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.
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.
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%.
There are merits to the Canadian approach of building economic strength through numbers. The jobs lost to the recession were recovered relatively quickly, an accomplishment that still eludes the U.S. economy.
But demographic pressures strain Canadian labour forecasts more so than in the U.S.
An aging population translates to fewer workers as a share of the total population, which will constrain fiscal flexibility and the capacity to grow.
Drummond estimates the Canadian labour force will be growing at about 0.3% per year by the end of this decade.
If the pace of Canadian productivity growth remains as it is, the economy will experience about 1% real growth. Factor in inflation and nominal growth would sit at about 3%, Drummond said. “That will not permit much increase in wages or corporate income.”
Canada’s stubborn lack of competitiveness resonates through the entire economy, impairing growth forecasts and limiting wages, meaning less disposable income, less consumer spending, fewer tax receipts, less government spending and higher deficits.
As a proportion of the national economy, the productivity gap in the business sector against the Americans means Canadians forfeit about $300-billion in lost output each year.
Had Canada matched the productivity record of the United States over the past 25 years, personal disposable incomes would be $7,500 higher, a recent Conference Board study found. Corporate profits and government revenue would have been 40% and 31% higher, respectively.
For many years, mitigating forces have served to mask Canada’s productivity shortcomings.
The low value of the Canadian dollar did so throughout the 1990s, keeping Canadian manufacturing artificially competitive through the advantage of relatively low prices.
High commodity prices in the following decade supported Canadian growth in spite of competitive disadvantages.
When the dollar appreciated, it provided the incentive to enhance productivity and narrow the gap against the U.S. An inflated dollar makes imports cheaper, allowing for an increase in machinery and equipment imports and productivity-enhancing capital investments.
The current account deficit in machinery and equipment shows Canadian businesses taking advantage of the currency shift, having quadrupled over the past 10 years.
That, too, has failed to reduce the productivity gap.
Economists are no nearer a consensus on the cause of the problem. Theories abound.
There is probably a cyclical element to Canadian productivity shortfall resulting from close trade links to a weak U.S. economy.
Factor out some of the more transient factors and Canadian labour underperformance may not be as pronounced as it seems.
The spike in commodity prices may also play a role.
That tradeoff may simply be inherent in an economy with strength in resources. High commodity prices, which have pushed up the value of the Canadian dollar, may also provoke a deterioration in competitiveness, experts say.
Part of the explanation may be that resource industries tend to engage in less productive activities when commodity prices are high.
Other resource-based economies have certainly experienced the same phenomenon, they said.
Should global commodity markets weaken significantly, the Canadian dollar would probably fall, thereby improving the competitiveness of Canadian manufacturing.
Either way, prices have helped to ensure Canadian economic health.
But given demographic trends, Canada can’t just rely on shifting fortunes to level out growth prospects, some experts argued.
