The Bank of Canada warned March 26 that weak productivity and low business investment have become an emergency situation that makes it harder to control inflation and that could erode living standards if left unaddressed.
This productivity trend is not new, but the situation has gotten worse over the past decade, especially after COVID-19 took hold.
“Too often, new Canadians are working in jobs that don’t take advantage of the skills they already possess. And too often these people wind up stuck in low-wage, low-productivity jobs,” Bank of Canada senior deputy governor Carolyn Rogers said in a speech.
Higher productivity raises company profits and lets them pay better wages without passing cost increases along to customers. But if productivity lags, the central bank and economists say, rising labour costs tend to lead to higher prices.
The senior deputy governor’s warning came ahead of the Bank of Canada’s next interest rate announcement on April 10.
Why is everyone talking about productivity lately? A look at what it means, and how we got here.
What is labour productivity and how is it measured?
Statistics Canada describes productivity as a measure of the efficiency with which an economy transforms inputs into outputs. In other words, how much work can a worker get done. In wonkish terms, that involves taking Canada’s real gross domestic product – the inflation-adjusted value of all goods and services the economy produces in a year – and dividing it by the number of hours worked.
That measure can then be used to compare productivity in this country against itself historically, and to see how Canada fares against other countries.
Higher labour productivity is closely associated with improving living standards because it allows wages to rise without increasing inflation.
What causes low labour productivity?
Canada’s labour productivity has been low compared to similar developed countries for decades. Key factors leading to low productivity are low investment in research and development, training and innovation; how Canada’s economy is structured; and more.
Reporting on analysis by the Bank of Nova Scotia, The Globe and Mail’s Jason Kirby writes that the sudden explosion in population, which grew by 1.25 million last year alone, is a contributing factor. The surge of temporary workers has helped keep a lid on what would have been even higher wage increases, giving businesses less of a reason to invest in productivity-boosting measures.
In contrast, columnist Andrew Coyne writes that “the problem is not that we have too much labour, but too little capital – machinery and equipment – for labour to work with.” He identifies the problem with Canada’s economy as one of capacity: “Not so much that growth is below potential as that potential growth itself is rather less than it might be. That’s not due to any deficiency of demand, but of the economy’s ability to supply goods and services to meet the demand.”
Fixing that, he says, “requires looking at the microeconomic foundations of the economy – the hard work of figuring out why or if a particular market isn’t functioning as it should – rather than macroeconomic lever-pulling.”
Several experts point to a lack of investment by Canadian companies in parts of their organizations that other countries prioritize.
Canadian companies on average “use less capital and technology, are less innovative, and operate at a smaller scale in an economy plagued by insularity,” and provide fewer training opportunities, noted Claude Lavoie, the former director-general of economic studies and policy analysis at the Department of Finance.
“Canada doesn’t do nearly as well as its peers in creating new trades and internship programs as this is where the talent to boost productivity would ideally come from,” said Barry Cross, an assistant professor of operations strategy at the Smith School of Business at Queen’s University.
A less-discussed contributor to low productivity is that Canadian companies spend less on marketing and sales than U.S. firms as a percentage of revenue. This, Prof. Cross says, prevents Canadian firms from growing from small to medium to large, a key ingredient in increasing productivity.
Where does Canada rank among other countries for productivity?
According to the latest data available from the Organization for Economic Co-operation and Development, Canada ranks ranks 29th among 38 OECD countries for labour productivity, despite being one of the best countries in the world to live in.
In the time a Canadian worker produces $1 worth of goods and services, a French worker produces $1.20 and an American $1.30 – a 30 per cent advantage, writes Claude Lavoie.
According to estimates from the New York City-based Conference Board, Globe columnist Tony Keller writes, workers in several Western European countries produce more goods and services – more GDP – for each hour of labour than U.S. workers. Canada’s output for each hour of work is just 79 per cent of the U.S. level. “The average European labours hundreds of hours less each year than the average Canadian. They produce more for each hour of work; we catch up by working longer hours,” Keller writes.
What can be done to improve labour productivity?
Statistics Canada says measures that raise labour productivity include increases in the number of machines and amount of equipment available to workers, employing a higher proportion of skilled workers, increases in plant scale, changes in organizational structure and improvements in technology.
Columnists and writers for The Globe have also pointed to other solutions:
- Encourage small businesses to adopt artificial intelligence
- Increase training opportunities
- Work harder, smarter or both
- Redirect some of the time spent on basic administrative tasks back into attracting customers and boosting revenue
- Restrict temporary foreign workers to buoy wages in Canada, thus increasing the pressure to boost productivity