The OECD projects Canada will be the worst performing economy among 38 advanced economies over both 2020-30 and 2030-60, with the lowest potential growth in real GDP per capita. BCBC has repeatedly sounded the alarm about the country’s humbling predicament: see Williams (December, 2021a), Williams and Finlayson (February, 2022), the Toronto Sun Editorial (April, 2022), Chart 28 on page 25 of the 2022 Federal Budget (April, 2022) and CKNW radio (July, 2022).
The principal reason Canada is expected to rank dead last for growth in income per capita is its serially weak growth in labour productivity (i.e., real GDP per hour worked). Productivity is not about working more hours – that’s in the denominator. It’s about working smarter – by applying more advanced capital equipment, facilities, technologies, skills and scale for each hour of labour employed in the production of goods and services. The workforce becomes more productive when high productivity businesses succeed and scale while low productivity businesses shrink and exit the marketplace, a process known as “creative destruction.”
Canada’s inability to improve the productivity of its workforce has long been the country’s economic Achilles’ Heel. Because of it, over the next 40 years, other countries are set to move ahead of us in raising living standards… while we hobble along in the slow lane.
For young Canadians entering the workforce today, the stagnation in average income per capita is expected to span most of their working lives (Williams 2021a).
How does B.C. compare with other provinces and countries?
British Columbia’s labour productivity growth for the total economy (including both the business and non-business sectors) compares well to other provinces (Figure 1). Over 2000-19, B.C. achieved the third highest productivity growth among the provinces – at 1.2% per annum on average. This was eclipsed only by Manitoba and Newfoundland and Labrador at 1.4% per annum for both.
B.C.’s productivity growth performance can be attributed to capital investments in large engineering construction projects, both private and public, since 2000 (see Williams 2022a and Williams 2022b).
At the other end of the spectrum, Ontario and Quebec, representing over 60% of Canada’s economy and population, achieved productivity growth of just 0.9% per annum on average over 2000-19.
B.C.’s performance has been remarkably consistent. Labour productivity growth averaged 1.2% per annum in both
the 2000-08 and 2008-19 business cycles. This is close to the average for the OECD and G7. In contrast, productivity growth for Canada as a whole lagged the OECD and G7 during the 2000-08 and 2008-19 business cycles. Again, Canada’s predicament largely reflects serially poor labour productivity growth in Ontario and Quebec.
Also, due to regulatory constraints on expanding oil and gas production and exports, including because of insufficient pipeline capacity, Alberta has not been able to deliver much growth in real GDP per hour. Nevertheless, Alberta has, by far, the highest level of labour productivity in Canada.
The challenge facing Canada
Labour productivity growth is critical to expanding the income pie that Canadians share. When properly measured, there is a strong empirical long-run relationship between labour productivity growth and real average hourly compensation for Canadian workers since 1961 (Williams 2021b). Canada’s external terms of trade (the ratio of export prices to import prices) are currently extraordinarily favourable. All else being equal, this will likely be a fillip for labour compensation growth. But over the longer term, trends in labour productivity will bear down on labour compensation like a gravitational force.
The OECD projects that Canada will have the 7th lowest growth rate in labour productivity among 38 advanced countries over 2020-30 (Figure 2). Over 2030-60, Canada is projected to be dead last in the OECD with the lowest growth in labour productivity (Figure 3).
B.C.’s labour productivity growth performance since 2000 compares reasonably well to other provinces and advanced countries. One of the reasons for our relative outperformance is strong capital investment in engineering construction projects, both private and public, over the past two decades (Williams 2022a and Williams 2022b). Capital investment has raised capital intensity (the amount of capital used in production per hour worked) and therefore labour productivity (output per hour worked). Several major projects – the Trans Mountain pipeline, Site C dam, Coastal Gas pipeline and Canada LNG projects, to name a few – will wind down in the next few years. What will take their place?
Clearly, the national economy is in rough shape in a structural sense. During the COVID-19 pandemic, Canada became the world’s 6th most indebted country (see Williams 2021c). As at 2022Q2, Canada is now the world's 4th most indebted country – with total economy-wide debt of 325% of GDP. Meanwhile, the OECD projects Canada will achieve the lowest growth in income per capita over the next 40 years, owing to serially low productivity growth (Williams 2021a). Canadian policymakers need to get started on the serious, unglamourous work of addressing the structural policies, impediments and frictions impairing our ability as a country to meaningfully improve labour productivity. Indeed, this should be the number one priority for the federal government and at or near the top of the list for the provinces, including British Columbia.