Labour productivity, hourly compensation and unit labour cost

Third quarter 2003

Note to readers

Labour productivity in the business sector increased by 0.7% in the third quarter compared with the previous three months, the strongest quarterly gain in more than a year. This increase put an end to a lacklustre performance during the last five quarters when productivity ranged between a gain of 0.3% and a decline of 0.5%.

In returning to stronger productivity growth, Canadian businesses experienced a slight increase in economic activity, despite the huge power outage in Ontario in August.

So far this year, economic activity in Canada has been affected by an exceptional combination of negative shocks. These included SARS, mad cow disease, the mid-August power blackout, forest fires in British Columbia and the rising value of the Canadian dollar.

Productivity growth rebounds

Businesses were able to increase their output slightly without hiring

In the third quarter, businesses were able to increase their production slightly without hiring more workers. On a quarter-to-quarter basis, business sector output in Canada slightly rebounded by 0.2% in the third quarter, after having experienced a reduction of 0.8% in the previous quarter. A drop in the non-farm inventories of businesses, in addition to a slowdown in exports had a dampening effect on output growth in the third quarter.

This small recovery in output has been accompanied by a listless labour market. In the third quarter, the number of jobs remained unchanged; however, the workers on average, dedicated fewer hours (-0.5%) to production. The number of hours worked was affected by the power outage that occurred in Ontario in August and the period of energy conservation that followed. Had it not been for this power outage, the number of hours worked would have dropped by only 0.3% rather than 0.5% in the third quarter. The power outage thus accounted for two-fifths of the decrease in hours worked in the business sector in the third quarter.

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Productivity gains higher in services sector

On a quarter-to-quarter basis, labour productivity in the third quarter grew faster in the services sector (+1.3%) than it did in goods (+1.0%). In the second quarter, labour productivity in services increased by 0.5%, compared with 0.3% increase in the goods sector.

Labour productivity in services rose in the third quarter, mainly because of a strong performance in finance, real estate and company management (+4.2%). In the goods sector, the productivity growth was sustained mainly by the manufacturing sector, where productivity growth rose from -0.2% in the second quarter to 1.6% in the third quarter.

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Productivity growth varies by industry

The growth in labour productivity varied widely among industry groups, from a decline of 1.1% in the information and cultural industries to a rise of 4.2% in the finance, real estate and company management.

Other important increases were observed in the transportation and warehousing Industry (+2.4%), followed by the accommodation and food services industry (+1.9%), the manufacturing and the other services industries (+1.6%), in the retail trade industry (+1.0%), and administrative and support and waste management and remediation services (+0.5%).

On the other hand, the construction industry saw its productivity remain nearly constant (+0.1%). Productivity dropped in professional, scientific and technical Services (-0.2%); agriculture, forestry, fishing and hunting (-0.4%) and in wholesale trade (-0.6%).

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Unit labour costs have increased at a moderate pace

On a quarter-to-quarter basis, unit labour costs, which indicate whether wage inflation exceeds productivity growth, remain relatively constant throughout the first three quarters in 2003. Unit labour costs increased slightly by a rate of 0.5% during the third quarter, after having increased by 0.8% in the second quarter and by 0.3% in the first quarter. Hourly compensation rose by 1.1% in the third quarter, due in part to the loss of hours worked incurred by the power outage in Ontario, without commensurate reduction in wages.

On a year-to-year basis, hourly compensation paid to business sector workers rose by 3.0% in the third quarter, compared to a rate of 2.3% in the second quarter. This increase in the annual rate of hourly compensation in the third quarter exceeds the 0.3% increase in labour productivity. Thus, unit labour costs increased by 2.8% on a year-to-year basis in the third quarter, slightly less than the 3.0% growth experienced in the previous quarter.

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Better productivity performance in the United States largely result of exceptional gains in output

On a quarter-to-quarter basis, real output (GDP) in the third quarter continued to rise less rapidly in Canada than in the United States for a second consecutive quarter. Over the past two quarters, the gap in output growth in the two countries remained high.

After a decline of 0.8% in the previous quarter, the output of Canadian businesses rebounded slightly by 0.2% in the third quarter. The decrease in non-farm inventories of businesses as well as the drop in exports had a dampening effect on output growth.

