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Canada's Economic Action Plan: A Sixth Report to Canadians

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Annex

Job Impact of the Economic Action Plan to Date

Canada's Economic Action Plan, including provincial and territorial actions, is expected to create or maintain 220,000 jobs by the end of 2010. An assessment of the Economic Action Plan provided in Budget 2010 indicated that the Plan was on track, with an estimated 130,000 jobs created or maintained as of January 2010.

This annex provides an update of the economic impact of the Economic Action Plan to date. The Action Plan remains on track, with close to 200,000 jobs estimated to have been created or maintained as of the end of August 2010.

The approach taken to estimate the job impact of the Economic Action Plan follows the approach taken in Budget 2010. This approach was reviewed and validated by well-respected economic experts from the private sector and academia.

Measuring the Job Impact of the Economic Action Plan

To estimate the total number of jobs maintained or created by the Economic Action Plan, all stimulus actions—infrastructure spending, tax reductions, EI measures and other actions—need to be taken into account. Job impacts cannot be observed directly for all elements of the Action Plan (i.e. tax reductions and EI measures) since they are not related to specific projects or activities but rather support income and overall economic activity.

For elements of the Economic Action Plan that are project-based, project managers can normally estimate the number of jobs related to each project. However, project-level data cannot readily be aggregated to determine an overall job impact because:

These comments have been raised by the Congressional Budget Office in its evaluation of the U.S. economic stimulus package.[1] For these reasons, estimates of the job impact of the Economic Action Plan are conducted using the Department of Finance's Canadian Economic and Fiscal Model (CEFM). To carry out this estimate, measures in the Action Plan were allocated to seven categories that correspond to those used in the CEFM (infrastructure investment measures, housing investment measures, other spending measures, measures for low-income households and the unemployed, EI premiums, personal income tax measures and corporate income tax measures).

Each of these categories has a different economic activity multiplier. These multipliers are summary measures that take into account first-round, indirect and induced impacts, and leakages to saving and imports (Table A.1). For example, infrastructure investment measures and measures for low-income households and the unemployed have high multipliers because of small leakages to imports and saving respectively. Consistent with historical relationships, a 1-per-cent increase in economic activity was assumed to translate into an immediate 0.2-per-cent increase in employment, rising to about 0.6 per cent after eight quarters. The job impact of the International Partnership to Support the Automotive Industry was estimated separately (see box below).

Table A.1
Expenditure and Tax Multipliers
  2009 2010 2010Q4
(dollar impact on the level of real GDP of a one-dollar
increase in fiscal measures)
Infrastructure investment measures 1.0 1.5 1.6
Housing investment measures 1.0 1.4 1.5
Other spending measures 0.8 1.3 1.4
Measures for low-income households and the
 unemployed
0.8 1.5 1.7
EI premiums 0.2 0.5 0.6
Personal income tax measures 0.4 0.9 1.0
Corporate income tax measures1 0.1 0.2 0.3
1 Corporate income tax measures have a limited impact on aggregate demand over the periods displayed in the table but have among the highest multiplier effects in the long run. This is because they increase the incentive to invest and accumulate capital, which leads to a higher capacity to produce goods and services.

Given the considerable uncertainty surrounding the size of fiscal multipliers, prudent estimates have been used. The multipliers used in assessing the economic impact of the Economic Action Plan are similar to or lower than those used by the U.S. Council of Economic Advisers in assessing the impact of the American Recovery and Reinvestment Act and those found in models of leading Canadian private sector forecasters.[2] In addition, recent economic research suggests that fiscal multipliers are larger than those used in this analysis when the policy interest rate has reached its effective lower bound, as it was in Canada from April 2009 to June 2010.[3] This is because in such a context, fiscal actions help anchor inflation expectations and boost confidence, leading to higher private sector economic activity than otherwise would be the case.

Overall, because of the inherent uncertainty in estimating the impact of fiscal stimulus, the approach taken to estimate the job impact of the Action Plan has been prudent. In addition to the prudent multipliers, the estimated impacts on employment do not fully include the impact of the work-sharing program on preserving jobs. At its peak in October 2009, the work-sharing program benefited over 165,000 Canadians. Furthermore, the estimated impacts on employment do not take into account actions that have been taken by the Government to improve access to financing for consumers and businesses through the Extraordinary Financing Framework.

