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Pressure makes diamonds. And the pressure of a severe labour shortage could make for the right environment to start to solve Canada’s productivity problem.

A recent report from the C.D. Howe Institute makes clear just how much that challenge confronts this country.

Since the 1990s, Canada has lagged the United States (and many other countries) in new investment for each available worker, but the problem has gotten worse since 2015. In 2021, new investment per available worker (when adjusted for purchasing power) in Canada was just over half that of the United States. In other words, for every dollar invested in the U.S., the equivalent of just 50 cents was invested in this country.

Canada scarcely fares better when compared to the other advanced economies that make up the Organization for Economic Co-operation and Development. This year, Canadian workers will get only 73 cents of new capital for every dollar invested in workers in other OECD countries (excluding the U.S.).

Most ominously, Canada’s capital stock is growing so slowly that it is not keeping pace with the growth in the country’s workforce. In essence, Canadian businesses are substituting labour for capital – the opposite of what they should be doing to boost productivity.

Co-authors William Robson, chief executive officer, and Mawakina Bafale, research assistant, lay out the stakes starkly enough: “We want Canadian workers to have higher productivity and higher wages. Higher business investment would improve their chances,” they write.

Part of the problem, they continue, is that Canadian businesses either do not see or refuse to respond to opportunities or threats that would spur them to make productivity-boosting capital investments.

True enough, and there is no more pertinent example than the labour shortage currently gripping many industries. And the first reaction by Canadian business has been to apply to bring in a flood of temporary foreign workers, with applications hitting their highest level in at least five years.

Ottawa should be wary of any further expansion, if the sole motivation of employers is – as seems likely – to avoid pressure to increase wages.

The pressure of those higher wages, or at least the worry of it, is needed to push businesses to invest in automation and other kinds of productivity-boosting measures. Can’t find enough cashiers? Perhaps it is time to take a hard look at more self-checkouts, or an e-commerce, curbside-delivery approach that you first tried ad hoc in the flurry of the pandemic. Can’t find enough asparagus pickers? Could be you need to contemplate investing in robots.

Mr. Robson, however, is wary of moving too quickly or too far on the labour front. In an interview, he said it would be preferable to move on other policy fronts that would be less stick and more carrot – such as improving access to capital for small- and medium-sized companies. He worries, not without cause, that companies already feel that they are operating in a hostile business environment.

But disruption may be what’s needed to jolt Canada out of the low-productivity, low-wage rut of the last three decades. Keeping up the pressure of today’s labour shortage could be a start.

Taxing questions

Responding to a recent Tax and Spend on the myth of greed-flation among the big grocery chains, one online reader asked about the effect of increases in compensation for executives and managers. Might higher pay push down profit margins and hide the effect of outsized price increases?

Such increases could, in theory, take a bite out of bottom-line profits. But they would not have any impact on gross margins, arrived at by subtracting the cost of goods sold, COGS, from revenue. (And it was gross margins that my article analyzed.)

COGS does include some types of labour costs, but only such expenditures that can be directly attributed to the product. Executive salaries would clearly fall outside that categorization.

In any case, raises would need to be very large indeed to meaningfully subtract from net income. Loblaw Cos. Ltd., for instance, posted a second-quarter adjusted net earnings available to common shareholders of $566-million.

Line Item

Raising the bar: One of the last income supports from the early days of the pandemic is set to quietly expire next month, notes Brendon Bernard, senior economist at Indeed, job-listing site. In the early weeks of the pandemic-induced economic crisis, Ottawa slashed the number of hours needed to qualify for Employment Insurance, in part to put those qualifying for the program on a more equal footing with those receiving the Canada Emergency Response Benefit, and its successor, the Canada Recovery Benefit.

Just 420 hours of work were needed to qualify for EI, much lower than the number of hours that would have been required in most parts of the country under the program’s rules, which increase the threshold as unemployment declines in an area. Starting Sept. 24, the 420-hour rule ends, particularly significant given low unemployment rates throughout the country.

But Mr. Bernard wrote in a Twitter thread that the rule could explain why the number of EI recipients “remains a bit higher than would be suggested by the employment data.” In June, he wrote, the number of regular EI recipients was 9 per cent higher than the pre-pandemic month of February, 2020. But the number of unemployed was down 13 per cent.

Follow me on Twitter, @PatrickBrethour or ask your Taxing Question here.

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