A populist narrative making the rounds is that policy makers can ignore productivity growth because the link between average pay and productivity has broken down. According to this view, workers are receiving a shrinking share of the economic pie, while overall income inequality is rising. However, a careful look at the data for Canada shows these assertions are incorrect.
A new study by one of us (David Williams) finds 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 average for the countries that belong to the Organization for Economic Co-operation and Development (OECD), the average worker’s pay would be $2,900 higher in 2019. Had Canada’s post-2000 productivity growth rate matched its own performance between 1961 and 2000, average pay would be $13,550 higher.
Productivity and Pay in Canada: Growing Together, Only Slower than Ever appears in the latest edition of International Productivity Monitor, published by the Centre for the Study of Living Standards. 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.
Over the long run (1961 to 2019), productivity and pay are closely aligned in Canada, with both rising by 1.5 per cent to 1.7 per cent per year (see table). After 2000, productivity growth slumped to around 1 per cent a year, the weakest on record, creating an unfavourable economic environment for pay increases.
Initially, during the 2000-08 business cycle, Canada benefited from favourable – but temporary – relative price movements that ameliorated the effects of meagre productivity gains on pay growth. As China opened to the world, Canada’s resource-based export economy gained from surging commodity prices, while cheap import prices boosted consumers’ purchasing power. Real pay growth, measured in terms of consumer prices, improved.
However, over the latest business cycle (2008-2019), the chickens came home to roost. There were no further fortuitous terms of trade shifts for Canada. Whether measured in terms of output prices or consumer prices, real pay growth slumped to approximately equal productivity growth.
Many advanced economies saw productivity decelerate after 2000. Nonetheless, Canada’s productivity growth performance ranked 21st out of 23 OECD countries over 1970-2000 and 25th out of 36 developed countries over 2000-19. By 2019, on a purchasing-power-parity basis, real output per hour worked in Canada was 27 per cent lower than in the United States, 21 per cent to 22 per cent lower than in France and Germany, and 10 per cent lower than in the United Kingdom.
Academic studies indicate that the rate of innovation adoption slowed among Canadian firms after 2000. The most likely culprits are regulatory impediments that dampen competition and the reallocation of labour and capital to best use. Since 2000, in terms of output per hour of labour input, the typical Canadian firm has fallen further behind the country’s leading companies, while Canada’s most productive businesses themselves have lost ground to the best performing global firms.
The good news is that there is ample scope for “catch up”. Canada can raise productivity – and therefore real pay and living standards – through speedier adoption of best practices and technologies already deployed by leading countries and firms. Curing the productivity-related maladies that weigh on our economy will require governments to review and retool structural policy settings that impinge on product market competition and innovation diffusion, business growth and creative destruction, resource reallocation, and private-sector investment in capital, skills and scale.
Productivity matters. Canadians should be concerned about serially low productivity growth because it points to feeble increases in real worker pay. Canada urgently needs a policy framework that fosters conditions for faster productivity growth.
As published in the Globe and Mail.