Labour productivity, hourly compensation and unit labour cost

Fourth quarter 2003

Note to readers

After posting strong growth of 0.8% in the first quarter 2003, business productivity then deteriorated, with declines in the second and fourth quarters and almost no increase in the third quarter. As a result, for 2003 as a whole, labour productivity increased by barely 0.1%, its worst performance since the 0.2% decline recorded in 1996.

Quarterly productivity continues at lethargic pace

Despite improved production in the fourth quarter, Canada’s business productivity declined by 0.3%, economic growth being accompanied by a marked increase in hours worked. For a second consecutive quarter, workers have devoted on average the same number of hours worked per job; job growth was mainly concentrated in full time jobs.

In the United States, quarterly productivity growth slowed in the fourth quarter to 0.5%, down significantly from the 2.1% observed in the third quarter. This was the lowest productivity increase since the second quarter of 2002.

Despite this slowdown, American businesses recorded strong productivity growth of 4.5% for 2003 overall, similar to the 4.9% posted in 2002. An increase of this magnitude had not been seen since 1950.

Weak productivity gains in Canada for 2003

This is now the third year that the growth in American business productivity has surpassed that of Canadian businesses. The gap in annual productivity growth in favour of the United States has gradually grown since 2001, when it was 1.1 percentage points. By 2002, the gap was 3.0 percentage points. In 2003, it was 4.4 percentage points. However, it is important to note that these annual productivity differences are based on preliminary data, which are subject to revision. Since 1998, these gaps have generally shrunk following revisions to the preliminary data.

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Both businesses producing services and businesses producing goods experienced a slowdown in productivity growth in 2003

Productivity in the services sector slowed down in 2003. Annual growth declined from 3.2% in 2002 to 0.7% in 2003. Over the past three years, the productivity rate of growth in services has been more than three times higher than the goods producing sector.

In the services sector, declines were observed in accommodation and food services (−3.5%), in finance, real estate and company management (−2.5%), in administrative and support, waste management and remediation services (−1.5%) and in transportation and warehousing (−1.4%).

These declines were partly offset by productivity increases in wholesale trade (+4.1%), in professional, scientific and technical services (+3.5%), in information and cultural industries (+3.1%) and in retail trade (+1.3%).

In the goods producing sector, the annual growth in productivity also slowed down, from a rate of 1.0% in 2002 to 0.2% in 2003. This deceleration was in part due to the lower growth in manufacturing where productivity went from 2.8% in 2002 to 1.0% in 2003.

The appreciation of the Canadian dollar over the year of 2003 has had a negative impact on the output of manufacturing industries which decreased by 0.4% in 2003. At the same time, hours worked in this sector declined at a more pronounced pace (−1.4%).

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Unit labour costs constrained in Canadian businesses

Declining 0.3% in the fourth quarter, hourly compensation paid by businesses to their employees fell at the same pace as labour productivity. Consequently, wage pressures in the Canadian economy have remained low.

On a quarterly basis, unit labour cost, an indicator that compares hourly compensation growth relative to labour productivity growth, declined slightly by 0.1% in the fourth quarter. It was the third quarterly decline of this indicator during the year of 2003.

For the whole year of 2003, the unit labour cost growth in the business sector increased by 1.0%, a similar growth to that of 2002 (+0.9%).

Unit labour costs remained in control in most of the industries

While businesses producing services have observed stagnation in their unit labour costs in the fourth quarter, the goods producing sector registered a second consecutive quarterly decline in the order of −0.6%.

Quarterly declines were noted in accommodation and food services (−2.9%), in transportation and warehousing (−2.9%), in wholesale trade (−2.8%) and in manufacturing (−1.9%).

On an annual basis, unit labour cost in the goods producing sector grew moderately by 0.8% in 2003. At the same time, services have seen its unit labour cost increase by 0.5%, after experencing a decline of 0.5% in 2002. In manufacturing, unit labour cost increased by 1.4% in 2003, after declining by 0.3% in 2002.

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Comparable increase in production, but a very different performance by labour markets in Canada and the United States

In the fourth quarter, production in Canadian and in American businesses grew at the same rate of 0.9%. Moreover, hours worked increased in both countries for a second consecutive quarter. However, the rate of growth in hours observed in the fourth quarter was faster in Canada than in the United States, as has consistently been the case since the first quarter of 2001. In the third quarter, hours worked increased at the same rate in both countries (+0.4%).

Canadian businesses more than doubled their production in the fourth quarter, compared to the rate of 0.4% observed in the third quarter. The recovery of exports, which had declined over the four previous quarters, was largely behind the strong production growth in Canada.

