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This is the second in a four-part series that explains productivity and why it matters to investors. You can read the first article here:

Most Canadians would likely say that we have been doing pretty well in terms of achieving economic prosperity-in fact, better than most countries. And they would be right. But, as they say in investing, the past does not necessarily provide good information for judging the future.

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Canada Has Had Some Help in Recent Years

In recent years, Canada has had a lot going for it. In fact, economic conditions have helped us to appear more productive than we really are. For example, as Kevin Lynch, past Clerk of the Privy Council, summarized in an article in The Globe and Mail:

• The U.S. economy experienced many years of significant growth-which helped create demand for our goods and services sold in the U.S.

• The world prices of many of our resources (e.g., oil, gold, uranium) have been quite high, bringing more money into Canada as we sold them in global markets



Investor Education: Productivity as explained by Gary Rabbior





• And we have had the entry of the baby-boom in the labour market which increased our supply of labour-and enabled us to produce more.

• A relatively low valued Canadian dollar made it easier for our largest trading partner (the U.S.), and other countries, to buy our exports

In other words, these factors made it easier for us to produce more, sell more, earn more, and do well. It didn't necessarily mean that we were more productive and that we were using our resources more effectively and finding ways to get more from our resources. In fact, as Mr. Lynch also noted, in 2007 Canada's level of business productivity was about 75 per cent of that of U.S. businesses. That means that the U.S. was making better use of its resources than we were-even though Canada was doing very well.

But Times Are Changing

Therefore, Canadians couldn't be blamed for thinking that Canada must be doing pretty well-and be producing as well, or better, than other countries-including the U.S. But they would be mistaken. Statistics show that Canada has had very low or, in some cases, no productivity improvement in recent years. We are lagging far behind the U.S. and other OECD countries.

There are a number of possible factors contributing to this-such as shifting more production away from manufacturing to resources; a lack of investment in capital; and a relatively poor performance in developing and integrating new innovation. These and other factors have been contributing to a lack of productivity improvement in Canada.

Therefore, as times and economic conditions changed, and continue to change, Canada faces new important challenges. Our dollar has strengthened so it now costs Americans, and others, more to buy our currency-which means the prices of our exports have risen-and may well rise further. This can make it more important for us to find ways to use our resources more efficiently.

In addition, the U.S. economy has weakened considerably over the last couple of years reducing demand for Canadian exports. Commodity prices are fluctuating up and down. And although unemployment is quite high now following the recession, the baby-boom is now starting to leave the labour market which may lead to a lower likely labour supply in the future. Some companies and industries are already experiencing labour shortages-and future labour shortages may worsen in the years ahead. A shortage of skilled labour can affect a company's ability to grow and take advantage of new opportunities.

Canada Needs to Improve Productivity

So what does this all mean for Canada? It means that we can no longer count on those other factors (low valued dollar, strong U.S. economy, high world commodity prices, and plentiful labour) to help us produce more, sell more, earn more, and become better off. In short, it comes down to the fact that we will need to improve our productivity.

Lowering Wages Would Help - But Is That What You'd Want?

Consider for a moment one way Canadian producers could lower costs to compete with other world producers? One way would be to lower wages to workers-and thereby lower cost.

But do we want to become more competitive and lower cost by lowering wages? Similarly, do we want to lower production costs to be more competitive by making people work harder-perhaps even working harder or longer for lower wages? Most, if not all, Canadians would agree that isn't the country we want to have-or the future we want to build. The alternative is to become more competitive by improving productivity-using all of our resources more effectively-and being able to achieve higher employment and higher incomes as a result of our success.

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