The federal election campaign is on and the political parties are busy rolling out their platforms. But there is one topic that is unlikely to be mentioned by our political leaders: Canada’s dismal track record on productivity – and what we might do about it.
| || ||Glen Hodgson |
Senior Vice-President and Chief Economist
Forecasting and Analysis
Originally published in the Globe and Mail on June 17, 2015.
The federal election campaign is on and the political parties are busy rolling out their platforms. But there is one topic that is unlikely to be mentioned by our political leaders: Canada’s dismal track record on productivity—and what we might do about it.
For nearly three decades, growth in Canadian productivity (at its simplest, output measured in dollars per hour worked) has lagged behind productivity growth in the United States and other major industrial countries. This productivity gap, and its root causes, have been well documented in research by the Conference Board of Canada over the years. The result of lagging productivity growth is a significant gap in per capita income that has opened up between Canadians and Americans—estimated at $7,000 per capita, and rising.
Productivity is about working smarter, not working harder, and is arguably the best way to increase real incomes and wealth. The rising stars in the global economy—countries like South Korea, Singapore and China—have all been carried upward by strong growth in productivity.
The unwillingness to discuss and debate Canada’s dismal productivity performance is a frustration to economists, since robust productivity growth is central to sustainable wealth creation. Why are our political leaders so reluctant to talk about productivity? We see two main reasons.
First, productivity is a complex concept. It can be hard to explain to the broad electorate, and there is no quick fix. Why take ownership of a concept that’s hard to sell and to resolve?
Second, improving Canadian productivity growth would inevitably require changes to how we organize our economy and society. Such policy changes would create many potential small winners, and a few big losers.
While large numbers of Canadians would benefit from policy reforms that boost productivity, certain groups and individuals are bound to lose existing advantages. The losers would protest loudly—and few political leaders appear eager to take on these negatively-affected interest groups in order to address the vague concept of productivity.
Yet without faster productivity growth, the Canada–U.S. income gap will likely continue to grow. More importantly, it will be increasingly difficult to sustain the standard of living to which Canadians are accustomed. Services like high quality publicly-funded health care may not be sustainable without stronger Canadian productivity growth, especially in the face of slowing labour force growth due to aging demographics, combined with decades of lower fertility rates. The labour force participation rate is already dropping, which will pull our economic growth potential downward to 2 per cent annually or lower unless we find a new source of dynamism—such as faster productivity growth.
Moreover, Canada’s productivity growth rate is unlikely to get better on its own. The respected academic economist Robert Gordon of Northwestern University has projected a sustained period of chronic slower productivity growth for industrial countries. He argues the inventions and innovations that boosted productivity in the past—ranging from indoor plumbing and electrification, to the internal combustion engine, and extending to the computer and space race spinoffs—are now far behind us. The Internet and digitization have created a revolution in how we access and use information, but their contribution to productivity growth has been remarkably short-lived. If Mr. Gordon is correct, it is all the more important to create the most productivity-supportive environment possible in Canada.
What would a Canadian productivity agenda look like? Based on extensive research by The Conference Board of Canada, it would include:
investment in education, skills and lifelong learning as a top priority;
- elimination of internal trade barriers;
- commitment to tax reform and simplification, to improve incentives and cut compliance costs;
- ramping up public infrastructure investment significantly, especially in cities;
- the design and implementation of a detailed innovation strategy for governments and business;
- a comprehensive free-trade agenda;
- further reduction in barriers to foreign investment;
- pricing carbon in order to fuel innovation in the low-carbon economy.
Some of these elements have seen policy action in recent years, but there is not a comprehensive agenda.
Productivity is critical to Canada’s future economic prosperity. Some political observers may see it as “too important” to be discussed during an election campaign. In our view, it is too important to be avoided.