The subtitle to the hardcopy version of this article was: “Canada’s productivity gap is looking worse than ever”, or something similar.
Financial Post – May 29, 2012
A competitive interest
By Tim Shufelt
It’s not often economists will admit to bafflement, especially on a matter of utmost importance to national economic health.
As the predominant measure of standard of living, productivity of labour in Canada, has fallen notoriously short of standards set by the U.S. economy.
For years, economists prescribed the typical remedies: reduced tax and regulatory burdens, free trade, low and stable inflation, interest rates and government debt.
Canadian governments mostly listened, adopting a national policy agenda deemed conducive to improving productivity and competitiveness.
On the output side, the results have been “pathetic,” economist Don Drummond said in a recent journal article in which he condemned “everything I have ever done on productivity.”
He estimated that policymakers in Canada had implemented about 70% of the measures typically advocated by analysts.
The World Economic Forum has ranked Canada in the 92nd percentile among the economic and policy environments required for a highly competitive economy.
Yet output per hour worked in the business sector averaged just 0.7% annual growth over the past 10 years, opening up a competitive shortfall of 30% against the United States.
Even during the last recession, which typically affords plenty of incentive for the business sector to operate leaner, Canada’s labour productivity slipped for the first time in eight recessions spanning the past 30 years, according to Statistics Canada.
“It’s frustrating,” said Eric Lascelles, chief economist at RBC Global Asset Management. “Canada should be massively more productive than it was before and yet we still seem to be falling behind.”
While the economy has performed relatively well in spite of this competitive disadvantage, the economic implications of the productivity gap for Canadians are profound. They may also be unavoidable.
“In the long term, productivity is one of the most important factors in determining standard of living, interest rates, inflation, and a lot of other things,” said Benjamin Tal, deputy chief economist at CIBC World Markets.
Mathematically, GDP growth is the product of two forces – the application of more labour and/or productivity enhancements.
In the process of recovering from the financial crisis and ensuing recession, Canada returned to output growth through the expansion of its labour force.
The U.S. predicated its growth on improving productivity.
In 2011, Canada’s labour productivity improved by 1.4%, which isn’t exactly horrible, until set aside U.S. gains, which measured 3.8%.