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Canada's Economic Action Plan - A Seventh Report To Canadians
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Archived - Annex

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Job Impact of the Economic Action Plan

The objective of Canada’s Economic Action Plan was to protect jobs and safeguard individual Canadians in the face of the worst global financial and economic crisis since the 1930s. It was estimated that the Economic Action Plan, including provincial and territorial actions, would create or maintain 220,000 jobs by the end of 2010. Assessments of the progress made towards this objective were provided in Budget 2010 and in the Sixth Report to Canadians published in September 2010.

This annex provides an assessment of the economic impact of the Economic Action Plan. Canada’s Economic Action Plan has achieved its objective, with over 220,000 jobs estimated to have been created or maintained as of December 2010.

The approach taken to estimate the job impact of the Economic Action Plan follows the approach taken in Budget 2010 and in the Sixth Report to Canadians. 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, Employment Insurance (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 obtain 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 business 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
Business tax measures1 0.1 0.2 0.3
1 Business 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 were 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 gross domestic product (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 assess the impact of the Economic Action Plan on jobs maintained or created, the economic activity multipliers from Table A.1 are combined with information on the amount of stimulus 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. 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 for which sufficient information was available. The extension to infrastructure programs has been taken into account.

Estimates take into account provincial, territorial and municipal leverage reported by partners. In some cases, reported leverage exceeds levels assumed at the outset of the Economic Action Plan.

Table A.2 shows the resulting estimated stimulus flowing in the economy as of December 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 December 2010
  (millions of dollars)
Reducing the Tax Burden for Canadians 5,520
Helping the Unemployed 7,897
Building Infrastructure to Create Jobs1 18,720
Advancing Canada’s Knowledge Economy
 and Creating Better Jobs1
4,582
Supporting Industries and Communities1 18,041
 
Total 54,759
Note: Totals may not add due to rounding.
1 Includes provincial, territorial and municipal leverage.

It is estimated that over $13 billion has been devoted to reducing the tax burden and helping the unemployed. Close to $19 billion has been invested in new public and housing infrastructure. More than $4 billion has been invested in knowledge infrastructure and science and technology to help create better jobs. Finally, over $18 billion has been disbursed to support industries and communities.

Combining the amounts flowing for each of the measures in the Economic Action Plan with the appropriate activity multipliers for production and employment discussed earlier provides an estimate of the Action Plan’s economic impact.

The implementation of the Economic Action Plan has had a substantial beneficial impact on output and employment (Table A.3). On average, the funds disbursed are estimated to have boosted Canada’s real GDP growth by 1.3 percentage points per quarter since the second quarter of 2009.

Improved economic growth translates into a higher level of employment. Indeed, the Economic Action Plan reduced the size of the contraction in employment in the second quarter of 2009, prevented another contraction in the third quarter of 2009, and contributed to the increase in employment in the last quarter of 2009 and in 2010. As of December 2010, it is estimated that the Economic Action Plan has created or maintained over 220,000 jobs.

Table A.3
Impact of Economic Action Plan Measures
2009
Q2
2009
Q3
2009
Q4
2010
Q1
2010
Q2
2010
Q3
2010
Q4
December
2010
  (per cent, period to period at annual rates,
unless otherwise indicated)
Real GDP Growth
Actual -2.8 0.9 4.9 5.6 2.3 1.0
Without Economic Action Plan
 (EAP) measures
-4.3 -0.5 2.9 3.8 1.8 -0.3
 
Impact of the EAP
 (percentage points)
1.5 1.4 2.0 1.8 0.5 1.3 0.4
Employment Growth
Actual -1.6 0.0 1.5 1.5 3.4 1.4 0.4
Without EAP measures -2.2 -0.6 0.6 0.6 2.8 0.7 -0.2
 
Impact of the EAP
 (percentage points)
0.6 0.6 0.9 0.9 0.6 0.7 0.6
Employment level
 (thousands)
28 53 92 129 158 189 215 222

The Canadian economy has virtually recovered all of the jobs lost during the recession, with close to 400,000 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.

Table A.4
Jobs Estimated to Have Been Created or Maintained According to Each Element of the Economic Action Plan
  December 2010
Reducing the Tax Burden for Canadians 21,000
Helping the Unemployed 29,000
Building Infrastructure to Create Jobs 82,000
Advancing Canada’s Knowledge Economy and Creating Better Jobs 25,000
Supporting Industries and Communities 65,000
 
Total 222,000
Note: Totals may not add due to rounding.

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, recovering most of the jobs lost during the recession, contrasting sharply with the 1980s and 1990s recoveries when employment in this industry continued to decline in the early stages of recovery. Employment in manufacturing has stabilized with weak U.S. demand and the appreciation of the Canadian dollar limiting employment growth in the manufacturing sector. Employment in the service sector has increased significantly and is now well 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
  December 2010
Primary and utilities 5,000
Construction 53,000
Manufacturing 37,000
Services 127,000
 
Total 222,000
Note: Totals may not add due to rounding.

[1] Congressional Budget Office, Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output From July 2010 Through September 2010 (November 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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