Labour productivity, hourly compensation and unit labour cost

First quarter 2004

Note to readers

Labour productivity in Canada’s business sector rose 0.4% between January and March this year, the first quarter-to-quarter gain in a year.

The increase follows a lackluster performance during much of 2003. Labour productivity fell during the second quarter last year, and was virtually flat during the third and fourth quarters. Productivity last rose during the first quarter of 2003 when it went up 1.1%.

Positive productivity growth resumes

In the United States, first-quarter growth in labour productivity this year was 1.2%, three times Canada’s pace. Productivity growth south of the border has outpaced Canada’s since the first quarter of 2003.

Higher productivity, as measured by production per hour worked, means that workers produced more without working more hours. In general, productivity growth helps improve prosperity and standards of living.

During the last two quarters of 2003 in Canada, when productivity growth was flat, gains in production were entirely due to an increase in hours worked. Between January and March this year, productivity increased in Canada largely because the output growth remained constant, while hours worked growth rate slowed down.

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Productivity increased only in the services sector

In the first quarter, quarterly productivity growth was concentrated in services. On a quarter to quarter basis, labour productivity growth in the services sector recovered to reach a rate of 0.4% in the first quarter 2004. At the same time, productivity in the goods sector declined by 0.4% during the same quarter.

The reverse was experienced in the previous quarter since productivity in services declined by 0.2%, while it increased by 0.7% in goods.

The productivity increase in services during the first quarter was sustained by a productivity recovery in retail trade, finance, insurance and real estate, information and cultural services, as well as in professional services. These four industry groups from services all registered productivity declines during the previous quarter.

After declining by 1.6% during the fourth quarter of 2003, labour productivity in retail trade rebounded by 2.1% in the first quarter of 2004. This was the best performance among all services. This recovery was fuelled by vigorous consumer spending reacting to a new round of interest rate declines.

After progressing by 1.0% in the first quarter, finance, insurance, real estate and rental came second. A dynamic stock market and housing market contributed to this rise.

Almost all industries included in the goods sector registered a productivity decrease in the first quarter. In particular, productivity in manufacturing industries remained essentially flat in the first quarter (-0.1%) after increasing by 1.6% in the first quarter.

In the context of strong demand for new housing that created some shortages of building supplies and skilled labour, construction industries registered a third consecutive decline in labour productivity, down 0.7% in the first quarter 2004.

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Wage costs continue to be under control in the business sector

On a quarter-to-quarter basis, unit labour costs – an indicator of the extent to which hourly compensation outgrew productivity growth – remained almost flat during the last three quarters.

Over the last three quarters, hourly compensation paid to business sector workers grew at about the same pace as productivity, resulting in little wage pressure on the Canadian economy. In the first quarter of 2004, hourly compensation increased by 0.2%. This was about the same pace as the previous four quarters.

On a year-to-year basis, unit labour costs increased by 0.8% in the first quarter, the weakest growth rate since the fourth quarter of 2002. This annual increase in unit labour costs during the first quarter came from an identical increase in hourly compensation, productivity growth being nil.

Observing industry groups, unit labour costs did not vary much in the fourth quarter both in the businesses producing goods and in the businesses producing services. Unit labour costs varied between -1.8% in transportation and storage and +2.3% in agriculture, forestry, fishing and hunting.

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US outpaces Canada for four straight quarters

Productivity growth south of the border has outpaced Canada’s for four straight quarters.

Between January and March of this year, real production grew more among American businesses than it did among their Canadian counterparts.

In the American business sector, production growth accelerated from 0.9% in the fourth quarter of 2003 to 1.3% in the first quarter of 2004. The first-quarter increase in American production was widespread, with advances in all major sectors (households, business, government and the non-resident sector).

In the first quarter, Canadian businesses had the same rate of production growth as in the final quarter of 2003, 0.9%. A recovery in consumer spending and sustained export growth were the main contributors to the strength of Canadian production.

Productivity growth in the U.S. rebounds

Labour productivity increased faster in the United States both because businesses there increased their output more than in Canada and because there was a smaller gain in hours worked than in Canadian businesses.

Canadian businesses recorded a 0.5% increase in production hours worked in the first quarter of 2004, while the increase south of the border was only 0.2%. This continues the trend of stronger growth in hours worked in Canada than in the United States.

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Annual productivity growth in Canada is flat

On a year-to-year basis, output growth in the United States surpassed output growth in Canada for the fourth quarter in a row.

