How to remedy Canada’s paltry productivity levels
In her speech on Tuesday, Bank of Canada senior deputy governor Carolyn Rogers mentioned it is time to “break” the emergency glass regarding the structural decline in Canadian productivity.
Real output per hour worked (labour productivity) in Canada has declined in 12 of the past 14 quarters and is now back to where it was in the fourth quarter of 2019. What is more concerning is the productivity slump from pre-pandemic levels is not due to a handful of industries, but is quite widespread across goods-producing sectors — with the exception of agriculture, forestry and fishing.
For some perspective, on a per-hour basis, an average worker in Canada produces around 70 per cent of the output of a worker in the United States (down from 88 per cent in 1984). Although labour composition (workers’ skills) and a lack of competition in the market are behind Canada’s poor productivity performance, the major problem remains the incredibly weak capex investment (that is, capital intensity).
On a volume basis, Canada has had the same level of investment in machinery, equipment and intellectual property (which are key to productivity growth) for almost the past two decades.
Productivity is the key to a high-growth, low-inflation environment where living standards steadily rise. Without a productivity increase, the Canadian economy will not have structural and sustainable economic growth.
Canada’s suffering from low productivity has its remedies. One that Rogers proposes is for Canada to invest in industries that generate the most output per hour worked, such as mining, oil and gas, and utilities. Although these industries have the highest productivity levels, the growth here is not too great, with mining down 0.7 per cent from its level in the fourth quarter of 2019 and utilities down 7.4 per cent. The only productivity gain was in services (and agriculture), which consists of the least productive industries (such as accommodation, food services and retail trade).
Other remedies include increasing competition, improving workers’ skills, reducing excessive regulation, redressing long-standing interprovincial trade barriers, matching efficiency in the labour market and, of course, higher business investment.
An immigration policy that produces positive economic multiplier effects would also go a long way toward turning Canada’s dismal productivity record around. The country is clearly either not adequately integrating new immigrants into the workforce or is not attracting workers into value-adding industries.
A declining productivity path not only keeps the economy from non-inflationary stable growth, but also drives down the neutral rate (the equilibrium interest rate where inflation is stable and there is full employment).
As the Canadian economy’s slowdown continues, inflation keeps coming down and productivity declines, the Bank of Canada will have to cut rates harder and faster than it expects.