Canada's Advancing Technologies: What Investors Should Know for the 2020s

In this mini-series, we're taking a look at four macro-economic trends Canada is facing in the decade ahead, and how the nation can successfully navigate them to thrive. In this edition: technological advancements.

The following is an excerpt from RBC Economics' recently released report, Navigating the 2020s.

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The Challenge

Canada's economy is being reshaped by technological advancements, with the digital economy growing by 40% over just seven years. Digital platforms facilitate financial transactions, the consumption and production of entertainment services, and serve as a marketplace for goods. Those activities, along with the software, infrastructure and support services that facilitate their delivery, now account for 5.5% of the country's GDP, employing close to 1 million Canadians. And the digital economy is highly productive, with GDP per worker running 16.5% faster than the overall economy.

While the digital economy is expected to add millions of new jobs and create opportunities in all sectors, it will also cause dislocation. More than a quarter of Canadian jobs are at risk of disruption in the coming decade. The challenge will not only be to help those currently facing disruption in their own industries and occupations, but also to help the next generation of Canadian workers adapt to a changing labour market. A recent survey of Canadian employers by the Canadian Federation of Independent Business found that 42% of small businesses cite a shortage of skilled workers as their largest business constraint—ahead of both insufficient demand or lack of working capital.

As we have argued in our Humans Wanted research and elsewhere, investing heavily in human skills that complement technologies such as machine-learning and artificial intelligence will go a long way to closing the 20% gap in labour productivity between Canada and the rest of the G7.

The Opportunity

Powering the knowledge community

The countries that do the best job of creating, accumulating and exporting knowledge are likely to prosper in the 2020s. The global race to lead in areas including AI and supercomputing has already begun. Ottawa has responded by funding innovation superclusters and other initiatives—its Innovation Superclusters Initiative aims to add $50 billion to GDP by 2030. Canada can already claim some success: our cities have large concentrations of AI startups and have also received significant investment from global tech giants. The first half of 2019 saw record venture capital investment of $2.15 billion in Canada, with information and communications technology accounting for 54% of dollars invested.

Our task this decade will be to build on that early head start. We already have a strong foundation in the form of a highly educated, flexible and dynamic workforce and a growing services sector. Educators, employers and policymakers are turning their attention to ensuring our workforce has the skills needed for the economy of the future, but about 40% of Canada's postsecondary students don't currently have access to work-integrated learning opportunities. More investment to help innovative firms commercialize their products and scale up will be required. We'll also need to retain more of the ideas developed here.

A thriving services sector will support Canada's growth

Twenty-nineteen was the year the services sector demonstrated its resilience. That's important, given its growing clout globally as the automation of goods production expands. Services output accounts for around 70% of our GDP, up from around 50% in the 1960s. Services' share of the overall economy will keep growing.

Despite a (mostly undeserved) reputation for low pay, nine of the top 10 industries in terms of employment growth have been in the services sector for more than a decade, and the fastest-growing—the professional, scientific and technical services industry—pays wages well above average.

Service-sector jobs tend to be more resilient to short-run ebbs and flows in the economic cycle. Consider this: employment in private service-producing industries declined less than 2% in the 2008-2009 recession; the drop in the goods sector was closer to 8%.

Leveraging our human capital

Immigration will be a powerful antidote to our aging society. It's well known that we possess the highest foreign-born population among G7 nations. Perhaps less well known: immigrants are keeping us younger. If we'd halted immigration in 2006, Canada's median age would be 42.7 years instead of 40.8 as it is today.

Our research indicates that, while we do a great job of attracting immigrants, we could do better in integrating them into the Canadian labour force. Immigrants earn about 10% less than those born in Canada. The gap spans occupation, age, gender and region. Bringing immigrants up to the wage and employment levels of those born in Canada could add $50 billion to GDP, our research shows. How to get there? Devoting more resources to helping immigrants transition into the labour force after they arrive in Canada, and helping Canadian employers better assess foreign work experience.

Immigrants aren't the only ones whose potential isn't being fully realized. Indigenous Canadians, whose share of the overall population is also increasing, fall short on key labour market measures including participation in the workforce. And women, who've made significant earnings gains in recent decades, still only lay claim to about 40% of the total wage pot. Narrowing these gaps and helping these cohorts share more fully in our prosperity will help Canada's economy thrive.

Closing the participation gap for women

Canadian women have seen significant gains in the labour market over the past two decades, increasing their share of wage income from 35% to nearly 40%. Much of these gains came as younger cohorts, particularly millennial women, became more educated and attached to the labour force than their older counterparts. As older women continue to exit the labour force through retirement, and millennials enter their prime earning years, the share of earnings earned by women is expected to continue to increase.

However, over the next decade, these gains are likely to be relatively modest—increasing only to 41% by 2030. Over the past 10 years, the employment-rate gap between men and women aged 25 to 44 has remained stubbornly between 7 and 8 percentage points, illustrating how even as some pay inequities have been addressed, women are still a long way from escaping the asymmetric costs of raising children. And as the population of seniors increases rapidly, women who have traditionally been tasked with providing care—54% of caregivers in Canada are women—may see a disproportionate strain placed on them in the coming years.

Equalizing participation rates of men and women in the labour market could yield a 4.9% increase in GDP. Solutions may be found in pockets such as Quebec. The province implemented a $5 per day daycare policy in 1997, which is largely credited with raising employment rates of women from 2 percentage points below the national average in 1995 to 4 percentage points above it today. We may require bold new policies such as this to support those caring for elders in order to ensure that progress for women doesn't stall.

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