The Job Impact of the International Partnership
to Support the Automotive Industry

In 2008, the motor-vehicle industry, including both assembly and parts, was Canada's largest manufacturing industry, accounting for 10 per cent of manufacturing real GDP and about 20 per cent of real merchandise exports. About 100,000 Canadians were directly employed in the motor-vehicle and parts manufacturing industries at the end of 2008. Of these workers, about 40,000 were employed in automotive assembly.

The automotive industry provides employment in a number of supporting industries. For every 10 direct jobs in auto assembly, there are:

  • 5 jobs in the motor-vehicle parts industry.
  • 7 jobs in other manufacturing industries, such as primary and fabricated metal products, plastics and rubber products, and machinery.
  • 24 jobs in non-manufacturing sectors, such as engineering, accounting and legal services, financial services, wholesale trade, and transportation and warehousing.

In 2008, General Motors and Chrysler accounted for close to 45 per cent of vehicles produced in Canada. Moreover, given the extreme interdependency of the auto supply chain, a shock to the supplier base caused by production disruptions at one of Canada's automakers would pose a systemic risk to continued operations of other automakers and suppliers in Canada.

As a result, the governments of Canada and Ontario worked together, in partnership with the government of the United States, to support the auto sector. Combined support by Canadian governments, provided through loans and other instruments to General Motors and Chrysler, totalled about $13.7 billion.

In early 2009, General Motors and Chrysler assembly plants directly employed an estimated 14,000 workers. In addition, over 50,000 jobs in other industries were estimated to be tied to production at General Motors and Chrysler. Based on Statistics Canada's input-output model of the Canadian economy, the Department of Finance estimates that 52,000 jobs (all the assembly jobs and about three-quarters of the indirect jobs) are being protected by government action to support the automotive industry. This estimate does not take into account the induced effects arising from the maintenance of economic activity in the automotive and related industries.

The Job Impact of the Economic Action Plan to Date

To assess the impact of the Economic Action Plan on jobs maintained or created to date, the economic activity multipliers from Table A.1 are combined with information on the proportion of Economic Action Plan measures actually flowing in the economy.

Determining the amount of stimulus flowing in the economy from tax reductions and measures to support the unemployed, industries and communities is fairly straightforward as flows correspond to amounts paid.

However, for infrastructure-related investment projects, amounts paid to provinces, territories, municipalities and third parties do not accurately reflect the full stimulus provided. Amounts paid tend to lag the economic impact of fiscal stimulus as payments are typically made when claims are received. Federal payments are made to recipients (such as provinces, territories and municipalities) only once defined portions of project work are completed and claims are submitted. In many cases, entire projects may even be finished before a claim is submitted. Indeed, there are more than 1,730 projects that are underway or completed for which recipients have not submitted any claims. This results in dollars spent by the federal government significantly lagging actual work done and stimulus provided.

To account for this lag, infrastructure project start and end dates have been used to arrive at an estimate of funds flowing. Economic stimulus was assumed to flow in a linear fashion from project start to end. This approach has been used for approximately three-quarters of project-based infrastructure spending.

Table A.2 shows the resulting estimated stimulus flowing in the economy as of August 31, 2010, the latest date for which amounts paid are available, to each area of the Economic Action Plan.

Table A.2
Economic Action Plan Funds Flowing in the Economy
  Dollars Flowing as
of August 2010
  (millions of dollars)
Reducing the Tax Burden for Canadians 4,653
Helping the Unemployed 6,661
Building Infrastructure to Create Jobs1 15,750
Creating the Economy of Tomorrow1 4,018
Supporting Industries and Communities1 16,975
 
Total 48,057
Note: Totals may not add due to rounding
1 Includes provincial, territorial and municipal leverage.

It is estimated that over $11 billion has been devoted to reducing the tax burden and helping the unemployed. More than $15 billion has been invested in new public and housing infrastructure. $4 billion has been invested in knowledge infrastructure and science and technology to help create the economy of tomorrow. Finally, close to $17 billion has been disbursed to support industries and communities.

