Economy

Productivity is the single most important determinant of a country’s per capita income over the longer term. Countries that are innovative and able to adapt to the ebb and flow of the new global economy boast high productivity and thus a superior standard of living. Productivity is a measure of how efficiently goods and services are produced.

The labour productivity data presented a challenge for this report card. Because of exceptional economic events, most comparator countries had negative productivity growth in 2008. The regular methodology, which takes the difference between the top and bottom performer and splits the grades into quartiles, would result in a country like Switzerland, with falling productivity, being awarded a “B” grade. This did not make intuitive sense to us. We therefore modified the grading methodology for this indicator so that only those countries with positive labour productivity growth get “A” or “B” grades, and countries with negative productivity growth are awarded “C” or “D” grades:

• We calculated the difference between the top performer and zero, and divided this number by 2. A country receives a report card rating of “A” on labour productivity growth if its score is in the top half of this number and a “B” if its score is in the bottom half.
• We calculated the difference between zero and the bottom performer, and divided this number by 2. A country receives a report card rating of “C” on labour productivity growth if its score is in the top half of this number and a “D” if its score is in the bottom half.

The modified methodology does not affect the overall Economy ranking, since it does not affect the normalization formula used to create the overall ranking. See the Methodology section for further details.

Canada’s labour productivity growth has been lower than that of the top countries for many decades, hurting its international competitiveness.

Like that of most of its peers, Canada’s labour productivity fell in 2008. The global financial crisis, the collapse in world trade, and related cuts to production have deeply cut into productivity and economic growth.

Canada earns a “C” grade for labour productivity growth in 2008 and ranks 12th among the 17 countries. Productivity growth in Canada fell by 0.9 per cent.

The U.S. was the top performer in 2008—the only country to receive an “A” grade. This may be puzzling given the headlines of economic crisis in the United States. The key to understanding how the U.S. can be simultaneously experiencing slower GDP growth and a rise in labour productivity is to understand how productivity is measured. Productivity is measured by dividing GDP by hours worked. Hours worked declined in the U.S. in 2008, undoubtedly because of large job losses.

Many people confuse the concept of productivity with that of work intensity. But improving productivity is not about working longer or harder, it’s about working smarter. It’s about finding more efficient and effective ways to produce goods and services so that more can be produced with the same amount of effort. It’s also about producing higher-value-added products and services that are worth more in the marketplace. The onus of improving productivity lies not just with governments, but with individual firms.

Take, for example, the auto manufacturer that introduces new robotics technologies that cut the time it takes to assemble cars, meaning that the same number of workers can now produce more cars per day, without working longer or harder. Or the same auto manufacturer that adds a GPS system to a car model that retails for $30,000. The innovative technology increases the sales price by $3,000. Because the redesigned car takes the same amount of time to build, however, labour productivity—in terms of output per worker—is boosted by 10 per cent.

Challenges to improving productivity are multi-faceted. To enhance productivity, Canada must foster a culture of innovation, open industries to competitive pressures, and improve the level and quality of capital intensity.

Measuring productivity in Canada shows that annual productivity growth has actually declined since the 1970s. Many of Canada’s peers, however, have also experienced a decrease in productivity growth over the past four decades. Canada’s improved letter grade—to a “C”, from a “D”—merely reflects its improved relative performance. It can be difficult to get a clear picture of productivity growth over time because it is highly cyclical. The Hodrick-Prescott filter1 is used to provide an improved impression of long-term trends in productivity growth by eliminating short-term fluctuations. It helps show that most comparator countries have experienced a progressive decline in trend productivity growth. Only the U.S. had a higher trend productivity growth rate in 2008 than in 1970, although this will not likely be true in 2009. Canada’s trend productivity growth matched that of the U.S. in the 1970s, first began to lag in the mid-1980s, and has since remained disappointingly low.

Use the drop-down menu to compare Canada's trend labour productivity growth rate with that of its peer countries.

Not necessarily. Because productivity is so volatile year-to-year, the results can be confusing. Norway is a good example of this; it recorded low productivity growth in recent years, yet has still managed to make top grades in other areas. This may be because its trend productivity growth is relatively high and, more importantly, Norway remains the leader in actual dollar value of productivity (US$55 per hour worked).

