News

Census-takers have given Canada less than a decade to kick its economic addiction to labour and find new ways to grow.

The economy has been humming along for years, based on robust hiring that has pushed the unemployment rate to a 30-year low. But because the population is aging, Canada's work force is only barely replacing retirees with new workers, according to 2006 census data released Tuesday.

The number of baby boomers reaching retirement age will accelerate rapidly in 2011. By 2016, young people will no longer be numerous enough to replace retirees and the work force could well start to shrink, Statistics Canada says.

The implications for Canada's economy are profound.

The rapid aging of the labour force will mean slower economic growth than we're used to; a strain on government resources to cover rising health-care costs with fewer income-tax payers; pressure on younger workers to produce more with less; and pressure on corporations to increase returns and dividends for their aging shareholders who depend on the income.

While companies and governments can take steps to mitigate the effects of a quickly aging work force, the only way improvements in Canada's standard of living can be maintained is through major gains in productivity — gains that have proved elusive for the past decade, despite repeated efforts by policy makers and corporate leaders.

"Can we do this? Absolutely we can. Will we? I would keep my fingers crossed here, because our record ... is very mixed at best," said Dale Orr, chief economist with Global Insight (Canada).

The most obvious solutions are for companies to find ways to prevent employees from retiring early, and for governments to increase immigration.

But even the most successful measures in those areas will make only marginal differences to work-force dynamics, said Terence Yuen, research economist for Watson Wyatt Worldwide.

The labour force has grown by 1.4 per cent a year over the past two decades, and much more than that in the past few years. But that growth rate will drop to almost zero in the next 20 years, according to Mr. Yuen's models.

If he allows for immigration and major delays in retirement, some companies will prosper, but the labour force overall will still grow by only 0.4 per cent a year.

"The impact is minimal, even with aggressive assumptions," Mr. Yuen said. "From a macro perspective, the impact is very small."

The key to maintaining economic growth lies almost solely in boosting productivity, he and other economists said. In other words, companies need to increase their output by using relatively less labour, and investing instead in machinery, equipment, technology and labour-saving strategies.

"Canada will have to rely a lot more on productivity gains in the future to sustain economic growth," said Laurent Martel, the lead Statscan analyst of the census report.

But policy makers and corporate leaders have been yakking about that for well over a decade, and Canada's productivity record has gone from bad to worse.

As pundits argued endlessly for key productivity-enhancing measures such as more government investment in education, corporate spending on training, lower corporate and capital taxes, and tax incentives to buy machinery and equipment, productivity has been improving at a measly 1-per-cent annual pace over the past five years.

That's a far cry from the 1.75-per-cent annual improvements that would be required to keep economic growth above 2 per cent as the work force ages over the next decade.

The natural pressures of pending labour shortages may well shake Canadian companies into becoming more productive, said Peter Dungan, economics professor at the University of Toronto. A well-managed company that foresees a shortage of workers, and the cost such a shortage implies, will naturally look for alternatives, he said, such as capital investment.

"It ought not to be a surprise to anyone in planning," he said.

Plus, as more retired people look to their stock holdings for returns and dividends, the pressure on the youngsters left in the work force to boost profits and create a healthy income stream will intensify, said David Perry, senior research associate with the Canadian Tax Foundation.

Mr. Perry does not necessarily see higher taxes in store for today's younger workers. That's because retirees increasingly have their own stream of income from savings and pension plans, and so will continue to pay taxes. And rising medical bills may well be offset by lower education bills as the number of children in school dwindles.

Where government policy becomes increasingly important, as the work force ages, is in distribution of income, economists added.

Fiscal policy will probably have to be overhauled to recognize that huge portions of the population are no longer in the work force, seniors need more programs and support, while smaller numbers of children require care.

And some sectors of the economy will flourish, while others, such as retail, will flounder — provoking a reordering of the business world that will be painful for some people, economists said.

"I think, going forward, we have to lower our expectations," Mr. Yuen said.