American production in the business sector returned to a more normal growth rate in the fourth quarter of 2003, after a 2.5% leap in the third quarter. The latter was marked by the strongest quarterly increase since the first quarter of 1984. This deceleration in the U.S. economy resulted from a slower increase in consumer expenditures and an acceleration in imports.

U.S. productivity made moderate gains

Hours worked in Canadian businesses increased by 1.1% in the fourth quarter, more than double the rate measured in the previous quarter. In comparison, hours worked in U.S. businesses in the fourth quarter held at the same rate of increase as in the third quarter, only reaching 0.4%.

The gap in productivity growth between Canada and the United States for the fourth quarter was essentially attributable to different labour market performances in light of identical growth in production in the two countries.

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Annual productivity growth in Canada significantly down in 2003

In 2003, annual productivity growth rose by barely 0.1% in Canada. Taking into account this weak increase, the average increase for the past three years came to 0.7%. This represents only one quarter of the 2.8% average annual rate recorded between 1997 and 2000. Canada’s economic growth was strong during this period, in part as a result of the intensification in the use of information and communications technology revolutions.

The period of rapid productivity was followed by a slowdown in 2001, a slight recovery in 2002 and stagnation in 2003. During 2001 and 2002, Canadian businesses felt the impact of the burst of the high-tech bubble and the September 11, 2001 attacks in the United States. In 2003, economic activity was disrupted by an extraordinary conjunction of one-time events, including the SARS and mad cow scares, the electrical outage in Ontario, forest fires in British Columbia and Hurricane Juan in the Maritimes. Moreover, the Canadian dollar appreciated rapidly against the American dollar, forcing exporting companies to adjust their operations.

In 2003, the Canadian situation contrasted sharply to that of the United States in terms of economic performance and the labour market. U.S. productivity in 2003 came from a simultaneous increase in production and a decrease in hours worked.

Higher output growth in the U.S. in 2003

Canadian production increased by just 1.5% in 2003, significantly lower than the 3.7% growth rate recorded in the United States. This was the strongest growth measured in the United States since 2000, or before the so-called dot-come decline. It was also the best production performance observed in the United States, compared to Canada, since 1999.

The improved productivity performance in the United States in 2003 was partly attributable to the reduction in hours worked. In 2003, hours worked in Canada increased at a rate of 1.5%, compared to the 0.8% decline in the United States.

Hours worked continue to rise in Canada and to drop in the U.S.

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Stronger Canadian dollar in 2003 serves to widen in labour costs in favour of the United States

On an annual basis, the rise in hourly compensation in Canadian businesses was only 1.2% in 2003, continuing the downward trend started in 2001. U.S. businesses saw hourly compensation rise by 3.3% in 2003, after a 2.2% rise in 2002. This rise ended the deceleration observed since 2001 in the United States.

The annual growth in unit labour cost in Canada slowed over the last two years. It was 1.0% in 2003 and 0.9% in 2002, much slower than the 3.2% growth recorded in 2001. In the United States, unit costs declined by 1.1% in 2003. This was the second consecutive annual decline.

Canadian dollar appreciation increased unit labour costs significantly

Measured in American dollars, unit labour costs in Canada grew considerably in 2003, while those in the United States declined. Between 2002 and 2003, with the value of the Canadian dollar increasing by close to 10.8% compared to that of the American dollar, the gap in unit costs between the two countries continued to widen significantly in favour of the United States. Unit labour costs in Canada, measured in American dollars, leapt by 13.3% in 2003, while the United States posted a 1.1% decline.

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Recent revisions of productivity figures in the United States had no impact on the Canada-U.S. gap

In February 2004, the United States released its annual revisions of labour productivity estimates, incorporating recent revisions of the U.S. National Accounts by the Bureau of Economic Analysis. The U.S. data had also been revised back to 1999 to incorporate the adjustments in annual benchmarks on hours worked.

Comparison of annual labour productivity growth in the business sector before and after revision

For the period between 1987 and 2002, average annual productivity growth was not affected by these revisions; therefore, the average gap in annual productivity growth in favour of the U.S. remained identical to that released before the revision.

On the other hand, in recent years, the impact of the revisions was to increase labour productivity in the United States for 1999 and 2001, and to reduce it for 2000 and 2002. The magnitude of the revisions varied between 0.2% and 0.6%. Nonetheless, the revisions to U.S. data did not result in any changes to the mid-term average, since average annual productivity growth over the 1996-2002 period remained at 2.9%, a higher rate than the 2.3% registered in Canada over the same period.

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Statistical tables

• Business sector: Labour productivity and related variables for Canada and the United States, quarterly
• Business sector: Some related variables for labour markets
• Labour productivity by industry
• Unit labour cost by industry
• Business sector: Labour productivity and related variables for Canada and the United States, annual

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