One of the great mysteries of Canada’s economy is its woeful productivity rate, especially compared with the United States.
No one has a solid answer. The weak dollar during the 1990’s and most of the previous decade is a popular theory, creating a crutch that allowed too many inefficient companies to become profitable. Some say Canadians, writ large, lack productivity DNA -- we’re just too complacent to create world-beating companies. Others say it doesn’t matter: unproductive companies employ more people, and more jobs means economic stability.
Here’s another suggestion, that might relate to the complacency argument: Canada’s economy doesn’t produce enough big manufacturing companies.
On Thursday, we all had some fun when Toronto-Dominion Bank passed Royal Bank of Canada for a few minutes as the country’s biggest company by market capitalization. For a little context, The Globe’s Emily Jackson put together this slide show of Canada’s 10 biggest companies.
Canada’s three biggest companies are banks, and there are a total of four among the Top 10. The other six spots are taken by commodities companies.
Nothing against any of those companies, but the industry groups in which they are situated tend to be the least productive. For example, labour productivity in the oil-and-gas industry plunged 3.2 per cent in the first quarter. Productivity in the services industry was unchanged. By contrast, productivity of goods-producing businesses increased by 1.2 per cent. (Those figures come from Statistics Canada’s June 10 report on productivity.)
The same is true in the United States. The Labor Department’s latest productivity figures show factory productivity generally advances faster than the overall rate. ( Here’s the data for the manufacturing sector; here’s the comparative table for non-financial companies.)
Now, take a look at the Top 10 companies in the Standard & Poor’s 500 Index.
Exxon Mobil Corp. is the biggest by market capitalization, and Chevron Corp. is No. 4. But those are the only resource companies in the group and there are no banks. AT&T Inc. ranks No. 9. The rest of the U.S.’s Top 10 makes stuff, starting with Apple Inc. at No. 2.
No industry is more exposed to competition than manufacturing. The proliferation of free-trade agreements starting in the mid-1980’s focused on goods. Trade negotiators are only now getting around to taking a harder look at services.
Does any of this explain the productivity gap between the U.S. and Canada? A quick comparison of the 10 biggest companies in each country certainly doesn’t count as empirical evidence. But it might be enough to serve as a starting point for a good discussion on the subject. Ask yourself, who’s under more pressure to innovate to stay ahead in their particular markets, Apple or TD? Second question: whose economy is more reliant on companies such as Apple, and whose economy is more reliant on companies such as TD?
Maybe Canada’s productivity gap isn’t such a mystery after all.
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