Canadian businesses increased their production by 1.6% on yearly basis, a rate superior to the 1.3% average observed over the four previous quarters. In comparison, output growth in US businesses increased by 5.9% in the first quarter, a continuation of its acceleration that started in the second quarter of 2003.

Output growth in the U.S. continues to accelerate

While hours worked continue to grow in Canada on an annual basis in the first quarter, US businesses have stopped adjusting their labour input downward. On a yearly basis, hours worked in Canada in the first quarter increased for an eighth consecutive quarter, rising by 1.6%, twice the rate of 0.8% registered during each of the previous two quarters. In the mean time, hours worked in American businesses increased slightly on a yearly basis (+0.3%) in the first quarter. This was the first increase in 14 quarters.

First increase to hours worked in the U.S. in 14 quarters

As Canadian businesses experienced the same rate of growth in production and in hours worked, productivity in Canada was essentially zero growth in the first quarter. By contrast, businesses south of the border experienced a strong growth of 5.6% to their productivity in the first quarter.

Productivity stagnation in Canada continues

During the six last quarters, the productivity growth in the Canadian businesses has been less than 1.0%, while American businesses registered productivity gains ranging from 2.9% to 5.6% on an annual basis. However, over the last several years, the United States have revised their preliminary labour productivity estimates downward substantially, while Canada has revised its estimates upward.

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Strong Canadian dollar hurt competitive position of Canadian businesses

American businesses continue to have a significant advantage over Canadian businesses with respect to changes in labour costs.

On an annual basis, the growth of unit labour costs in Canadian businesses has been slowing over the last three quarters, from 2.0% in the third quarter of 2003 to 0.8% in the first quarter of 2004.

By comparison, American businesses have enjoyed declining unit labour costs for nine straight quarters. In the first quarter, unit labour costs in the United States decreased at an annual rate of 0.8%.

After reaching a record high, Canadian unit labour costs decelerate in US$

When the exchange rate is taken into account, American businesses enjoy an even greater advantage in the first quarter of this year compared to a year earlier. With the value of the Canadian dollar relative to the U.S. dollar rising 12.7% between the first quarter of 2003 and the same quarter of 2004, the gap in the growth of unit labour costs between the two countries continues to favour the United States by a considerable margin.

Year over year, unit labour costs in U.S. dollars jumped 15.4% in Canada in the first quarter, whereas they were down 0.8% in the United States.

In the last quarter of 2003, unit labour costs in Canada, measured in U.S. dollars, soared 21.0% on an annual basis to a record high, as the Canadian dollar rose 16.2% relative to the U.S. dollar.

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Productivity gaps narrow following recent revisions in Canada

Data released today incorporates revisions to Canadian Gross domestic product (GDP) for 2000-2003. Revised American data are expected next September.

Overall, the 2000-2003 revisions increased the growth rate of labour productivity in Canada for each of the last four years. For that period, the revisions ranged from 0.1% to 0.4%, narrowing the gap in productivity growth between Canada and the United States.

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

	Canada		United States
	Before revision	After revision
	annuel % change
1987-2002	1.5	1.6	2.1
1996-2002	2.3	2.5	2.9
2000	3.8	3.9	2.9
2001	1.0	1.4	2.2
2002	1.9	2.3	4.9
2003	0.1	0.4	4.5

Source: U.S. data are from the Bureau of Labor Statistics, Productivity and Costs - First quarter 2004, published in NEWS, June 3.

Canadian businesses outperformed their American counterparts in productivity in only one of the past four years: 2000. The difference in productivity growth for the year 2000 increased from 0.9 percentage points in Canada’s favour before revision to 1.0 percentage points after revision.

Since then, the gap in productivity growth varied from 1.2% to 4.4% per year in favour of the United States before revision, compared with 0.8% to 4.1% after revision. 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.

The revisions also resulted in a change over the medium term, as the average annual productivity growth for the period from 1996 to 2002 was revised upward from 2.3% to 2.5%. This revised rate is still slightly below the U.S. rate of 2.9% for the same period.

The revisions had virtually no effect on average annual productivity growth in Canada for the period from 1987 to 2002. The average gap in annual productivity growth in favour of the United States declined from 0.6 percentage points before revision to 0.5 percentage points after revision.

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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
• Labour productivity by industry
• Unit labour cost by industry

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