Thank you again for having me here as well. For anyone who is unaware, the Conference Board of Canada is a non-profit, non-partisan think tank based here in Ottawa. We do research in a variety of areas, including economic policy, public policy, and education and learning.
When I was first asked to testify today, the question raised was the services sector. I thought you've given yourselves a very broad mandate. As Michael Landry already outlined, it accounts for roughly three-quarters of economic activity in the country and 80% of employment when you include government and the public sector. It is by far the dominant part of the Canadian economy. Given its dominant role, I find it surprising that it's often overlooked or undervalued.
Just as an example, we often hear characterization of the sector that it pays low wages. This is generally and often inaccurate. There are many high-wage industries and occupations within the sector. In fact in aggregate the service sector's wages are only about 6% below the average for the economy as a whole. And there are a variety of industries that pay above-average wages, including wholesale trade, information services, financial services, and business services.
In terms of recent performance, the services sector has generally survived the recession with minimal damage. Some sectors have been more affected than others. Just as an example, over the past year, the goods-producing portion of the economy has shrunk by 11%, while the services sector portion of the economy has basically been flat over the same period of time. Services industries related to the movement of goods and tourism have been the ones worst affected. This includes things like wholesale trade, transportation, and accommodations. Industries like professional services and publishing, which are dependent on business spending, have also been affected by the recession. However there are many others—including sectors like retail, telecom, and even much of the financial sector—that are either quickly rebounding from the effects of the recession or actually grew through the recession. They did not see an outright decline in economic activity over the last year.
Despite its relative success, Canada's service sector still faces a number of challenges. I just want to identify a few of them here for you today. First is non-tariff barriers to trade. Services are generally not thought to be a particularly trade-dependent sector, and this is somewhat true, but they still account for about 15% of Canada's total trade volumes. The share is even higher when you consider the fact that many of the material inputs the sector uses are imported. Major sources of trade in services include tourism, transportation, financial services, and business services. Given that much focus in trade policy is on the movement of goods, we actually find it interesting that a lot of our research has found that non-tariff barriers to trade—things like regulatory differences, access to visas, border security—have actually had a bigger effect on the service sector than they have on the goods sector.
Just to give an example, roughly half the number of visitors who were coming to Canada in 2000 are coming here now. The number of visitors coming to Canada from the U.S. has declined by half. This is an absolute decline in the number of visitors, and it's a decline in market share within the U.S. It's not just the fact that Americans are traveling less; they're actually travelling less to Canada. There's a variety of factors that contribute to this, including the strengthening Canadian dollar over much of this period, but tighter border security is an issue for the tourism sector.
Another issue for the services industry is labour force. Most components of the service sector are labour-intensive. Thus, labour market conditions are of particular import to many businesses within the sector. Obviously this is less of a concern at the moment due to the recession, but we do expect this issue to quickly re-emerge in the coming years. It is the most pressing for high-skilled workers, for whom unemployment levels tend to be low, even during recessionary periods. As a result, we must continue to coordinate our education and immigration policies in order to reduce the effects of labour shortages on growth in the services sector. For lower-skilled workers, the services sector also faces challenges. These include things like seasonal fluctuations in demand, high employee turnover, and poor productivity.
This brings me to the last issue I want to highlight today, which is the productivity gap. It is well publicized that output per worker here in Canada is significantly below that in the United States. In fact, most of that productivity gap can be attributed to the services sector. Retail, wholesale trade, financial services, and business services all have significantly lower output per worker than their U.S. counterparts.
Now, there are a variety of contributing factors to this. Some of these are beyond our control; some of them are within our control. For example, there are fewer opportunities for economies of scale in Canada. We have a small population based over a larger area, fewer opportunities for economies of scale. We also see under-investment in machinery equipment by the services sector here in Canada. Just to give you an idea, the capital intensity of the retail sector in the U.S. versus Canada--so the amount of invested capital per employee in the retail industry--is roughly two-thirds in Canada of what it is in the United States. So needless to say, it's harder for Canadian workers to produce as much when they have less invested capital to work with.
Finally, we've seen limited foreign investment in the industry. Some of this is deliberate; some of it is not. For example, we restrict investment in some sectors, like telecom and air transportation. The end result is that it reduces investment in the sector and reduces the ability of our services sector to benefit from global best practices, global innovation, and different techniques.
Just to sum up, the services sector is a large and growing part of the Canadian economy. We believe the services sector will continue to outperform the goods-producing sector over the medium to long term, thus enabling its success as a key component to Canada remaining internationally competitive in the coming years.
Thank you.