Low and falling levels of capital investment per worker, along with comparatively low levels of innovation and business scaling, help explain Canada’s poor productivity growth performance.

Report highlights:

• The OECD projects that Canada will be the worst performing economy out of 38 advanced countries over 2020-30 and 2030-60, with the lowest growth in real GDP per capita. The principal reason is Canada’s serial inability to generate meaningful gains in labour productivity (real output per hour worked) and real market incomes. Low and declining investment per available worker is an important contributor to this.

• Alberta businesses consistently invest significantly more per available worker than firms elsewhere in Canada. Canadian investment per available worker is low and falling compared to other countries – but it would be even lower if not for Alberta.

• British Columbia's total investment (residential and non-residential) per available worker is slightly higher than the “Rest of Canada” (i.e., Canada excluding B.C. and Alberta). This reflects relatively high investment per available worker in residential structures and non-residential structures (the latter reflects several major capital projects), partly offset by relatively low investment in machinery and equipment (M&E) and intellectual property products (IPP).

• In 2020, B.C.’s real investment per available worker by asset type was $9,700 in residential structures, $8,200 in non-residential structures ($4,500 excluding major capital projects), $2,700 in M&E, and $1,500 in IPP. All figures are measured in 2012 constant prices.

• B.C. firms have a modest advantage over the Rest of Canada (but not Alberta) in non-residential investment per available worker. This is because there are currently several major capital projects underway that are lifting structures investment.

• B.C. firms' investment per available worker in M&E and IPP, respectively, have been declining since about 2007. Investments per available worker in both asset types are consistently lower than the Rest of Canada.

• B.C. has an unusually large share of its economy focused on constructing, renovating, and trading residential structures compared to other regions (and other countries). On average over 1981-2020, British Columbians invested around $1,400 more per available worker ($900 more per capita) in residential structures than the Rest of Canada. Since 1987, B.C. has consistently invested more in residential structures than any other asset type.

• Possible reasons for Canada and B.C.’s serially poor business non-residential investment performance compared to other countries include: antiquated federal and provincial tax systems; inefficient regulatory approval processes at all levels of government; punitive corporate income tax rates on businesses that grow net income beyond $0.5 million; lack of relief for energy-intensive, trade-exposed industries in B.C.’s carbon tax regime, unlike the backstop federal carbon tax regime; B.C.’s inefficient provincial sales tax (PST) regime; high internal barriers to trade across provinces; and Canada and B.C.’s retreat from international trade since 2000.

• Canadian and B.C. policymakers are unwittingly pursuing labour-intensive economic growth strategies during the digital fourth industrial revolution. As other countries shift their economies toward higher value-added, capital- and technology-intensive activities suited to the digital age, the data indicates Canada is instead gravitating toward lower value-added, labour-intensive activities. This will likely perpetuate serially low growth in labour productivity and real market incomes, consistent with the OECD’s projections for real GDP per capita in Canada and, by extension, B.C.

Key takeaways:

The OECD projects that Canada will be the worst performing economy out of 38 advanced countries over 2020-30 and 2030-60, with the lowest growth in real GDP per capita. The main reason is Canada’s persistently low growth in labour productivity. Low and falling rates of real capital investment per available worker are a key contributor to this.B.C. firms have gradually reduced their investments per available worker in machinery and equipment and intellectual property products since around 2007. Non-residential structures investment has been rising and is slightly above the Rest of Canada (i.e., Canada excluding B.C. and Alberta) but could slip by the mid-2020s as major capital projects in the province wind down. B.C. consistently invests significantly more than any other region in Canada in constructing, renovating and trading residential structures. This holds true regardless of whether residential structures investment is measured per available worker, per capita, or as a percent of GDP.Canada and B.C.’s economic growth model relies heavily on credit-dependent industries and record high levels of immigration to drive topline GDP economic growth and demand for new housing. In our view, policymakers are paying scant attention to expanding the economy’s long-term productive capacity by fostering higher business non-residential investment per worker and increasing exports as a share of GDP (Williams and Finlayson, 2022). Demonstrably, current policies are yielding scant growth in real GDP per capita and real market incomes. Canada’s total capital investment per available worker is declining, except with respect to residential structures. Exports as a share of GDP have fallen in Canada and B.C. over the past two decades while they have risen as a share of GDP in most other advanced countries (Peacock and Finlayson, 2022).Canada and B.C. appear to be pursuing unusually labour-intensive economic growth strategies during the digital fourth industrial revolution. As other countries shift their economies toward high value-added, capital- and technology-intensive activities, ours appears to be transitioning toward lower value-added, labour-intensive activities. This will likely perpetuate serially slow growth in real market incomes for Canadians and British Columbians.