Yes, weak productivity is a national crisis
Aconsensus is emerging that Canada’s chronically slow economic growth and weak productivity constitute a national crisis. Bank of Canada senior deputy governor Carolyn Rogers last week called lagging productivity “an emergency,” saying “it’s time to break the glass.” With real GDP growth in the past decade the weakest since the 1930s and real per capita GDP languishing at 2014 levels, it’s hard to avoid that conclusion.
Concern about Canada’s flagging growth is not new. The standing Senate committee on banking, trade and commerce warned in 2018 that Canada was “falling behind” as the United States climbed from seventh most competitive economy in the world to second in just five years, while Canada remained mired in 14th place. In 2021, former cabinet ministers Lisa Raitt (a Conservative) and Anne Mclellan (a Liberal) formed the bipartisan Coalition for a Better Future to support the need for stronger economic growth. Without action to reverse the current trend, the OECD secretariat predicts Canada’s growth over the next quarter century will be the slowest among its member countries.
While a consensus is forming that Canada’s lack of economic growth represents a crisis, the diagnosis of its causes often is off-base. Economists know growth is determined by three variables: the supply of labour, the stock of capital, and the efficiency with which labour and capital are combined and deployed — which they call, not very descriptively, “total” or “multi-factor productivity.”
The Trudeau government has focused on raising the supply of labour by boosting immigration and introducing a national child-care program. More immigration increases the population and labour force, hence the Dominic Barton-led Advisory Council on Economic Growth’s proposal to raise Canada’s target intake by 50 per cent to 450,000, which we did each of the past two years. National child care was introduced in the 2021 budget with the explicit goal of raising the labour force participation rate of young mothers.
But focusing exclusively on labour inputs has not lifted per capita GDP and might even have contributed to its recent decline. As I documented in a recent study for the Fraser Institute, the labour force participation rate of women has not increased despite the introduction of national child care. Worse, as Bill Robson of the C.D. Howe Institute has observed, the surge of population growth has not been accompanied by more capital investment. As a result, investment per worker in Canada has fallen a precipitous 26 per cent since 2015, inevitably lowering productivity.
Canada’s recent experience shows GDP per capita cannot increase without more investments. Chronic weak investment was what Rogers diagnosed as the heart of Canada’s poor productivity performance. Business investment has fallen 21.4 per cent since 2014, and Statistics Canada’s annual survey of investment intentions sees little change in 2024. Meanwhile, total factor productivity was stagnant between 2015 and 2021, remaining three per cent below its peak in 2005.
The recent performance of the U.S. economy demonstrates that higher investment
and productivity are achievable goals — or are, that is, in a society that rewards risk-taking and encourages disruptive innovations. Business investment in the U.S. has surged 33 per cent since 2014. Meanwhile, optimism about the potential productivity benefits of artificial intelligence technology has sent the U.S. stock market soaring. Investors are increasingly confident that sprinkling the economy with the “fairy dust” of higher productivity (to borrow a phrase from Bloomberg’s Jonathan Ferro) can simultaneously boost economic growth and slow inflation.
Lagging growth in Canada really is a national crisis. As incomes here fall further behind those in the U.S., the temptation rises for our most productive and ambitious people to emigrate.
Michael Bliss, Canada’s leading historian of business, concluded his book Northern Enterprise by warning “the one sure prescription for the eventual failure of the Canadian experiment in nationality would be to create an ever-widening gap in standards of living between the two North American democracies.”
Achieving sustained economic growth will require more business investment. Without it, expanding the supply of labour will only put more downward pressure on per capita incomes in Canada.