New study says diversifying Alberta economy may not protect against oil/gas volatility

Oil sands mining operation.

Labour income volatility in Alberta in last 20 years increased by 40%

A new study takes a “hard look” at economic diversification in Alberta and argues that over the past few decades the provincial economy has already diversified, but worker incomes have become increasingly concentrated in the most volatile sectors, oil and gas and construction. That conclusion, say economists Bev Dahlby and Mukesh Khanal, calls for a different policy approach from both the Alberta and federal governments.

Whenever there is a downturn in the Alberta economy because of slumping oil and gas prices, politicians call for policies to diversify the economy, on the assumption that expanding other sectors of the economy will insulate Alberta’s economy against volatile oil and gas prices.

Just because a sector is not directly part of the oil and gas extraction sector, does not necessarily make it counter-cyclical, the authors say, and the sectors that have been promoted in the name of diversification are often linked to the oil and gas extraction sector and follow the same boom-bust cycle.

The report shows that not only are the government’s attempts to subsidize certain sectors in the name of “diversification” failing to insulate the provincial economy from fluctuations in oil and gas prices, they may even exacerbate the economic cycle.

“Alberta’s economic output has become more diversified in the last 20 years, and that has resulted in about a 20 per cent decline in the volatility of economic output. Therefore, output diversification is not really the need of the hour in Alberta,” said Khanal in a press release.

“In fact, since manufacturing is the third-most volatile economic sector in Alberta after oil and gas and construction sectors, policies to support and increase manufacturing, particularly petrochemical manufacturing, will actually make Alberta’s economic output even more volatile.

The real problem is income volatility, according to Dahlby and Khanal.

In the last 20 years, labour income has become concentrated in the two most volatile sectors: oil and gas, and construction. As a result, labor income volatility in Alberta in the last 20 years has increased by 40 per cent.

Instead of focusing on reducing output volatility by diversifying output, since it is already diversified, government policies should focus on reducing income volatility. It’s not industries that should get support – it is worker’s incomes, says the School of Public Policy professors.

They recommend that the Alberta government should find ways to expand unemployment insurance, as the current federal government policy provides fewer supports to unemployed Albertans than it does to residents of other regions.  

Government should also promote self-insurance by expanding tax-sheltered savings products so workers can save during good-times to help sustain themselves during downturns.

Rather than exacerbating Alberta’s boom-and-bust cycle, the provincial government should adopt a counter-cyclical fiscal policy, which during boom times means restraining public spending, lowering public expectations concerning growth, and saving a substantial share of the non-renewable resource revenues.

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