The 2022 Federal Budget (pages 25-26) acknowledges that Canada’s economy has longstanding structural problems – but the government appears unsure what to do about them. As shown in research published in 2021 by BCBC (Williams, 2021a), and in the Globe and Mail (Williams and Finlayson, 2022), the OECD projects that Canada will be the worst
performing economy out of 38 advanced countries over the next forty years (2020-2060), achieving the lowest growth in real GDP per capita – the most important measure of overall prosperity. The main reason for Canada’s inability to generate gains in per capita GDP is its persistent inability to achieve meaningful gains in labour productivity.
How has Canada’s labour productivity changed relative to peer countries since 2000?
Table 1 and Figure 1
show Canada’s labour productivity (real GDP per hour worked) as a percent of United States levels. It also shows the other G7 countries, the OECD and Euro area averages, and Australia and New Zealand, two small resource-based economies like Canada. The data are from the OECD.
In 2000, the Canadian workforce was 82% as productive as the U.S. workforce, measured in terms of real output (“value-added") per hour worked. By 2020, that percentage had dropped to 77% and was just above the OECD average. The good news is that Canada’s workforce is still generating more value-added per hour worked than Japan, New Zealand, and the OECD average. The bad news is that Canada’s workforce is less productive than the U.S., France, Germany, United Kingdom, the Euro area average, Australia, and Italy.
There was a pronounced decline in labour productivity relative to the U.S. between 2000 and 2020 in Japan and Italy, followed by Canada, New Zealand, and the United Kingdom (Table 1 and Figure 2). In contrast, Germany, France, the Euro area average, Australia, and the OECD average all generated faster productivity growth than the U.S. over the past 20 years, meaning that their relative levels of productivity improved.
Canadian firms are less productive, on average, than their counterparts in peer countries
The slowdown in Canadian labour productivity growth after 2000 matters because it led to slower real wage growth (Williams 2021b). What does firm-level data say about this? International research in studies such as Andrews et al. (2016) has found a widening gap or increased dispersion between the level of productivity at the world’s most productive companies (firms with the highest value-added per hour worked) and the productivity of other firms. One explanation is the rise of “winner takes most” competition in product or labour markets, where a few firms or people earn a disproportionate share of rewards based not on their absolute performance but rather their performance relative to other firms or workers. For example, having a 1% better product, service, or skills than the next best competitor might result in 90% of market revenues accruing to the leading firm or person. Common examples include technology platforms, sports stars, and financiers. Innovations and productivity gains appear to have generally become more concentrated among top firms (the best), and less likely to be shared with other firms (the rest) through product market competition and creative destruction (the natural process of firm entry and exit in product markets).
Gu (2019) used micro-data since 2000 to look at Canadian productivity at the firm level. He split the data into the top 10% most productive firms by industry and compared their level of productivity to the other 90% of firms. He then examined how the gap in productivity levels between Canada’s top firms and the rest had changed since 2000. Gu found that Canada’s post-2000 productivity growth slowdown was due to: (1) slower rates of innovation at Canada’s top firms; (2) a decline in the rate of innovation diffusion from Canada’s top firms to other firms; and (3) and a decline in resource reallocation among firms (i.e., slower creative destruction and business dynamism).
Overall, firm-level studies indicate that Canada’s most productive firms are not keeping up with globally leading firms, and other Canadian firms are falling even further behind. This story should be a three-alarm fire for policymakers in Ottawa and in every provincial capital.
The Canadian workforce is less productive than in peer countries because, on average, companies here use less capital and technology, are less innovative, and operate at a smaller scale. The difference is not about the number of working hours because that is accounted for in the productivity metric (i.e., output per hour worked). To put it another way, the average Canadian worker would need to work almost 30% more hours to generate the same output as American and French workers, 25% more hours to match the output of German workers, 15% more hours to keep up with British workers, and 6% more hours to match the output of Australian workers.
“Past is prologue,” as Shakespeare wrote in The Tempest. Demonstrably, Ottawa’s various ad hoc policy initiatives to spur productivity growth over the past 20 years have largely failed. Today, despite Canada having an extraordinary 39 Federal Cabinet ministers – which is to our knowledge the largest executive branch of government of any major country – none of them are accountable for improving labour productivity growth and real market incomes for the average Canadian. Something needs to change.
BCBC’s view is that Canada needs a dedicated, specialist and independent productivity-focussed institution. We believe Canada would benefit from an Australian-style Productivity Commission to review the structural impediments that systematically hold back Canadian firms from investing, scaling, and entering and exiting markets for goods and services. Operating at arm’s length from government, the agency would marshal expertise and research, conduct public inquiries, and make recommendations to Parliament about the interaction between public policy, labour productivity, and real incomes. BCBC’s recent column in the Globe and Mail lays out our proposal and rationale (Williams and Finlayson, 2021).
This could indicate slower innovation diffusion from global top firms to Canadian top firms as found in Andrews et al. (2016). It would also be consistent with Canada’s retreat from international trade over the past 20 years (Peacock and Finlayson, 2022).
Similarly, the average Canadian worker could reduce their working hours by 18% and 21% to produce the same output as Japanese and New Zealand workers, respectively.