Earlier this month, I used this space to pose a question: Can Canada's woeful productivity rate against that of the United States be explained by their relatively stronger collection of manufacturing companies?
The basis of my query was a simple observation: The biggest companies by market capitalization in Canada mostly are banks and the biggest companies in the U.S. mostly are manufacturing companies. Factories tend to be more productive than financial services firms.
Urban Futures was intrigued enough to dig a little deeper. The Vancouver-based research firm decided to go beyond market capitalization and compare the output per worker across all industries in each country. The firm's conclusions are interesting.
The guys at Urban Futures – Andrew Ramlo, David Baxter, Ryan Berlin – found that employees are dispersed across industries in Canada about the same as they are in the U.S. For example, government accounts for 17 per cent of all jobs in both the U.S. and Canada. The same 10 industries are the largest employers in each country, although the ranking is slightly different. The majority of workers – 70 per cent in Canada and 77 per cent in the U.S. – work in these industries.
In other words, the Canadian and U.S. economies are rather similar, undermining the hypothesis that some of the American productivity advantage might be explained by a stronger representation of highly efficient industries.
So we're back where we started: Why is Canada's productivity rate so terrible? The Urban Futures report shows that the labour productivity rate in government is 65 per cent below the average in Canada, and only 29 per cent below the average in the U.S.; labour productivity in professional, scientific and technical services was 21 per cent below the average in Canada, while it was 30 per cent above the average in the United States.
"Research on this topic is abundant; however, definitive and specific answers are not," the report says.
The Urban Futures study cites work by Statistics Canada that suggests the productivity gap has little to do with skills or capital intensity, but rather weaker growth in multifactor productivity – output relative to all inputs. For example, this analysis suggests the decline in Canadian manufacturing productivity could be explained by the rise in the value of the Canadian dollar.
This analysis is important because policy makers need to know where to concentrate their efforts. As the population ages and people retire from the work force at a faster rate than they are replaced, the only way to generate more economic growth is through productivity gains.
"The next chapter of research into Canada's labour productivity performance should delve further into issues relating to multifactor productivity, measuring more precisely the role played by technological change, market scale, barriers to trade and market entry, and intermediate inputs such as energy, materials, land, and purchased services."