David Williams is vice-president of policy at the Business Council of British Columbia. Jock Finlayson is the council’s executive vice-president and chief policy officer.
It’s been about 12 years since the peak of the last business cycle in 2007. And as the 43rd federal Parliament sits for its first session, it’s a good time to reflect on how Canada’s economy has performed compared with other advanced countries over the current business cycle. Has Canada “kept up with the Joneses?"
Unfortunately, the answer is no. Canadians have seen a substantial deterioration in living standards relative to peer countries since 2007, according to Organization for Economic Cooperation and Development data. This is primarily because other countries have increased their productivity by more than Canada.
Canada’s peer group – “the Joneses” – includes the other Group of Seven countries, namely the United States, France, Germany, Italy, Japan and Britain. Australia and New Zealand are added because they have resource-based economies like Canada with similar institutions and well-educated work forces. Finally, we can also compare Canada to the average performances of the OECD, the G7 and the Euro area.
Germany, France, New Zealand, Australia and, on average, the Euro area, G7 and OECD have all increased GDP per person relative to U.S. levels since 2007. In contrast, Britain, Japan, Italy and Canada have lost ground to the U.S., with Canada’s decline being the steepest.
Canada and Australia, for example, had identical GDP per person in 2007, at 83 per cent of U.S. levels, while Germany’s was lower at 77 per cent. As the table shows, Australia and Germany lifted GDP per person to around 86 per cent to 87 per cent of U.S. levels by 2018, while Canada’s dropped to 77 per cent.
Labour productivity explains most of Canada’s relative decline in GDP per person. Australian and German workers’ output per hour improved by five percentage points vis-a-vis the United States between 2007 and 2018. In contrast, Canadian workers’ output per hour fell by the same amount. The Australian and German economies have become relatively more efficient over the current business cycle, while Canada has become less efficient.
The deterioration in Canada’s economic performance compared with other advanced economies is widely felt. It helps to explain weak gains in real income, the “affordability” challenges facing many households, and the diminished quality of publicly funded services.
The OECD calculates the Gini coefficient, a comprehensive measure of income dispersion across households, for its member countries. These data show that Canada has the most evenly distributed market incomes, and the third most evenly distributed disposable incomes, among the G7 countries, Australia and New Zealand. Compared with its peers, Canada does a decent job in sharing economic gains, but has more of a problem generating them.
Canadian policy makers have been focused on trying to boost already very high rates of labour utilization by emphasizing work force participation and employment. As the table shows, this strategy has done little to advance Canada’s relative living standards over the current business cycle.
At the same time, governments have paid insufficient attention to policy changes that would reduce inefficiencies and raise productivity, such as comprehensive tax reform, the modernization and streamlining of regulatory systems, fostering more intense product market competition, and reducing internal trade barriers.
An optimistic view is that Canada now has considerable scope to raise living standards by pursuing structural reforms that accelerate productivity. This should be elected officials’ paramount focus if they care about improving the economic well-being of citizens over time.