Productivity growth and productivity levels are both important. While the focus in the media is most often on productivity growth rates, the actual level of productivity (that is, the dollar value of output per hour worked) is equally of interest.

Low productivity levels present an enormous challenge for Canada’s future economic prosperity. In 2008, Canada’s level of productivity was US$35, much lower than that of the United States, at US$44. This earned Canada a disappointing 16th place among its 17 peer countries on the level of labour productivity. Only Japan was lower. Worse still, Canada’s productivity level has fallen to 80 per cent of the U.S. level from a high of 90 per cent in the mid-1980s. Despite a broad and growing consensus that Canadian productivity needs to be improved, the gap with the U.S. is widening, not narrowing.

Use the drop-down menu to compare the change in Canada's level of labour productivity with that of its peer countries.

Use the drop-down menu to compare Canada's labour productivity growth in each decade with those of its peer countries.

Canada’s productivity has consistently lagged. In the 1970s, Canada’s labour productivity grew an average of 1.4 per cent annually, compared with the U.S. average of 1.5 per cent per year. Both countries experienced a decline in the 1980s, reaching near-parity.

The 1990s were challenging for Canada, a decade in which the country saw its economic position relative to the U.S. erode sharply. Large increases in investment in machinery and equipment, particularly information and communications technologies, in the U.S. during the second half of the 1990s, fuelled U.S. productivity growth. Analysts point to Canada’s longstanding problem of lower capital intensity—the amount of machinery and equipment per worker—relative to the United States.

U.S. productivity growth has remained relatively steady in the recent decade, while Canada’s productivity growth rate has dropped to 0.9 per cent per year, on average.

Canada will have a difficult time trying to close the productivity gap with the United States. Evidence has shown that countries with lower levels of productivity not only have to grow faster to catch up but they have to maintain faster growth for an extended period of time.

If U.S. productivity grows by its 2000–2008 annual growth rate of 1.67 per cent over the next 15 years, for example, Canada’s productivity growth will have to be 3.22 per cent per year to eventually match the U.S. productivity level. That’s a near-insurmountable four times Canada’s annual productivity growth rate between 2000 and 2008. Closing the productivity gap with the U.S. is essential to closing the income gap, but Canada is going in the wrong direction.

The Conference Board has developed the diagram below to illustrate the key drivers of productivity. At the top are firm-specific factors. These factors relate to the physical and human capital, as well as innovation and technological change, in a particular organization.

The middle layer relates to the business and policy environment within which the firm-specific factors coalesce. For example, if an organization exists in a highly competitive field, this competitive environment can have an indirect influence on productivity through its effects on the firm-specific variables.

The bottom layer relates to dynamics in the global economy. Canada has influence over some of these dynamics, such as trade liberalization. Others, like changes in global commodity prices, are essentially beyond the control of any individual country.

To better understand productivity drivers:

“Explaining the Canada–U.S. Productivity Gap: What It Is and Why It Matters,” Chapter 2 in Performance and Potential 2003–04, Ottawa: The Conference Board of Canada, 2003.

Harmonize Consumption Taxes to Improve Economic Efficiency, Ottawa: The Conference Board of Canada, 2008.

Investment in machinery and equipment—particularly information and communications technology—is associated with the adoption and diffusion of the latest state-of-the-art technologies, which in turn boost productivity. We know that countries with higher machinery and equipment investments generally have higher productivity growth. The chart below shows that Canada’s investment in machinery and equipment as a percentage of gross domestic product (GDP) is among the lowest of its peer countries. (Data are not available for Belgium, Norway and Switzerland.)

Canada’s productivity gap also reflects its weaker inward and outward foreign direct investment, low R&D intensity, a weak innovation record, and the relatively small percentage of Canadians with advanced degrees in science and technology.

¹ The Hodrick-Prescott filter is a mathematical tool used in economics to obtain a smoothed non-linear representation of a time series, one that reflects long-term trends rather than short-term fluctuations. Robert Hodrick and Edward Prescott, “Postwar U.S. Business Cycles: An Empirical Investigation,” Journal of Money, Credit, and Banking 29, 1 (February 1997), pp. 1-16.

See discussions on other indicators
Income Per Capita	Unemployment Rate
GDP Growth	Employment Growth
Labour Productivity Growth	Inward FDI Performance Index
Inflation	Outward FDI Performance Index