The implementation of the Economic Action Plan has had a substantial beneficial impact on production and employment (Table A.3). The funds disbursed are estimated to have reduced the decline in real GDP in the second quarter of 2009, avoided another contraction in the third quarter of 2009 and to have boosted growth in the last three quarters.

Improved economic growth translates into a higher level of employment. Indeed, the Economic Action Plan reduced the size of the contraction in employment in both the second and third quarters of 2009, and led to a larger increase in employment in the last quarter of 2009 and in the first half of 2010. As of August 2010, it is estimated that the Economic Action Plan has created or maintained close to 200,000 jobs.

Table A.3
Impact of Economic Action Plan Measures Implemented
to Date on Real GDP and Employment
  2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 August
2010
  (per cent, period to period at annual rates, unless otherwise indicated)
Real GDP Growth
Actual -2.8 0.9 4.9 5.8 2.0
Without Economic
 Action Plan (EAP)
 measures
-4.3 -0.6 2.8 3.9 1.4
 
Impact of the EAP
 (percentage points)
1.5 1.5 2.1 1.9 0.6
Employment Growth
Actual -1.1 -0.1 1.3 1.6 4.2
Without EAP
 measures
-1.7 -0.7 0.3 0.7 3.5
 
Impact of the EAP
 (percentage points)
0.6 0.6 1.0 0.9 0.7
Employment level
 (thousands)
29 56 98 137 167 199

The Canadian economy has now recovered all of the jobs lost during the recession, with nearly 430,000 jobs created since July 2009. The Economic Action Plan has strongly supported this jobs recovery.

Table A.4 breaks down the jobs estimated to have been created or maintained according to the five elements of the Economic Action Plan. To date, most of the jobs created or maintained have been the result of infrastructure investment and support to industries and communities.

Table A.4
Jobs Estimated to Have Been Created or Maintained According
to Each Element of the Economic Action Plan
  August 2010 End of 20101
Reducing the Tax Burden for Canadians 17,000 19,000
Helping the Unemployed 23,000 24,000
Building Infrastructure to Create Jobs 74,000 84,000
Creating the Economy of Tomorrow 24,000 27,000
Supporting Industries and Communities 62,000 66,000
 
Total 199,000 220,000
Note: Totals may not add due to rounding.
1 The end of 2010 estimates correspond to jobs expected to be created or maintained at the time the Economic Action Plan was announced.

Sectoral Impact of the Economic Action Plan on Jobs

The manufacturing and construction sectors were particularly hard hit by the economic slowdown. The Economic Action Plan responded with several measures to support these sectors directly, particularly through infrastructure investment and funding to support housing as well as industries and communities.

Employment in construction has increased strongly since the implementation of the Action Plan while employment in manufacturing has stabilized. Weak U.S. demand and the appreciation of the Canadian dollar have limited employment growth in the manufacturing sector. Employment in the service sector has increased significantly and is now above pre-recession levels.

Table A.5 provides a sectoral breakdown of the jobs estimated to have been created or maintained by the Economic Action Plan.[4]

Table A.5
Sectoral Breakdown of the Number of Jobs Estimated to Have Been Created or Maintained by the Economic Action Plan
  August 2010 End of 20101
Primary and utilities 4,000 5,000
Construction 50,000 50,000
Manufacturing 36,000 37,000
Services 109,000 129,000
 
Total 199,000 220,000
Note: Totals may not add due to rounding.
1 The end of 2010 estimates correspond to jobs expected to be created or maintained at the time the Economic Action Plan was announced.

[1] Congressional Budget Office, Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output From April 2010 Through June 2010 (August 2010).

[2] Executive Office of the President, Council of Economic Advisers. Christina Romer and Jared Bernstein. "The Job Impact of the American Recovery and Reinvestment Plan" (January 2009) and Government of Canada, Budget 2009, Annex 1.

[3] Lawrence Christiano, Martin Eichenbaum and Sergio Rebelo. "When is the Government Spending Multiplier Large?" National Bureau of Economic Research Working Paper No. 15394 (2009).

[4] The results are based on estimates from the CEFM and simulations from an input-output model of the Canadian economy.

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