For three decades, growth in Canadian labour productivity (at its simplest, output in dollars per hour worked) has lagged behind productivity growth in the United States and other major countries. A recent update of the productivity data by Statistics Canada, to the end of 2011, has revealed that the problem has gotten even worse.
If we continue to discount or dismiss the productivity issue, Canadians’ future incomes will be threatened – particularly if there is a sustained downward adjustment in the price of key natural resources. If there ever was a time to take poor productivity growth seriously, that time has arrived.
For years now, the Conference Board of Canada and others have been warning Canadians about our poor track record on productivity growth compared with the U.S. and other major industrial countries. The result of lagging productivity growth is a significant gap in per-capita income that has opened up between Canadians and Americans – at least $7,000, and still rising.
Statistics Canada recently updated the data comparing Canadian labour productivity growth with that of the United States from 1960 to 2011. While the productivity performance of the two countries was comparable up to 1980, the trend lines have diverged since then. Labour productivity in Canada grew by 1.4 per cent annually over the 1980-2011 period, while it grew at a much faster 2.2 per cent in the U.S. [See chart.]
Even more striking are the different growth trends for the specific components of labour productivity growth. Capital deepening (i.e. greater use of cutting-edge physical capital such as information technology or robotics) has been a bit better in Canada than the United States. Labour composition growth (or the deepening skills and knowledge of the work force) has also been a bit better in Canada. So for two of the three underlying factors, Canada's labour productivity growth was slightly better than that of the U.S.
But there is a big difference between the two countries in terms of the third factor, multi-factor productivity (MFP) – or what we have previously labelled as “innovation.” MFP is calculated as whatever is left over once growth in labour composition and capital deepening is subtracted from overall labour productivity growth. As hard as it is to believe, Canada had zero growth in MFP over the 32-year period covered by Statistics Canada.
There are several possible explanations for this stunning result. Canadian business investment has shifted away from manufacturing toward resource development, and there is likely a long payback period from innovative investment in resources. Some key resource sectors, such as the oil sands, have absorbed significant and innovative investment, but have yet to see a significant and sustained increase in output that would boost productivity. Innovation may be embedded in the growth in capital deepening and changing labour composition, where Canada did slightly better than the United States.
Due to anticipated labour shortages, Canadian firms may be more inclined to hire workers within an existing business model than American firms. Or maybe there is excessive protection or insufficient competition in some important business market segments in Canada, reducing the drive for innovation.
Just as there is no single explanation, there is unlikely to be a quick fix to the problem. Canada continues to lack an overarching productivity strategy. There has been some action – for example, governments have taken steps to make the business tax environment more attractive to private investment, but with little apparent return so far. And this issue is not solely the responsibility of governments; many Canadian businesses have yet to embrace innovation as a core element of their business culture. The Conference Board’s Centre for Business Innovation is undertaking original research on how an innovation culture and related good practices can be fostered within Canadian firms.
But the inescapable bottom line is that growth in Canadian labour productivity is falling further behind that of our American neighbours; the problem is even worse than previously thought. Unless productivity growth becomes more of a national priority, there is no reason to expect that long-term pattern to change.
Glen Hodgson is senior vice-president and chief economist at the Conference Board of Canada.