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Lagging productivity hits Canadians in the wallet

Canada's productivity growth has lagged the U.S. by almost a full percentage point per year over the past 25 years, previous Conference Board papers have shown.

Kevin Van Paassen/Kevin Van Paassen/The Globe and Mail

Imagine, for a moment, that your personal disposable income was $7,500 higher than it is today.

It's a sweet thought, and a sizable chunk of change, something that could help pay for a renovation, a trip or whittle down debt.

It's also the equivalent of what each Canadian would have gained if the country's productivity growth had kept pace with the United States over the past two decades, a paper to be released Wednesday shows.

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The Conference Board of Canada has run a model simulation to figure out how much richer Canada would be had the country's labour productivity growth kept up with the U.S. in the past 20 years.

The results are startling. If productivity growth been stronger, real per capita GDP would have been $8,500 higher in 2008 and personal disposable income $7,500 higher. Corporate profits would have been a whopping 40 per cent higher, and federal government revenue would have been 31 per cent higher.

"The results are striking," the analysis notes. "They show -- to policy makers and Canadians in general -- just how vital it is for Canada to improve its productivity performance."

Productivity studies can often come across as dry, abstract things. As the paper notes in its opening lines, the topic can be "esoteric."

But there are vital reasons why it attracts so much attention from policy makers, central bankers and academics alike. Productivity is key to raising living standards and boosting the competitiveness of firms.

And -- any way you slice it -- Canada's productivity performance in recent years has been lousy.

Canada's productivity growth has lagged the U.S. by almost a full percentage point per year over the past 25 years, previous Conference Board papers have shown.

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With that lag -- Canada's productivity level is now just 80 per cent of the U.S. level, down from 90 per cent in the mid-1980s -- comes a real difference in earnings.

In fact, the income gap, in purchasing power parity terms, between Canadian workers and their American counterparts was almost $13,000 in 2008. The Canadian workforce tends to be well-educated and prior studies have found a lack of physical tools is one key factor hampering their productivity.

The simulation exercise released Wednesday underscores "how much richer Canadians would be, how much more profitable corporations would be, and how much more revenue the federal government would have at its disposal if Canada's labour productivity growth had kept pace" with the U.S., it said.

The results reinforce the need to keep looking at the root causes of Canada's productivity problems in order to find solutions.

Here are some details of the findings from the simulation, which explores how Canada would have looked in 2008 if it had raised productivity at the same pace as Americans, chiefly through innovation and capital intensity improvements:

  • total investments by businesses and government would have been $51-billion higher.

  • wages would have been higher. Thus, consumer spending would have also risen – it would have been 25.5 per cent higher in the alternative scenario.

  • additional revenues in the government's coffers would have let net government spending on goods and services be 24.9 per cent higher.

  • real GDP would have been $282-billion or 21.3 per cent higher in 2008 if labour productivity growth had been stronger and comparable to the U.S.

  • personal disposable income per capita would have been 26.1 per cent higher, or $7,500 per person -- enough to cut in half the current gap in incomes between the U.S. and Canada, the report said.

  • output on the goods-producing side of the economy would have been 20.4 per cent higher while it would have jumped almost 24 per cent on the services side. Universities would have been the biggest beneficiaries.

  • total federal government revenue would have been 31.1 per cent higher.

If Canada continues to have sluggish productivity growth, it will slide further behind the U.S., "threatening our prosperity in an increasingly competitive world," the paper concludes.

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"Conversely, if Canada eschews complacency and takes the necessary steps to boost its labour productivity growth, the results of our simulation clearly show that all Canadians will be collectively wealthier."

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About the Author

Tavia Grant has worked at The Globe and Mail since early 2005, covering topics from employment and currency markets to trade, microfinance and Latin American economies. She previously worked for Bloomberg News in Toronto and Zurich, writing on mining, stocks, currencies and secret Swiss bank accounts. More

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