Skip to main content

Canada is about to pay the price for its failure to address a productivity rate that is universally described as woeful.

The recession has left the economy smaller. Factories have idled assembly lines, or have closed completely, because of a lack of demand. The same is true for stores and restaurants that have shut.

So even though the economy is expanding again, it is producing less, over all, than it was before the financial crisis. Ultimately, that means fewer jobs.

The only way to generate more wealth under those conditions is to squeeze out more production for each hour worked.

This is the reality facing most of the world's advanced economies. The problem for Canada is that its productivity rate is the second-weakest in the Group of Seven, ahead of Italy and behind the United States, Japan, Germany, Britain and France.

A new study by the Conference Board of Canada concludes that the country must improve its productivity rate if it's to generate economic growth in the years ahead, reinforcing the Bank of Canada's latest observations on the economy.

"We have a productivity performance that has been relatively disappointing in recent years," Bank of Canada Governor Mark Carney told reporters last week. "Until we see evidence of an uptick in productivity, at least at this stage, looking for growth, real growth much north of 2 per cent is not yet a realistic prospect."

Mr. Carney was referring to what policy makers call the "potential growth rate," which essentially is the speed at which they believe the economy can expand without stoking inflation.

Canada's potential growth rate is 1.5 per cent this year, about half as fast as what the central bank thought the economy could handle before the financial crisis. Canada's economy grew at an average annual rate of 3.3 per cent over the decade to 2007, according to the International Monetary Fund.

Productivity has been left to decline for years despite a loud chorus of academic economists warning about the inevitable consequences of being a slow runner in an increasingly global economy. There are also demographic issues. As the baby boom generation retires, the labour pool will shrink, constraining economic growth by limiting the number of people available to fill jobs and become full-salaried consumers.

"Since 1984, labour productivity growth in Canada has fallen to less than half the growth experienced over the previous 20 years," the Conference Board notes in its report, which is to be released today. "Improving productivity growth will become an even more important component of economic growth in the future, as Canada's labour force growth is expected to slow down."

The Conference Board's latest research on productivity advances the discussion by erasing a variable from the debate about why Canada has lagged other nations.

Economic theory holds that a well-educated work force should lead to investment in physical capital such as state-of-the-art computers and assembly lines. While Canada boasts a fair share of university graduates, the country's investment in physical capital has nonetheless lagged.

"This study asked whether Canada's average educational attainment acted as a constraint to the accumulation of physical capital," the 47-page study says. "The answer is no."

So what's the problem? The Conference Board says there are many, but boils it down to five constraints on investment: governments' decisions to tax capital instead of consumption; a weak dollar in the 1990s and earlier this decade; a lack of venture capital; inadequate spending on infrastructure; and burdensome regulations.

Within that list are reasons to expect Canada's productivity rate is set to improve.

The University of Calgary's Jack Mintz, who has advised the federal and Ontario governments on tax policy, said policy makers have been taking productivity more seriously in recent years. For example, the federal government and some provinces have reduced levies on capital, or have sought to raise revenue by targeting consumption.

Canada's dollar has been trading above 90 cents against its U.S. counterpart for much of the past year, lowering the cost of technology and other productivity-enhancing gear produced overseas. Also, much of the fiscal stimulus spending was targeted at building roads, schools and other infrastructure.

Still, surviving the recession has sapped some of the momentum.

"There is an eye on productivity in terms of the longer run," Mr. Mintz said. "We are going to come back to it. But right now, there is a concern about jobs."

****

Grading performance

Labour productivity growth, 2008, in per cent

U.S. / 1.47%

Netherlands / 0.45

U.K. / 0.07

Austria / -0.05

Australia / -0.09

Japan / -0.21

Germany / -0.24

Switzerland / -0.24

Belgium / -0.42

France / -0.83

Finland / -0.87

Canada / -0.9

Norway / -1.14

Ireland / -1.21

Sweden / -1.67

Italy / -1.81

Denmark / -2.21

THE GLOBE AND MAIL

SOURCE: THE CONFERENCE BOARD OF CANADA

Interact with The Globe