| || || |
Forecasting and Analysis
Over the next two decades, Canada and its regions will have to contend with the challenges of more and more aging baby-boomers leaving the workforce. The result will be slower growth in our economy while simultaneously adding to demand and expenditures for health care. One part of the solution to slower growth would be to lift our productivity—a sure fire way to boost income per capita and help us pay for those public services we want and need.
While we’re hopeful for the future, our past performance on the productivity front has not been strong. Numerous past studies have highlighted our poor labour productivity performance relative to the United States but few have looked at the issue from a regional perspective. Productivity is not just a federal issue. Here, we look at productivity among the provinces and find that with just one exception, poor productivity growth is a problem that exists from coast-to-coast. With the baby boomers contributing to slower economic growth and to rising health care expenditures across all regions, it’s vital that all provinces develop an agenda to boost their productivity growth.
Over the 1998 to 2011 time period, the U.S. posted average annual compound growth in labour productivity of 2.5 per cent while Canada posted average growth of 1.3 per cent. But it’s no wonder that productivity growth for Canada as a whole has been so low when its three biggest provinces are productivity growth laggards. Quebec and Ontario, for instance, posted gains of 1.1 and 1.2 per cent respectively and in Alberta, the headline number is even worse, with growth of just 0.5 per cent. (See chart “Business Sector Labour Productivity Growth”).
Only one province posted stronger business sector labour productivity growth than the United States and that was Newfoundland and Labrador. While Newfoundland and Labrador does have programs to promote productivity, the primary reason behind its productivity miracle was a structural shift in its economy where an oil boom increased the contribution of the highly productive mineral fuels industry from an estimated 1.5 per cent of real GDP in 1997 to 19.4 per cent in 2011. Therefore, its success cannot be benchmarked by the other provinces. Moreover, looking only at the headline productivity growth rates does not tell the whole story. For example, Alberta has the weakest growth among the provinces, but it also has the highest level of labour productivity in the country.
Nevertheless, the data clearly shows that labour productivity growth is a problem across the country. By embracing a productivity strategy, provinces would have the ability to make themselves more competitive, increase the standard of living for their residents and experience faster economic growth. So how can provinces boost their productivity growth?
There are three main factors that drive labour productivity growth: the composition of labour, capital intensity and multifactor productivity (MFP) growth. Labour composition basically refers to the skill set of the working population and all provinces perform fairly well on this metric. This is not to suggest that there is no room for improving the quality of the labour force, but it is not the driving force behind weak productivity growth.
When it comes to capital intensity (the amount of capital per worker), the provincial performance has been mixed. Half the provinces experienced larger increases in capital intensity over the 1998 to 2010 period than the U.S., led by the resource intensive economies of Saskatchewan and Alberta. But that leaves half the provinces still trailing in capital investment. Policies such as adopting a harmonized sales tax (where it is not already in place), investment tax credits and reducing corporate tax rates and regulatory burdens are steps provinces can take to boost investment and subsequently, productivity.
MFP, the final component, captures increases in labour productivity not attributable to increases in capital or labour composition. MFP is essentially the efficiency with which capital and labour mix to create output. This captures a wide range of factors from the industrial structure of an economy to its innovation performance. With the exception of Newfoundland and Labrador (which as noted above benefited from a structural economic shift), all provinces posted sub-par MFP growth relative to the U.S. That is the main reason why labour productivity growth in the provinces (and for Canada as a whole) is so much weaker than in the U.S. While there is no easy answer to improving MFP growth, research has shown that initiatives such as: credits and programs that encourage business spending on research and development; investments in public infrastructure; and a reduction in barriers to interprovincial trade and labour mobility can help provinces boost their MFP growth.
Governments at a variety of levels have understood for years the need to address lagging productivity performance, but the data show that we have not made nearly enough progress. With every province facing an aging population and budget challenges, the time is now to develop and implement productivity strategies with a focus on improving MFP growth.