We often hear that “our economy is growing” or “economic growth is strong.” Yet many hard‑working Canadians feel that their standard of living is going sideways. Their intuition is correct. Growth in Canadian gross domestic product (GDP) per person – a key measure of living standards – has been nearly stagnant for more than a decade.
In a recent Business Council of British Columbia report, Jock Finlayson and I argue that the paramount focus of public policy in Canada and B.C. needs to be on raising GDP per person, not just GDP. To do this, we need to foster productivity-driven economic growth. More on that in a moment.
Higher GDP per person implies a higher level of material well-being for citizens, on average. People can afford higher quality food, more health and education services, better housing and so on.
GDP per person is a far more important metric of living standards than GDP. Imagine there are two countries, A and B. Country A has a GDP of $100 and a population of 5. Country B has a GDP of $200 and a population of 20. GDP per person for country A and B is $20 and $10, respectively. Country B has twice the GDP of A, but half the GDP per person. Clearly, the average citizen of country A is better off. That’s how Canadians, on average, can have a better standard of living than citizens of, say, Brazil and India, even though those countries have larger economies.
Prior to 2000, Canadian real GDP per person was doubling in roughly 30 years (i.e. one generation). The average child grew up to earn double their parent’s real income. But at recent growth rates in GDP per person, it will now take as long as four to five generations to make the same gains. Today’s parents can therefore only expect their great-great or great-great-great grandchildren to earn twice their real income today. That’s a significant deceleration. It helps explain why many Canadians feel they are working hard but seeing scant improvement in their standard of living over time.
There are only two ways to raise GDP per person: (1) by raising labour productivity (i.e. finding ways to produce more output per hour of work); and by raising labour intensity (i.e. finding ways to work more hours per head of population). In other words, the choice is between “working better” and “working more.”
A recent Institute for Research on Public Policy report by Peter Nicholson highlights that, since 1870, Canada has kept GDP per person at roughly 80% of U.S. levels. To sustain this ratio in recent decades, Canada has increasingly relied on working more hours per head of population to offset faltering productivity growth. In other words, Canada has relied on “working more” rather than “working better.” However, with Canada’s prime-age labour force participation already very high, we have largely exhausted this strategy as a means of raising future living standards.
The other driver of gains in GDP per person – productivity growth – has much more room for improvement. Productivity is the efficiency by which the economy transforms inputs (capital and labour) into outputs. Raising productivity – output per hour worked – is about finding ways to “work better.” For example, by upskilling, innovating, deploying more capital, scaling up firms, or reorganizing companies and industries to best use, Canadian workers can produce more goods and services than we did the previous year with the same work effort.
Unfortunately, these days Canadian productivity is improving at a glacial pace compared to past generations. Slowing labour productivity growth since the 1970s has opened a sizable gap in productivity levels relative to other advanced countries. Canadian workers now produce 26% less GDP per hour than American workers, and 22-23% less than workers in Germany and France.
The key policy reforms we recommend to raise productivity are: (1) overhaul business taxation to incentivize firms to scale up; (2) modernize our byzantine regulatory regimes so as to attract rather than repel business investment, to incentivize innovation and reward good business performance; (3) promote intense competition in product markets; (4) make Canada and B.C. preferred locations for global talent; and (5) stimulate innovation and commercialization and the scaling-up of home-grown technologies. The reforms would encourage Canadian firms and workers to work smarter, not harder.
The next time someone talks about growing our economy, ask them whether that growth is productivity-driven. If it’s not, average Canadian living standards are probably going nowhere fast.
Dr. David Williams is Vice President of Policy at the Business Council of British Columbia
As published by The Province.