In the meantime, output growth in the United States picked up, reaching a level of 2.4% in the third quarter compared with 1.1% in the second quarter. This was the highest quarterly increase since the first three months of 1984 (+2.7%). This growth was the result of several factors, including reductions in income tax, interest rates that were at an all-time low, and the weakness of the U.S. dollar.

This exceptional output growth in the United States was accompanied by a slight improvement in their labour market. While the number of hours worked continued to decrease in Canada in the third quarter, the U.S. business sector saw an end to the downturn in employment. Hours worked in U.S. businesses increased by 0.4 % in the third quarter. This was only the second increase in the past 14 quarters. In contrast, hours worked in Canada declined for a second consecutive quarter, decreasing by 0.5% in the third quarter compared to a 0.8% drop in the second quarter.

Highest U.S. productivity growth since the first quarter of 2002

These factors combined to produce lower productivity gains in Canada than in the United States during the third quarter. On a quarter-to-quarter basis, the productivity growth in the Canadian business sector was limited to 0.7% in the third quarter, while it was three times higher (+2.1%) in the U.S.'s businesses. Since the second quarter of 2002, productivity growth in the U.S. was higher than in Canada.

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Marginal annual productivity gains were experienced without growth in output in Canada

Canadian productivity slightly increased at an annual rate of 0.3% in the third quarter, after two quarters of negative growth. This modest Canadian performance is below that observed south of the border where a strong growth rate of 4.4% was observed in the same period.

In the fourth quarter of 2000, the year-to-year productivity growth rate between the two countries was identical. Since this period, productivity performance between Canada and the U.S. appears to favour the American business sector, fluctuating between 0.6% and 5.0% per quarter. Substantial gaps are consistently observed for the five preceding quarters. However, over the past few years, preliminary estimates of American productivity have been largely revised downwards, while those of Canada have been revised upwards.

Productivity growth in the U.S. accelerated once again

In the third quarter, productivity performance differs between the two countries as a result of differing output growth rates. Year-to-year, output in the Canadian business sector remains practically unchanged in the third quarter while their American counterparts experienced a strong growth in output. In the third quarter, output in Canada grew only at an annual rate of 0.1% while in the same period; output in the U.S. grew at a rate of 4.4%.

Second consecutive quarter of higher output growth in the U.S.

Meanwhile, hours worked in the two countries decreased from one year to the next in the third quarter, but at a slower pace in Canada than in the U.S. In fact, the hours worked in Canada decreased by 0.2% in the third quarter - the first decline since the first quarter of 2002. Concurrently, hours worked in the U.S. decreased for a twelfth consecutive quarter, a reduction of 0.6%.

Hours worked fell, but at a slower pace in Canada

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Higher Canadian dollar continues to drive labour costs in Canada

American businesses also held a significant advantage over Canadian businesses with respect to changes in labour costs.

On a year-to-year basis, unit labour costs in Canada increased by 2.8% in the third quarter, whereas they dropped by 2.1% in the United States, as expressed in the respective currencies of each country.

The gap in unit labour costs between Canada and the United States for the third quarter of 2003 is the result of weaker growth in labour productivity in Canada, since the changes in hourly compensation were similar. Productivity in Canada increased at scarcely 0.3% compared with the third quarter of 2002, while in the United States, productivity was up 5.0% on year over year basis.

Canadian dollar appreciation continues to increase unit labour costs

Expressed in U.S. dollars, the advantage for American businesses in terms of unit labour costs was even greater in the third quarter. With the 11.7% upsurge in the value of the Canadian dollar vis-à-vis its U.S. counterpart between the third quarter of 2002 and the same quarter of 2003, the United States continues to hold a clear advantage in terms of the trend for unit costs. Unit labour costs for Canadian businesses, as measured in U.S. currency, posted a spectacular increase of 16.4% annually in the third quarter, while those of American businesses recorded a drop of 2.1%.

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Statistical tables

• Business sector: Labour productivity and related variables for Canada and the United States
• Business sector: Some related variables for labour markets

Information on methods and data quality available in the Integrated Meta Data Base: 5042.