OPINION: The value-added myth

Wednesday 22 Apr 2020

The Dangers Of ‘Value Added’ Mythologies

It’s a common refrain in Canada: we shouldn’t be mere drawers of water or hewers of wood, but should support and even subsidise the creation of “value-added” manufacturing jobs. But primary resource industries like mining and oil and gas extraction actually produce far more added value than most manufacturing and processing sectors.

The problem with value added, writes Trevor Tombe, is that most of its advocates chronically misrepresent the concept, which leads to bad policy decisions that cause more economic harm than good.

It’s a common refrain in Canada: we shouldn’t be mere drawers of water or hewers of wood, but should create “value-added” manufacturing jobs. This sentiment shapes policy debates right across this country. In British Columbia, there is a slogan: “BC Logs for BC Jobs”, which calls for restricting raw log exports in favour of local processing. In Ontario, some are concerned that the Trans-Pacific Partnership will destroy value-added jobs in the auto sector.

In Quebec, the government recently bailed out Bombardier – an aircraft manufacturer whose marketing material often touts its “high value added jobs”. The province provided $1 billion, taking a 49 percent stake in the struggling C-Series jet project, and there is pressure on the federal government to chip in too. If Ottawa bites, it will likely be because some “business case” touts the “value added jobs” associated with the firm.

Striving for more value added is perhaps nowhere greater than in Alberta. Ever fearful of being overly “dependent” on primary oil and gas production, the province has long subsidized refining and processing activities – most recently with billions for the Northwest Upgrader project – all in the name of supporting value added.

It’s worth exploring what value added actually is, and some of the consequences of policies meant to promote it.

Something has “added value” if it creates output that is worth more than the total cost of its intermediate inputs. That is, if the price of the good exceed the cost of material or service inputs required for its production. Manufacturing activities that transform various parts into a more valuable finished product clearly add value. But the phenomenon is by no means unique to manufacturing or processing.

A trucker adds value by transporting a product from Montreal to Ottawa, so long as the product is valued more in Ottawa than Montreal. A logger adds value by making a log from a tree. An oil rig adds value by pumping oil from under the ground to the surface. From the perspective of the economy as a whole, it does not matter how value is added, so long as it is.

Sectoral added value is essentially measured by the total amount of income a sector generates. Wages paid to workers, profits collected by firms, rent earned by building or land owners, all add up to a sector’s value added. There are some subtle complications, but this intuition is almost always sufficient.

Conveniently, Statistics Canada collects and organizes this data for anyone to see. For each dollar of output from the mining sectors, for example, 71 cents of income – and therefore 71 cents of value added – is created. In other sectors, it is much lower. For wood products manufacturers (the “value added processing” of logs) 32 cents of income is created for each dollar in output. Refineries have the lowest, with only 11 cents of income on the dollar.

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Photo credit: CBC.ca

Source: C2C Journal, Canada

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