ARCHIVE: CANCOMPETE
Surest Way to Boost Productivity: Invest in Physical and Human Capital
Greg Sutherland, Senior Economist, Centre for Municipal Studies Winter 2009
The surest way for Canada to boost its flagging productivity is by investing in physical and human capital. Currently, Canada’s productivity growth is weaker than that of most other developed countries, which translates directly into lower standards of living. A new Conference Board report, Sluggish Productivity Growth in Canada: Could the Urbanization Process Be a Factor?, argues that Canada should strengthen policies that encourage investment in new technologies, and help Canadians enhance their skills and training. Canada should strengthen policies that encourage investment in new technologies. In 2005, Canada ranked 12th in productivity growth among the 21 countries that the Conference Board used in its sample (based on Organisation for Economic Co-operation and Development data), down from 7th place in 2000. Between 1981 and 2005, Canada posted an average annual increase in productivity of 1.3 per cent, while productivity grew by 1.7 per cent annually in the United States. Compounded over 25 years, that productivity gap helps explain why gross domestic product per capita in the United States was $6,400 more than that in Canada in 2006, compared to just $2,300 more in 1980. Physical Capital and Education Boost Productivity For the purposes of the Conference Board study, physical capital includes everything from infrastructure and buildings to machinery and equipment. A 10 per cent increase in the capital-to-labour ratio—which calculates the average amount of physical capital made available to each worker—would boost productivity growth in Canada by 5 per cent over five years. Such an increase in productivity growth would represent a considerable addition to Canada’s annual productivity growth (which has averaged just over 1 per cent in recent years). Furthermore, if Canadians were to remain in school—on average—one extra year, productivity growth would improve by nearly 2 per cent over five years, or 0.4 percentage points each year. Does Urbanization Affect Productivity? The study, part of the Conference Board’s CanCompete research program, looked at whether urbanization, in and of itself, plays a role in Canada’s productivity performance. The empirical evidence suggests that neither the level of urbanization (the share of the urban population relative to the total population) nor urban concentration (the share of the urban population in the largest city—in Canada’s case, Toronto) has a significant impact on a country’s productivity growth. What really matters is investment in physical and human capital. If Canadians were to remain in school—on average—one extra year, productivity growth would improve by nearly 2 per cent over five years. “Since most investment in physical and human capital takes place in urban areas, indirectly, one can then say that cities are where the lion’s share of productivity improvements is happening,” says Greg Sutherland, Senior Economist with the Conference Board’s Centre for Municipal Studies. Several other factors were also tested, including the average firm size, population density, and the geographic size of the country. Country size was the only other factor having a direct impact on productivity, albeit a small negative impact. But Canada cannot use its geographic size as an excuse for its poor productivity growth, since Australia and the United States are also large countries but perform much better.
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