Labour productivity, hourly compensation and unit labour cost

Labour productivity in Canada's business sector was stagnant for the second consecutive quarter between April and June, extending a lethargic pace that began in 2003.

South of the border, second quarter productivity growth in the American business sector was a weak 0.1%, the first time this has occurred since the fourth quarter 2003. This was a sharp slowdown compared to the growth of 0.7% during the first three months of the year.

Productivity, as measured by real gross domestic product (GDP) for every hour worked, improves when GDP increases more rapidly than the number of hours worked. Productivity gains contribute to improve the standard of living in the long run.

In Canada, the pace of growth in GDP doubled during the second quarter, reflecting to a large extent the increase in the number of hours worked. As a result, productivity was a flat 0.0%.

Putting it another way, because productivity was flat, Canada's growth in economic output during the first half of 2005 was attributable entirely to the increase in the number of hours worked. Growth in employment was all concentrated in full-time jobs during the second quarter.

However, with the rise of the Canadian dollar easing off during the first two quarters of 2005, Canadian businesses were able to increase their exports during this period by stabilizing their unit labour costs in relation to their American counterparts.

Productivity flat for the past two years

On average, labour productivity in the Canadian business sector has been virtually unchanged for the past two years. Zero growth in 2004 was the smallest since 1996, while the increase in 2003 was only 0.2%.

In contrast, however, before pausing in the second quarter, productivity in the American business sector grew at an average quarterly rate of 0.7% during the previous five quarters.

GDP growth in the Canadian business sector accelerated to 0.8% during the second quarter, twice the pace observed in the first three months of the year (+0.4%).

Continued robust consumer spending and the recovery in the housing sector were largely responsible for this improvement. A slowdown in imports in the second quarter, following four quarters of robust growth, also contributed to Canada's improved economic output.

For the American business sector, growth in GDP slowed slightly, from 1.1% in the first quarter to 0.9% in the second. Over the last six quarters, growth in GDP in the United States has remained fairly stable, fluctuating between 0.9% and 1.2%.

GDP growth has been more rapid in the United States than in Canada for a fourth quarter in a row. Over this period, the economic activity strength south of the boarder has resulted essentially from consumer expenditures and business investments.

Over the first two quarters of 2005, the number of hours worked increased at the same pace in both countries. The growth of hours worked doubled in the second quarter, reaching 0.8% in each economy.

Rise in Canadian unit labour costs in US dollars

Excluding the exchange rate, the labour cost of producing one unit of GDP in the Canadian business sector rose on an annual basis by 2.0% in the second quarter. This is slightly more than the 1.1% increase recorded in each of the previous two quarters.

In the United States, businesses saw their unit labour costs edge up for a fourth straight quarter. Year over year, their unit labour costs rose by 4.3% in the second quarter of 2005. The rise in the labour cost of producing one unit of GDP in the American business sector has accelerated gradually over the past four quarters.

However, Canada lost all of its advantage when unit labour costs are adjusted by the exchange rate.

The 8.6% appreciation of the Canadian dollar in relation to the US dollar in the second quarter, compared to the same quarter in 2004, resulted in a sharp gain of 11.5% in the unit labour cost measured in US dollars. This was more than twice the gain of 4.3% in the United States.

Given this deterioration in competitiveness of costs, Canadian exports slowed on an annual basis to a marginal 0.1% in the second quarter, after rebounding 4.3% in the first quarter of 2005.

Downward revision in US productivity growth

Data released today include revisions to GDP in the United States for the 2002 to 2004 period. Revisions for 2001 to 2004 for Canada's GDP were released in The Daily of June 9, 2005.

Overall, revisions of American data resulted in a decrease in the growth rate of labour productivity in the United States for each of the last three years. The downward revisions range from 0.3% for 2002 to 0.5% for 2003 and 2004.

Even though the revisions for the last two years are significant, they do not alter the results of the Canada-US labour productivity gap reported for those years.

The revisions resulted in a mid-term change since average annual growth in US productivity for the 2000 to 2004 period fell from 3.8% to 3.5%. Despite this revision, the US labour productivity growth remains almost four times higher than its Canadian counterpart (+0.9%) during the same period.

Available on CANSIM: tables 383-0008 and 383-0012.

Definitions, data sources and methods: survey number 5042.

A more comprehensive analysis, including additional charts and tables, is now available online in the second quarter 2005 issue of Canadian Economic Accounts Quarterly Review (13-010-XIE, free). From the Our products and services page, under Browse our Internet publications, choose Free, then National accounts.

Third quarter data for labour productivity, hourly compensation and unit labour cost will be released on December 9.

To order data, contact Client Services (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: 613-951-3292; maynard@statcan.gc.ca), Micro-economic Analysis Division.