Stagnation of Canada’s private sector
Submitted by:
Bavleen Singh Arora [2312995]
UNIVERSITY CANADA WEST
MBAF-504 – 14 [ Group 1]: BUSINESS ECONOMICS
Prof. Iqtidar Shah
25 February 2024
Introduction
This report analyzes the underlying factors behind the ongoing stagnation in Atlantic Canada's private
sector over the past decade. Drawing on insights from "Stagnation in Atlantic Canada's Private Sector"
(MacDonald, 2023), it assesses weaknesses across key economic indicators—employment, productivity,
and investment—to inform targeted policy recommendations. Reviving private sector dynamism will be
critical for unlocking sustainable, widely shared prosperity.
Employment Dynamics
Employment rates serve as an immediate indicator of labor market health and broader economic
confidence. Persistently high unemployment plagued Atlantic Canada over the study period, signaling an
opportunity for structural reforms. The region’s labor force participation rate declined from 63.6% in
2007 to 60.9% in 2019, whereas the national rate ticked up from 67.6% to 65.5% over the same period
(Statistics Canada, 2020). This divergence suggests the region’s working-age adults have been detaching
from the formal labor market due to the paucity of suitable employment opportunities.
Table 1
Employment concentration in seasonal resource extraction industries has also exposed Atlantic Canada’s
labor market to global commodity price shocks. Total employment in agriculture and natural resource
sectors shrank from 5.1% in 2007 to just 3.6% in 2019 even as these sectors grew nationally (Statistics
Canada, 2021). This reliance on volatile seasonal industries juxtaposed with anemic growth in
countercyclical sectors indicates clear potential for economic diversification policies.
Furthermore, Atlantic Canada’s private sector net job creation lagged the country overall during the
analysis timeframe. Firms added only 6.3% more jobs over 2007-2019, less than half the 14.5% national
growth rate (Statistics Canada, 2023). Lackluster employment growth suggests impediments to small
business formation and scale-up. Easing regulatory barriers or targeting scale-up financing programs
could accelerate private sector job gains.
Competitive Forces
Drawing on Michael Porter's Five Forces model, assessing the intensity of competitive forces in Atlantic
Canada provides perspective on profitability challenges:
Rivalry is likely limited with few large private firms, but this also signals barriers to scale.
The threat of new entrants appears high given low startup rates. Regulatory burdens could be a barrier.
Buyer power may be disproportionately high given the small customer base.
Supplier power could be elevated amid resource reliance.
The threat of substitutions is increasing with digital disruption and trade exposure.
Identifying the most salient forces shaping competition allows targeted reforms to reduce barriers to
entry, ensure access to growth capital, diversify demand, and increase competitive intensity.
Labor Economics
From a labor economic lens, lagging participation rates signal potential issues like inadequate skills
alignment, limited job openings, and mobility factors. Educational attainment gaps reduce workforce
productivity. Seasonal unemployment spikes indicate potential for countercyclical sector growth.
Tax and subsidy adjustments could incentivize skills development. Analyzing occupational mismatches
and forecasting growing fields could inform retraining. Enhancing labor market flexibility and mobility
safety nets would reduce seasonal swings.
Employment
The high unemployment rate in Atlantic Canada presents an opportunity for structural improvements.
The region's labor force participation rate declined from 63.6% in 2007 to 60.9% in 2019 while the
national rate rose (MacDonald, 2023). This implies working-age persons leaving the employment market
owing to a lack of possibilities.
Overreliance on volatile seasonal industries has also exposed the region. Agriculture and natural
resource employment shrank from 5.1% in 2007 to 3.6% in 2019, whereas these sectors expanded
nationally (MacDonald, 2023). Diversifying into more countercyclical services could provide stability.
Additionally, the private sector generated few net new jobs. Firms added only 6.3% more jobs over 20072019 - less than half the 14.5% national rate (MacDonald, 2023). Easing small business regulatory
burdens could accelerate growth.
figure 3 shows us the businesses entered the provinces in the period of 2007-2019
Productivity
Productivity loosely measures efficiency in converting inputs like labor and capital into economic
outputs. Atlantic Canada's private sector GDP per hour of work grew just 0.3% annually from 2007-2019,
trailing the national 0.9% rate (MacDonald, 2023). This gap signals obstacles to unlocking greater output
per worker.
The services sector drives over 70% of Atlantic GDP but experienced minimal 0.1% annual productivity
increases over the study period (MacDonald, 2023). Business costs from regulatory complexity
potentially hamper performance. Addressing skills gaps may also boost productivity, as only 61% of the
regional labor force holds post-secondary credentials versus 64% nationally (MacDonald, 2023).
Firm Behavior
Applying microeconomic analysis of firm decision-making could reveal Private sector uncertainty and risk
aversion manifests in low capital expenditure and R&D spend. Potential causes range from limited
market size, high finance costs, regulatory burdens, or lack of growth incentives.
Policy options include scale-up grants, R&D tax credits, subsidized lending, public co-investment in
technology commercialization, and streamlined bureaucracy.
In summary, diagnosing competitive environment barriers, labor force development constraints, and
biases driving suboptimal firm decisions could point to targeted microeconomic solutions suited to
overcoming Atlantic Canada’s economic stagnation. Focused interventions informed by empirically
identifying root structural causes can unlock the region's growth potential.
Productivity Pitfalls
Productivity growth represents a pivotal contributor to improving living standards and maintaining firm
competitiveness. Yet Atlantic Canada’s private sector GDP produced per hour worked grew at an
annualized rate of just 0.3% from 2007-2019, far below the 0.9% national rate (Statistics Canada, 2022).
Lagging labor productivity signals an opportunity to assess and address policy, infrastructure, and
innovation bottlenecks stifling efficiency.
Of particular concern, the services sector which drives 73% of Atlantic Canada’s economic output has
chronically posted the lowest productivity growth levels of any sector, averaging gains of just 0.1%
annually over the measured period (APEC, 2020). Baseline services productivity appears constrained by
inadequate accumulation of human capital. As of 2019, only 61% of Atlantic Canada’s overall labor force
held post-secondary qualifications, whereas the national average stood at 64% (Statistics Canada, 2023).
Workforce skills upgrading initiatives could play a pivotal role in unlocking productivity potential.
Lagging Private Investment
Trends in capital expenditure and research and development spending provide perspective business
confidence in regional growth incentives. At $3,428 per worker in 2019, Atlantic Canada’s annual capital
investment ranked second lowest among all provinces—25% below the national average (Statistics
Canada, 2021). Chronically low investment indicates perceived market risks and uncertainty in the
regional business climate, highlighting the potential efficacy of targeted investment stimuli.
Innovation inputs lag as well, with private sector investment in research and development amounting to
just 0.72% of the region’s GDP in 2018 versus a national target level of 1.66% (Government of Canada,
2021). Stimulating R&D and intellectual property development through enhanced tax credits or publicprivate research co-investment programs could provide the catalyst to unlock innovative capacities and
growth.
Conclusion
In summary, analysis of Atlantic Canada’s 2007-2019 employment volatility, sagging productivity, and
risk-averse investment behavior highlights the structural economic impediments underlying the ongoing
private sector stagnation. Strategic reforms informed by this diagnosis of labor force challenges, sectoral
composition inefficiencies, inadequate innovation inputs and low business confidence could ignite
renewal sources of dynamism, competitiveness and broadly shared gains. Policy innovations around
skills development, small business support, research commercialization ecosystems, and investment
incentives warrant prioritization in restoring the region’s promise.
References
MacDonald, D. (2023). Stagnation in Atlantic Canada's Private Sector. Halifax: Atlantic Provinces
Economic Council.