voters, for a generation. 

Anglo-American politics have been marked for the past decade or longer by what’s sometimes referred to as a “realignment” along the lines of educational polarization. In effect, we’re seeing university or college-educated professionals move to the political Left and non-university or college-educated members of the working class move to the Right. This trend is exemplified by Donald Trump’s surprise victory in the 2016 U.S. presidential election—including in states like Michigan, Ohio, and Wisconsin—as well as the British Conservative Party’s breach of the so-called “red wall” in Northern England in the country’s 2019 elections.  

There’s plenty of evidence that Canada has experienced similar political developments over the several election cycles, dating back arguably to the Reform Party and today’s Conservative Party. In the 2021 federal election, Conservative leader Erin O’Toole attempted to hasten these trends to extend the party’s reach to working-class Canadians including with policy proposals such as mandated worker representation on corporate boards. 

Yet it’s been Poilievre’s disciplined focus on affordability that’s bringing a lot of working-class members into the Conservative fold. Polling for instance shows that the Poilievre-led Conservatives now outperform the other parties with members of private-sector trade unions. 

The Conservatives’ success in reaching a broad coalition of voters—including the working class—conjures images of Tony Blair’s landslide victory in the 1997 British election. In that campaign, the Blair-led Labour Party’s signature campaign slogan was “Things can only get better!”, which was ripped from an early 1990s radio hit that served as the campaign theme song. The song included the memorable lines: 

…and do you feel scared? I do! But I won’t stop and falter! And if we throw it all away, things can only get better…

It would be a fitting soundtrack to Poilievre’s 2025 election campaign if Blair had not famously co-opted it almost 30 years ago. It is difficult to imagine things getting much worse as far as affordability goes in Canada. 

The Trudeau government’s supporters or foreign columnists can trot out all the favourable statistics they like, but Canadians remember recent and happier times. They would prefer a future that resembled the more normal past, instead of the end of the month when many renters will fork over an average of $1,922 to not be evicted from their one-bedroom apartment.  

Certainly, not all of Canada’s unaffordability issues began with Trudeau or his government. But their inability to help fix everyday problems for working and middle-class Canadians is a failure they have to own. There’s compelling evidence in particular the government’s high spending and high immigration rates have contributed to the inflationary environment in which Canadians now find themselves. 

Herein lies the opportunity for Poilievre: the affordability crisis has clearly been key to his political ascendancy, one that has included expanding the Conservative Party’s voter coalition to include working-class voters. 

The 2015 federal election proved that the Conservatives have a rock-solid traditional base in Western Canada that all but guarantees them a shot of winning any given election. However, adding youthful, working-class, and swing voters to their voting pool could deliver a Conservative supermajority that has not been elected since the 1980s. 

Conservative Party Leader Pierre Poilievre greets supporters after giving remarks at a press conference in Mississauga, Ont., Sunday, April 7, 2024. Christopher Katsarov/The Canadian Press.

Conservative parties in Canada have a history of grand coalitions that have often delivered enormous majorities, only for them to implode and usher in a generation of Liberal governments. Sir Robert Borden’s 1917 majority absorbed the pro-conscription wing of the Liberals, only for it to fall apart in 1921, ushering in nearly continuous Liberal governments until 1957. 

In 1984, Brian Mulroney delivered another large majority with the votes of alienated Westerners and nationalist Quebecers. That coalition fell apart as well and ushered in another 13 years of Liberal governments. 

It’s a powerful reminder that the Conservative Party’s relationship with prospective working-class voters cannot be merely transactional. Britain, again, highlights that politicians cannot take the realignment for granted, given that the Conservative Party is poised to suffer a major electoral defeat, in part because the working-class members who voted for it in 2019 are now abandoning the party. Put differently: political trends in Britain confirm that working-class voters behave like any other swing voters who punish incumbents who fail to improve their quality of life. 

Poilievre’s speech last month in Vancouver signaled that he understands the opportunities and risks here. His line that his “daily obsession will be about what is good for the working-class people in this country” is a sign that he’s determined to avoid the fate of his British brethren.

The key question will be how these speeches and comments come to manifest themselves in a pro-working-class policy agenda. Frankly, Canadians of all stripes will need to feel their quality of life improve over a government’s term in office, including in their monthly paycheques, rent, and mortgage payments. Phone bills will have to come down, and $70 worth of groceries should result in more fully stuffed grocery bags, hopefully in reliable and thin plastic ones. 

Given the rampant affordability concerns currently capturing Canadian attention, the government that oversees those improvements will win the loyalty of a generation, regardless of class.