Labour Productivity Growth

Key Messages

Putting labour productivity growth in context

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

How do the provinces rank relative to Canada’s international peers?

Taken as a whole, Canada and many of its provinces have a mediocre record compared with international peers. Canada’s five-year labour productivity growth has been lower than that of the top countries for many decades, hurting its international competitiveness. No province earns an “A” grade, although this is mainly due to the outlier performance of Ireland. If Ireland were removed from the peer group, Manitoba, Nova Scotia, and Saskatchewan would move up into the “A” group and Manitoba would be in second place behind the United States. With Ireland in the mix, Manitoba and Nova Scotia earn “B” grades. However, seven provinces earn “C”s and one—Newfoundland and Labrador—earns a “D–” grade for having lower productivity growth than the worst-performing international peer country.

Canada’s poor performance is not a new phenomenon. Between 2002 and 2012, the U.S. posted average annual compound growth in labour productivity of 1.7 per cent, while Canada posted growth of 0.8 per cent. Ontario and Quebec—the two largest provinces—posted gains below 1 per cent per year.

Newfoundland and Labrador has an uneven productivity story. In the nine years between 2001 and 2010, the province posted an average annual compound growth in labour productivity of 3 per cent—almost a full percentage point higher than the United States at 2.1 per cent. The primary reason behind Newfoundland and Labrador’s productivity surge was a boom in the mining and oil and gas sectors. Oil production was hurt by the 2008–09 recession, however, and dropped sharply again in 2012 as a result of maintenance work, pulling down the province’s recent productivity performance. As Statistics Canada notes, “growth in labour productivity is often influenced by the degree of diversity in the industrial structure. As a result, labour productivity tends to be more volatile in the smaller provinces.” ¹

How do the provinces perform relative to each other?

In addition to ranking the provinces against Canada’s international peers in each report card, the provinces have been compared with each other and placed into three categories: “above average,” “average,” and “below average.”² But in this report card on labour productivity growth, there is no above-average performer, meaning that, aside from the large drop in Newfoundland and Labrador, there is little variability among the provincial growth rates.

Manitoba, the best-performing province, benefited from upswings in the agriculture, metal mining, and construction industries. Newfoundland and Labrador, with productivity growth of -2.8 per cent, is the sole below-average performer.

Which is more important: productivity growth or productivity levels?

Although the focus in the media is most often on productivity growth rates, these rates do not tell the whole story. The actual level of productivity (that is, the dollar value of output per hour worked) is equally of interest. For example, Newfoundland and Labrador has the weakest growth among the provinces, but it also has the second-highest level of labour productivity in the country.

Low productivity levels present an enormous challenge for the future economic prosperity of most provinces. In 2012, Canada’s level of labour productivity was US$42 per hour worked, much lower than that of the United States, at US$56. As a share of the U.S. level, the provinces range from a high of 98 per cent in Alberta to a low of 55 per cent in Prince Edward Island.

Worse still, these shares have fallen over time in all provinces but Newfoundland and Labrador. The largest decline was in British Columbia, where the level of labour productivity fell from par with the U.S. in 1981, to 74 per cent of the U.S. level in 2012. Despite a broad and growing consensus that Canadian productivity needs to be improved, the gap with the U.S. is widening in most provinces, not narrowing.

Are Canadians not working hard enough?

Many people confuse the concept of productivity with that of work intensity. 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 also with individual firms and their management.

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 take the auto manufacturer that adds a GPS system to a car model that retails for $30,000. That 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.

What drives productivity growth?

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

The Conference Board has developed a diagram 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 is the business and policy environment within which the firm-specific factors coalesce. For example, if an organization is 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 is 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.

How can the provinces improve their productivity performance?

There is no silver bullet for improving productivity; many factors need examination.

Focusing on firm-specific factors, most provinces do fairly well on the human capital component. Canadian workers, relative to their international peers, are well educated and highly skilled. While there is room for improvement on adult literacy and numeracy skills, the quality of the labour force is not the driving force behind weak productivity growth.

When it comes to capital intensity (the amount of capital each worker has available, particularly machinery and equipment), provincial performance has been mixed. Not surprisingly, resource-intensive provinces are more capital intensive. The capital stock per worker in Alberta, Saskatchewan, and Newfoundland and Labrador is higher than the national average, and both Alberta and Saskatchewan have higher capital intensity than the United States. But that leaves seven provinces, including the two largest, Ontario and Quebec, trailing in capital intensity.

