Labour productivity, hourly compensation and unit labour cost

Accompanied by a dynamic job-creation rate, labour productivity in the business sector rose 0.9% in the second quarter from the first - an increase comparable to the average growth rate over the previous two quarters and slightly higher than the annual rate for 2001 (+0.8%).

Equally significant, productivity growth has now been positive for the last six quarters. Large increases in the last three quarters resulted in a year-over-year growth of 3.0% in the second quarter, similar to 2.9% in the first. These rates are well above any recorded since 2000 and are also above the average for the 1990s.

Quarterly productivity still going strong, along with healthy job growth

This productivity growth has occurred along with strong output growth. On a quarter-to-quarter basis, output in the business sector rose 1.3% in the second quarter, stimulated by domestic consumer demand as strong as in the first quarter and a recovery in inventory accumulation by businesses. This second quarter increase in production was slightly lower than the impressive 1.9% growth posted in the first.

Strong employment growth accompanied output growth in the second quarter. Employment advanced 0.9%, a rate similar to that of the first (+1.0%). However, a 0.5% decrease in hours worked per job slightly moderated the growth in the total number of hours worked. Quarterly growth in hours worked reached 0.5% in the second quarter compared with 0.8% in the first.

Productivity growth occurred in the context of strong increases in employment and of even larger increases in output in the first two quarters of 2002.

Unit labour cost down for the third consecutive quarter

Changes in unit labour cost reflect the changes in the two components used to calculate this statistic: hourly compensation and labour productivity. The growth rate for hourly compensation paid to business-sector employees (+0,8%) was slightly lower than that for labour productivity (+0.9%). As a result, the unit labour cost fell 0.2% in the second quarter, a figure equal to the average of all decreases posted over the two previous quarters.

Canadian quarterly productivity growth tops that of the United States

On a quarter-to-quarter basis, productivity growth in Canadian businesses (+0.9%) was more than double that of their US counterparts (+0.4%) in the second quarter. This was the best productivity performance by Canadian companies in relation to American firms since the second quarter of 2001.

Canadian quarterly productivity growth in the second quarter stemmed from a rate of growth in output that was faster than that of hours worked, although both of these were strongly positive. In the United States, productivity growth was mainly the result of a reduction in the number of hours worked.

On a quarterly basis, output in Canada rose 1.3% in the second quarter, exceeding the near-zero growth of 0.1% in the United States for the same period. In the first quarter, Canada's growth in output (+1.9%) was also stronger than that of the United States (+1.4%).

In the second quarter, hours worked in Canada increased for the third consecutive quarter, with a rise of 0.5%; hours worked in the United States fell 0.3%.

A faster annual growth pace in output in Canada, but less productivity growth

On a year-to-year basis, output of Canadian businesses in the second quarter (+3.8%) increased almost twice the rate of the United States (+2.2%).

In spite of a higher output growth, cumulative annual growth in labour productivity continued to increase less in Canada (+3.0%) than in the United States (+4.8%). This was the second consecutive quarter in which US businesses outperformed their Canadian counterparts. In the fourth quarter of 2001, the annual growth pace in productivity between the two countries was similar.

On a year-to-year basis, the better US productivity performance resulted partly from a reduction in hours worked. In the second quarter, hours worked in Canada increased 0.8% annually but dropped 2.4% in the United States.

US businesses have a unit-cost advantage over their Canadian competitors

For the fourth consecutive quarter, hourly compensation paid by businesses in both countries grew at approximately the same rate. On a quarter-to-quarter basis, hourly compensation in Canada was up 0.8% in the second quarter; in the United States, it increased 0.9%.

In light of the similar growth rate in compensation, Canada's improved unit labour cost performance in the second quarter stemmed from the fact that productivity growth was higher in this country than in the United States. In the second quarter, unit labour cost fell 0.2% in Canada, but rose 0.5% in the United States (when expressed in their respective national currencies).

However, Canada loses its advantage when the unit labour cost is adjusted for changes in the exchange rate. Because the Canadian dollar appreciated approximately 2.5% in the second quarter over the first, the unit labour cost (measured in US dollars) increased faster in Canada (+2.4%). This quarterly increase caused a 1.9% drop in the relative Canadian unit labour cost.

On a year-to-year basis, with unit labour cost adjusted to the same currency, American businesses also experienced an advantage in the second quarter for the first time since the second quarter of 2000. Measured in US dollars, unit labour cost for Canadian businesses shrank 1.3% in the second quarter. Given the 2.2% decline in unit cost posted in the United States over the same period, Canadian businesses saw their relative unit labour cost shrink 0.9% on an annual basis.

Smaller productivity gap following recent revisions in the United States and Canada

Canada and the United States have now published their usual annual revisions to national accounting system statistics for output and employment. For the second year in a row, both countries' revisions indicated a significant reduction in the productivity gap.

This year's revisions showed an increase in Canada's growth in labour productivity for 1999 and 2000, and a decline for 1998 and 2001. By comparison, downward revisions in the United States mainly affected 2000 and 2001. For 2001, US productivity growth was revised downward substantially, from 2.0 % to 1.1%. This revised rate, however, is still higher than that of Canada, which was also revised down from 1.1% to 0.8%.

Recent revisions have reduced the difference in productivity growth rates between the two countries in the late 1990s. Before these revisions, the US advantage in labour productivity growth varied between 0.1% and 1.9% per year over the period since 1998. It now varies between -0.3% and 0.9 %. Canadian businesses outperformed their American counterparts in terms of average annual productivity growth in only one of the last four years, that is, 1999. From 1997 to 2000, the average annual gap in favour of the United States shrank by one-third, from 0.9% to 0.6%.

This matches the revisions of the previous year, before which the gap for the 1997 to 2000 period was even larger (1.8%). Thus, over the last two revision cycles, the annual average gap in favour of the United States has declined by two-thirds from 1.8% to 0.6%.

Available on CANSIM: table 383-0008.

Information on methods and data quality: survey number 1402 in the Integrated Meta Data Base.

A comparison of the cumulative effect of revisions over the last two years may be found on Statistics Canada's Web site (). From the Statistical methods page, choose Methodology, then Productivity growth in Canada - Appendices.

A technical note on quarterly estimates of labour productivity is available on request. To obtain a copy, send an e-mail message to productivity.measures@statcan.gc.ca.

For more information, or to enquire about the concepts, methods or data quality of this release, contact Jean-Pierre Maynard (613-951-3654; Fax: 613-951-5403; maynard@statcan.gc.ca), Micro-Economic Analysis Division.