Pay and productivity in Canada: Growing together, only slower than ever
Productivity and Pay in Canada: Growing Together, Only Slower than Ever, authored by Dr. David Williams, BCBC's Vice President of Policy, is the lead article in the Spring 2021 edition of the International Productivity Monitor, a peer-reviewed journal published by Canada's Centre for the Study of Living Standards and the Productivity Institute of the United Kingdom. The article examines the relationship between growth in real output per hour worked (labour productivity) and real total labour compensation per hour worked (pay) over six business cycles, from 1961 to 2019. Compensation includes both money and benefits paid by employers, as well as the labour income of self-employed workers, across all industries.
The study shows that the slowdown in Canadians’ real pay growth since 2000 is commensurate with the slowdown in productivity growth. Had Canada’s productivity growth rate after 2000 matched the OECD’s, the average worker’s pay would be $2,900 higher in 2019. Had Canada’s productivity growth after 2000 matched its own performance before 2000, average pay would be around $13,550 per annum higher in 2019.
The good news is that there is ample scope for “catch up”. Canada can raise productivity – and therefore real pay and living standards – through faster adoption of best practices and technologies already deployed by leading countries and firms. Curing the productivity-related maladies that have long weighed on Canada’s economic performance will require governments to review structural policy settings that encourage or discourage product market competition and innovation diffusion, business dynamism and creative destruction, resource reallocation, and private sector investment in capital, skills and scale.
Key take-aways from the study:
Productivity growth matters. Low productivity growth has led to low real average pay growth in Canada over the long run (1961-2019) and over the last business cycle (2008-19).
Some commentators claim that people do not need to care about productivity growth because it has “decoupled” from real pay growth. That is not correct. Carefully measured, pay and productivity are growing together, only slower than ever.
Canada has long suffered from low productivity growth but it was even slower after 2000.
Although productivity growth slowed in many advanced countries after 2000, Canada ranks near back of the pack in its productivity growth performance before and after 2000. This indicates our productivity growth problem is entrenched.
International studies show that the adoption of best-practices and technologies among firms globally is generally slow – and getter slower – and due to regulatory impediments to competition and resource reallocation. For Canada, since 2000, in terms of output generated per hour worked, the typical firm has fallen further behind Canada’s leading firms, and Canada’s leading firms have fallen further behind global leading firms.
Low productivity growth not only holds back people’s real pay growth, but also our fiscal capacity to afford improvements to the social safety net.
The good news is that Canada has ample scope to raise productivity growth by becoming better at adopting leading technologies and practices already deployed by global leading firms and countries. This productivity “catch up” will require a hard-headed assessment of the incentives and disincentives facing competition in product markets, capital investment, adoption of leading technologies and practices, skills, and economics of scale.
The best way to conduct those assessments in a systematic and ongoing way is to set up an Australian-style Productivity Commission. This proven institutional model would be better than Canada’s historically haphazard approach to policy issues that affect productivity growth. The potential benefits of such an institution would easily outweigh its costs.
About the International Productivity Monitor
International Productivity Monitor is a peer-reviewed journal published by the Canadian Centre for the Study of Living Standards and the Productivity Institute of the United Kingdom. Its objective is to focus attention on the importance of productivity for improving living standards and quality of life. The journal ranks in the top fifth of all economic journals on RePEc with an impact factor of 2.718, and is in the top 10% of all economic journals by file downloads.
The journal publishes high-quality articles on productivity issues, trends and developments in Canada and other countries and serves as a vehicle for the international discussion of productivity topics. The articles are largely non-technical in nature and understandable to a wide audience of productivity researchers and analysts as well as the general public. The publication is accessible online and free to download.