Slipping behind

Canadian real GDP per person – a key measure of living standards for the average citizen – has been slipping compared to peer nations over time:

• In 1981, Canadian real GDP per person was 94% of U.S. levels. At the time, this gave Canada the 5^th highest GDP per person among OECD nations.
• By 2000, real GDP per person was 81% of U.S. levels and Canada stood 10^th in the OECD on this measure of prosperity.
• By 2017, Canada had fallen to 78% of U.S. levels and was 14^th in the OECD.

It is interesting to compare Canada’s performance with that of Australia, another resource-based economy with a highly-educated workforce and similar institutions. Canada’s GDP is larger than Australia’s. However, this mainly reflects Canada’s bigger population. On a per person basis, which is what matters for gauging prosperity and living standards, Canada’s GDP is now lower than Australia’s. Australia’s GDP per person was 87% of U.S. levels in 2017, well above Canada’s (Figure 1). Australia’s outperformance is mainly due to its stronger productivity growth over recent decades.

Figure 1

Canadian living standards are falling behind Australia
(another resource-based economy)

Real GDP per person, as a percent of U.S.

Source: OECD.stat.

At 14^th place among OECD nations in 2017, Canadian real GDP per person sits just ahead of the U.K., France, Japan and Italy (Figure 2).

Figure 2

Canada ranked 14th among OECD nations in 2017

Real GDP per person, as a percent of U.S., 2017

Source: OECD.stat.

How to raise GDP per person

There are only two ways to raise GDP per person. We can increase:

1. Labour productivity – by finding ways to produce more output per hour of work; or
2. Labour utilization – by finding ways to work more hours per head of population.

In other words, the choice is between “working better” and “working more”:

Canada has been good at “working more”
… but not at “working better”

The decline in Canada’s GDP per person relative to the U.S. and some other peer nations is mainly due to its slippage in relative labour productivity levels. Figure 3 shows that Canada’s labour productivity (output per hour worked) has deteriorated from a little over 90% of U.S. levels in the early 1980s to around 75% in 2017.

The erosion of Canada’s relative productivity performance is partly offset by Canada’s higher rates of labour utilization compared to the U.S. and some other countries.[1] In other words, Canada has increasingly relied on finding ways to “work more” instead of “working better” to keep pace with the living standards of peer nations such as the U.S.

Figure 3

Canada is good at finding ways to "work more" not "work better"

Components of GDP per person, Canada as a percent of U.S.

Source: Nicholson 2018.

Time for action

Raising living standards – a key measure of which is GDP per person – should be the overarching goal of Canadian public policy. Lifting GDP per person is best achieved through higher labour productivity (output per hour worked). This requires higher skills per worker, more capital equipment per worker, more innovation, scaling up businesses and reorganizing labour and capital to ensure best use.

Canada’s current high standard of living is a testament to the productivity growth achieved by past generations and, more recently, to high rates of labour utilization. However, Canada has been slipping down the ranks of peer nations on living standards over time. It’s time for Canadian public policy to strive for productivity-driven GDP growth that will raise GDP per person.

To read more on this topic see: Productivity and Living Standards in Canada and British Columbia.

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[1] Relative to the U.S., Canada has higher rates of unemployment and lower working hours per worker, but higher rates of labour force participation among prime-age workers (25-54 years). Canada therefore ends up with more working hours per head of population compared to the U.S.