Investing in machinery and equipment—particularly information and communications technology—enables the adoption and diffusion of the latest state-of-the-art technologies, which in turn boost productivity. We know that countries with higher investment in machinery and equipment generally have higher productivity growth. Canada’s investment in machinery and equipment as a percentage of gross domestic product (GDP) is among the lowest of its peer countries.

At the provincial level, it is again the resource-intensive provinces—Alberta, Saskatchewan, and Newfoundland and Labrador—that have higher M&E investment per worker than the United States. Policies such as adopting a harmonized sales tax (where it is not already in place), providing investment tax credits, and reducing corporate tax rates and regulatory burdens are steps provinces can take to help boost investment and, subsequently, productivity. 

Innovation, the third component of the firm-specific factors, is a key source of productivity gains and prosperity. The Conference Board defines innovation as a process through which economic or social value is extracted from knowledge—through the creating, diffusing, and transforming of ideas—to produce new or improved products, services, processes, strategies, or capabilities. Despite nearly two decades of innovation agendas and prosperity reports, Canada remains near the bottom of its peer group on innovation. While there is no easy answer to improving innovation performance, research has shown that both public policy and business culture can help. Some examples of measures are: 

How do the territories perform on productivity?

Two territories—Nunavut and Yukon—had significantly higher labour productivity growth over 2008–12 than any province. Nunavut earns an “A+” while Yukon earns an “A” grade. The Northwest Territories, however, had a dramatic drop in labour productivity growth over those five years, led by declines in its mining industry, which accounts for about 35 per cent of the territory’s GDP. In particular, the diamond industry in the N.W.T. is rapidly maturing and production is declining.

However, the level of labour productivity in the N.W.T. is high. At US$62, N.W.T.’s level of labour productivity is the highest among the provinces and second only to the top international peer, Norway. Nunavut and Yukon also rank higher than most international peers.

The territories are not included in the overall provincial and international benchmarking calculations because data are not available for many of the indicators included in the six main report card categories. The Conference Board is, however, committed to including the territories in our analysis, and so we produce separate territorial report cards when data are available, such as for labour productivity growth.

The Conference Board of Canada produces a biannual Territorial Outlook report that examines the economic and fiscal outlook for each of the territories, including output by industry, labour market conditions, and the demographic make-up of each territory. The Territorial Outlook can be accessed online at our e-Library and for clients subscribing to e-Data.

Research on issues affecting the territories is also produced by the Centre for the North, a Conference Board initiative that began in 2009.

Does a high per capita income equate to well-being?

In general, a country’s well-being and per capita income go hand-in-hand because a country’s economy must generate a high level of income to pay for the social services that ensure a high quality of life. However, a comparison of the well-being in the U.S. and Canada reveals that one must be careful in using the per capita income indicator to draw conclusions about quality of life in the two countries.

Canada’s provinces, except for Alberta, have a lower per capita income than the United States. Yet many would make the case that quality of life is superior in Canada, despite the lower income per capita. For instance, Canada’s per capita homicide rate is far lower than that of the U.S., and the health care system, while far from perfect, provides universal coverage for Canadians. This is not the situation in the United States, where millions of Americans are still without health care insurance. This factor partially explains why Canada continues to perform better on health outcomes than the United States. While the Obama administration’s affordable health care legislation will hopefully improve the health care system south of the border, it will take years before the U.S. attains the access to health care enjoyed by Canadians, who don’t have to worry about an untimely illness leading to personal bankruptcy.

How can the provinces increase their per capita income?

Conference Board research indicates that the best way to increase per capita income is to boost productivity. For all of the provinces, this involves fostering innovation, investing more in machinery and equipment, and attracting more foreign direct investment. As well, a greater emphasis on advanced educational attainment, lifelong learning, and workplace skills training could also help boost productivity and lift per capita income.

Footnotes

1  Statistics Canada, Hours Worked and Labour Productivity in the Provinces and Territories, 2012.

2  To compare the performance of Canadian provinces relative to one another, we first determined the average score and standard deviation of the provincial values. The standard deviation is a measure of how much variability there is in a set of numbers. If the numbers are normally distributed (i.e., the distribution is not heavily weighted to one side or another and/or does not have significant outliers), about 68 per cent will fall within one standard deviation above or below the average. Any province scoring one standard deviation above the average is “above average.” Provinces scoring less than the average minus one standard deviation are “below average.” The remaining provinces are “average” performers.