The surprising economic strength of Quebec City

The surprising economic strength of Quebec City

LIQ_Mag_Nov2013_CoverThis article first appeared in the November 2013 issue of Life in Québec Magazine.

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By Stephen Gordon

Le mystère de Québec is the term some political observers have given to the sometimes inexplicably idiosyncratic voting habits of the people of the greater Quebec City area. The region has experimented with both the ADQ and Stephen Harper’s Conservatives, and many attribute the result of the 1995 referendum to the fact that Quebec City voters were markedly less in favour of independence than other Quebec francophones. This is a genuinely puzzling pattern, because there is nothing obviously special that sets Quebec City apart from the rest of the province. Unlike Montreal, but like the rest of Quebec outside Montreal, the population of Quebec City is comprised almost entirely of white francophones born in Canada.

There’s another, perhaps even more intriguing Quebec City enigma: its economy. In 2000, Quebec City’s unemployment rate was slightly above that of Montreal, and more than one percentage point above the Canadian average. But by August 2013, the average unemployment in the Quebec City Census Metropolitan Area (CMA) was 5.1 per cent – more than two percentage points lower than the Canada-wide average, and three and a half percentage points below the unemployment rate in the rest of Quebec. Of the thirty-five largest CMAs in Canada, Quebec City’s unemployment rate is lowest east of Saskatchewan. So perhaps the more interesting mystère de Québec is: why is Quebec City’s economy performing so well?

To be sure, Quebec City has several built-in advantages: it is a tourist destination with a global reputation, and it home to both the provincial government and, in the form of l’Université Laval, a major centre of post-secondary education. But these assets are at best a partial explanation for Quebec City’s recent success. For one thing, Quebec City has been a tourist attraction for generations, and little has changed over the past decade or so that would explain the sharp improvement in the local labour market. And if the presence of a major university was the key, then Montreal – home to four major universities, including l’Ùniversité de Montréal and McGill University, the flagship schools of Quebec’s French-language and English-language post-secondary systems – would be outperforming most of Canada.

A city’s labour market does benefit from the presence of a provincial government, but the gains can be overstated. For one thing, most government workers work outside the capital, serving the public. Moreover, government employment can be a two-edged sword: capital cities are hardest hit during austerity drives: Quebec City lost fifteen per cent of its public administration jobs (which includes federal and municipal sectors) during the cutbacks in the 1990s.

The austerity years had come to their close by 2000, and Quebec City has seen increases in public administration jobs since then. But this increase in hiring still cannot be said to be the driving factor behind the job boom: government employment has increased more slowly than the total.

So if the obvious reasons don’t explain the mystère économique de Québec, what does? My conjecture – and it is too early to call it anything more than that – is that Quebec City is at the forefront of the transition to a post-industrial economy, and it is – so far – handling the transition well.

LiQ_Mag_Abonnez-vousManufacturing employment has been in decline in advanced economies for decades, and this trend predates the entry of low-cost producers in China and in other emerging economies on world markets. As did their counterparts in the rest of Canada, Quebec City’s manufacturers faced difficult times during the recession of the early 1990s and the challenges of adjusting to free trade with the US and Mexico. But for much of the Canadian manufacturing sector, the sharp fall in the exchange rate during the 1990s permitted firms to avoid making significant structural changes: the cheap Canadian dollar made it possible for inefficient producers to stay competitive on world markets.

This strategy did not survive the surge in prices of natural resources and the resulting appreciation of the Canadian dollar. Manufacturing employment fell by more than ten per cent in Canada as a whole – but the Quebec City area managed to escape the worst of it. Manufacturing employment did fall, but at half the rate of the decline seen in Montreal. Instead of competing on price – a game that is hard to win against low-cost competitors in emerging countries – Quebec City manufacturers have done better than most in making the adjustment to competing on quality.

It’s hard to point to a single Quebec City formula for success: a tour of the region’s industrial parks offers a wide variety of economic activity. The days of large manufacturing firms employing thousands of workers are over. Quebec City has already made the transition to smaller, specialized firms that don’t depend on a cheap Canadian dollar to stay in business.

But this transformation in manufacturing doesn’t explain the employment boom, either: the main achievement there has been to keep employment losses under control. Nor is construction the answer. The increase in activity and employment in construction over the past decade was real enough, but it is not what sets Quebec City apart: Montreal enjoyed a similar real estate boom.

The path to prosperity in a post-industrial economy is in the high-skill, high-wage service sector, and Quebec City’s success here seems to be the best solution to the mystery. Firms providing specialized services – including health services – to individuals and to other businesses accounts for half the growth in employment since 2000. One of the more surprising sources of employment growth is what economists call the FIRE sector: Finance, Insurance and Real Estate.  When we think of finance jobs in Quebec, we generally associate them with Montreal, but Quebec City is home to a thriving niche in the insurance business. Employment in Quebec City’s FIRE sector has grown twice as fast as in Montreal.

So far, so good – what about the future? Some difficult challenges remain on the horizon. The construction boom is nearing its end, and there are already many condos standing vacant, even as other projects are under construction. The construction industry has already begun to slow, but it remains to be seen if the landing will be hard or soft. A more serious challenge is posed by demographics. Quebec City’s population is aging rapidly, and much will depend on its ability to attract and retain the skilled workers required of a post-industrial economy.

These and other challenges will also have to be faced by cities in the rest of the province and in the rest of Canada. But if past experience is a good indicator for the future – and it usually is – then the outlook for Quebec City’s economy is more encouraging than most.

About Author

Stephen Gordon

Ontario-born Stephen Gordon has been teaching at the Département d’économique at Laval University for more than twenty years. He founded the influential economics blog Worthwhile Canadian Initiative (http://worthwhile.typepad.com) and contributes regularly to the web site of Maclean’s magazine. Follow Stephen on Twitter @stephenfgordon

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