If It Matters, Measure It: Unpacking Diversification in Canada

Abstract

Will greater diversification benefit our economy? While many think it will, few are explicit about what they mean by diversification or what an “ideal” level would be. Even fewer recognize that favoured policies to promote diversification could actually do more harm than good.

There are many ways to measure diversification in Canada, and each measure tells a different story. Canada’s GDP and employment, for example, are more diverse than many other countries, including the U.S. Employment is also more diversified today than at any point in its recent history, even in resource-rich provinces. Perhaps surprisingly, Alberta and Saskatchewan lead the country in employment diversity. Even accounting for non-resource jobs that are indirectly linked to resources does not reveal resource-rich provinces to be less diverse than others. To be sure, by other measures they are less diverse and more volatile, so we gather and analyze a wealth of data to paint a full, nuanced, and sometimes surprising picture of diversification in Canada.

But does diversification even matter? Economists, for centuries, have found gains from specializing in areas where we have a comparative advantage. Subsidizing certain selected industries therefore risks causing economic damage by distorting activity and displacing workers and investment from more valuable uses. Policy-makers should therefore focus on neutral policies: create a favorable investment climate, facilitate adjustment and re-training, encourage savings (including by government), and so on. We discuss the pros and cons of various options.

At the end of the day, responsible governments must define their objectives clearly, and recognize the costs of policies meant to achieve those objectives. We cannot hope to have a sensible debate on economic policy without full and complete information. If it matters, measure it.

Keywords: GDP, Economic Diversification, Diversify, Employment Diversity