Low productivity is making Canada poorer

In the upcoming election, the Liberals will argue that the economy has done well with 353,000 new jobs created since July 2018 ( although 26,000 have been lost in the past two months). The Conservatives will argue that many low- and middle- income Canadians have faced cost pressures including rising taxes such as carbon and payroll levies.

Less will be said about Canada’s age- old problem: our sub- par performance in growing household incomes. With more output produced by our workers using machines and other capital, businesses would be able to pay more income to households. It is a critical to our standard of living.

In 2018, Canadians produced US$ 50 in GD P per hour worked. By contrast, land- locked Switzerland, with its strong internationally competitive manufacturing and service companies, produced US$ 60 in GDP per working hour. The U. S. produced roughly US$ 65 in GDP per hour. And the fastest growing OECD country in the past three decades, Ireland, produced US$ 84 in GDP per hour.

Guess who pays higher wages? U. S. employers pay workers US$ 23 per hour, Switzerland US$ 33 (with 30 hour work weeks), Ireland US$26 and Canada, with the lowest productivity, a measly US$ 19 per hour. So labour productivity really matters to Canadian pocketbooks.

As reported in the Wall Street Journal this week, tech giants have come to Toronto to hire 230,000 workers. But they only pay US$74,000 for Canadian engineers and programmers who are very well- trained by our well- subsidized education system. In contrast, tech giants pay US$ 114,000 in Chicago and US$ 125,000 in Austin, Texas, for example.

As Jim Balsillie, former co- CEO of Blackberry notes,

Canada is benefiting little from the income earned from intellectual property created by our own talent and public investments in artificial intelligence and other new technologies. It is great we are getting jobs in the tech sector but must it be for a branch plant economy?

Our low wages are a cost advantage but that should not be the aim of public policy. It is far better to have robust labour productivity and a wage cost disadvantage instead. We do have some industries that have much higher levels of GDP per working hour compared to the industrial average. In 2012 constant dollars, oil and gas extraction produces $644 in GDP per working hour, mining $ 214, utilities $ 201, telecommunications $ 169, brewery manufacturing $120, and real estate $133. The lowest are in personal $ 18 and food $20 services.

Canada’s highest incomes come from capital- intensive industries where GDP per working hour is greatest. Surprisingly, incomes are disappointingly low from scientific research and development or computer design services (about $50 per hour).

So how can we make Canada richer? For various political reasons, our governments have made our economy less dynamic by impeding competition and directing resources to low- profit businesses. Competition creates incentives for innovation so long as intellectual property rights are properly protected. Here are some ideas to consider.

The first is to stop killing our high- wage resource sector with high- cost regulations. Our regulatory system, now made much worse by the federal government’s Bill C- 69, is costing billions in GDP. Instead, we should be looking for new approaches to regulation to balance with environment and social concerns such as Australia’s use of pre- approved corridors to enable faster reviews of pipelines, train, highways and other transportation networks.

The second is to remove protections, especially for low- productivity businesses that cannot otherwise continue. Keeping resources engaged in poor performing businesses ultimately hurts other sectors of the economy competing for resources as well as paying more taxes to make up for losers. A recent example is SNC- Lavalin, which, in its past quarterly report, cannot make enough money to cover its wages and other current costs, never mind capital depreciation and interest expense. Its shares are now trading, at time of writing, at slightly over $ 17, well below the $ 60 level they were at over a year ago. Trying to maintain jobs by protecting SNC- Lavalin, whether from criminal prosecution or competition, is not in the public interest. There are other more profitable engineering firms that can take up the slack.

The third is to open up competition through internal and external free trade. On the plus side, Canada has opened up trade agreements with a number of countries in Europe and Asia. However, trade tariffs are 1.6 per cent on imported goods. Numerous non- tariff barriers exist, limiting competition in telecommunications, banking, dairy, egg and poultry farming, just to name a few. We also have weak internal trade as provinces inhibit the free flow of goods, services and labour to protect their own industries.

Fourth, we should make sure our public services are provided effectively and efficiently. Education is especially important to economic growth — Canada has recently slipped in science and mathematics in OECD PISA tests although we still rank well internationally. On the other hand, Commonwealth Fund studies rank Canada’s health- care system as 10th out of 11 countries despite our being one the highest per capita spenders ( don’t tell Elizabeth Warren and Bernie Sanders!).

Lastly, our tax system needs reform in several ways. We over rely on the most inefficient tax sources — income taxes — rather than consumption taxes. Many of our taxes are flawed with politically driven exemptions. Even the GST is riddled with special treatments, resulting in a mediocre consumption tax. Our carbon policies are a mishmash with differential explicit or implicit regulatory prices on oil, natural gas and coal products, impeding the private sector from finding the most effective and lowest- cost technologies. Our corporate tax should also be reviewed — Swiss and Irish growth rates have in part resulted from much more competitive corporate tax rates.

In other words, we need a productivity agenda to boost income for average Canadians. Other countries do it with far more spectacular results. I am sure we can, too.