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Labour productivity note to readers
The labour productivity of Canadian businesses fell for the first time in more than a year in the fourth quarter. This occurred as gross domestic product (GDP) growth slowed while hours worked continued to increase steadily. By definition, productivity improves when the GDP rises more than hours worked.
Chart F.1 Productivity in Canadian businesses
declines for the first time in more than a year
In the fourth quarter, productivity lost 0.8%, after posting a slight 0.1% increase in each of the previous two quarters, and a 0.5% gain in the first quarter. For 2007 as a whole, labour productivity increased a mere 0.5%, the lowest annual increase since 2004.
For U.S. businesses, the quarterly labour productivity decelerated significantly in the fourth quarter, increasing only 0.2%, after rising by 1.6% in the third quarter.
Despite this slowdown, U.S. businesses had a revised growth of 1.9% in their productivity for all of 2007, an improvement compared to the 1.0% for 2006.
In 2007, U.S. businesses had higher productivity gains than their Canadian counterparts. During the previous two years, the differential in annual productivity growth between the two countries was slightly in favour of Canadian businesses.
Chart F.2 U.S. productivity growth slows considerably in
fourth quarter
The overall drop in productivity reported in the fourth quarter for Canadian businesses was mainly due to a significant decrease in the professional, scientific and technical services, construction and mining and oil and gas extraction. Moreover, productivity in manufacturing fell for the first time since the third quarter of 2006.
By contrast, significant productivity gains were posted in wholesale trade, utilities and in accommodation and food services.
The fourth quarter slowdown in North-American economic activity had a negative impact on labour productivity in Canada as well as in the U.S.
In the third quarter, the value added in the business sector increased by 0.8% in Canada and 1.4% in the United States. In the fourth quarter, the increase in production slowed significantly, posting a weak rise of 0.1% in both countries.
In the fourth quarter, it was mainly the sharp 2.2% fall in exports that limited Canadian business GDP growth, whereas in the United States, the weak business GDP resulted from the slowdown in consumer spending and exports. A decrease in business inventories and a new slowdown in real estate also contributed to the slowdown in the U.S. GDP.
The difference between Canadian and U.S. productivity growth also stemmed from the differences between their labour market activities.
Hours worked devoted to production in Canadian businesses grew 0.9% in the fourth quarter, more than the rise posted for the previous quarter (+0.6%). Full-time work accounted for slightly more than half of the increase in hours worked in the fourth quarter.
By comparison, hours worked in U.S. businesses fell by 0.2% in the fourth quarter, the same as in the previous quarter. The volume of hours worked fell in three of the four quarters of 2007.
Labour cost per unit of production, a measure of inflationary pressures from wages, rose by 1.4% for Canadian businesses in the fourth quarter. This was a sharp appreciation from the zero growth posted in the previous quarter.
In the fourth quarter, hourly compensation in Canada had a quarterly increase of 0.6%, compared to 0.2% in the third quarter.
Chart F.3 Canadian unit labour costs in U.S. dollars continue
to climb
The unit labour cost for U.S. businesses increased 0.7% in the fourth quarter, after two quarters of decreases. In the previous quarter, the cost of labour fell by 0.7% in the U.S.
The sharp appreciation in the Canadian dollar in the fourth quarter led to a 7.9% jump in the Canadian unit labour cost in U.S. dollars, after strong increases of 5.1% in the third and 7.0% in the second quarter
The productivity decline for all businesses in the fourth quarter is largely due to goods producing businesses. On a quarterly basis, productivity in the goods sector fell by 0.9%, while it remained almost flat for service producing businesses (-0.1%).
Good performances in wholesale trade (+1.0%), accommodation and food services (+1.8%) and information and culture (+0.6) were completely offset by negative or zero growth in most of the other service producing industries. The slight decrease in productivity in this sector occurred as production and hours worked grew virtually in tandem.
In contrast, the goods producing industries posted a 0.8% drop in production in the fourth quarter, following a 0.3% decrease in the third. Meanwhile, hours worked held steady in the fourth quarter, after rising by 0.2% in the third quarter.
The fourth-quarter decline in productivity for the goods producing businesses was mainly a reflection of the decreases observed in manufacturing, construction and mining. These decreases were only partly offset by the increase in productivity of public utilities.
In the manufacturing sector, productivity fell by 0.4% in the fourth quarter. This was the first decrease since the third quarter of 2006.
Chart F.4 Productivity in manufacturing sector
declines for the first time in a year
This slowdown in the fourth quarter brought the growth in manufacturing productivity for 2007 to 1.9%, compared to a slight decrease of 0.1% in 2006.
Hours worked in manufacturing fell sharply by 1.2% in the fourth quarter, the seventh straight quarterly decline, reflecting continued restructuring in this sector.
Meanwhile, production in manufacturing declined for the second consecutive quarter, falling 1.6% in the fourth quarter, after dropping 0.8% in the third. The manufacturing sector has been hampered by the sharp increase in the costs of energy and other raw materials, and by foreign competition, which rose following the appreciation of the Canadian dollar.
Canadian manufacturers had to cope with the 6.0% appreciation in the Canadian dollar against its U.S. counterpart in the fourth quarter, following 4.9% appreciation in the third quarter, and 6.3% in the second quarter.
However, Canadian businesses made the most of this latest appreciation in the loonie, and invested in machinery and equipment to improve their efficiency. These purchases rose by 3.4% in the fourth quarter, about the same as in the previous quarter (+3.3%).
Canadian productivity decelerated to its slowest growth in three years in 2007, rising only 0.5%, compared to 1.1% in 2006.
Chart F.5 Productivity gap is widely in favour
of the U.S. in 2007
By comparison, U.S. productivity increased by 1.9% in 2007. This was an acceleration compared to the annual rate of 1.0% posted in 2006, marking the end of the slowing that began after the peak of 4.1% reached in 2002.
During the previous two years, Canadian businesses achieved higher productivity gains than their U.S. counterparts. However, the gap in productivity growth swung back in favour of the U.S. in 2007, mainly because of the different increases in hours worked in the two countries.
The volume of hours worked in Canadian businesses continued to rise steadily, increasing 2.2% in 2007, compared to 1.5% in 2006. In the meantime, the volume of hours worked in U.S. businesses rose by only 0.4% in 2007, much less than in 2006 (+2.1%).
Chart F.6 Growth in hours worked accelerates in
Canada, while it slows dramatically in the U.S.
Three-quarters of the increase in the number of jobs in Canada in 2007 were attributable to full-time work. In 2007, the number of jobs rose steadily in Canadian businesses (+2.2%), at a rate comparable to that for hours worked.
In terms of GDP growth, Canadian businesses outdid their U.S. counterparts for the first time in four years. The growth in real GDP in Canadian businesses reached 2.6% in 2007, a similar pace to 2006. Meanwhile, the GDP in U.S. businesses rose 2.3% in 2007, the slowest growth rate since 2002 (+1.5%), and down sharply from 3.1% in 2006.
Chart F.7 Canadian GDP growth ahead of the U.S.
for the first time in five years
In 2007, the tightening of the labour market in Canada, especially in the west, continued to push up hourly wages (+3.7%), although at a slower pace than in 2006 and 2005 which saw increases of 4.2% and 5.2% respectively. However, it is much higher than the 2.6% annual average growth registered between 2001 and 2004.
The modest 0.5% rise in productivity, combined with this strong growth in hourly compensation, resulted in a significant 3.2% increase in the unit labour cost.
With the 5.3% appreciation of the loonie compared to its U.S. counterpart in 2007, Canadian unit labour cost in U.S. dollars jumped 9.5% in 2007, compared to 3.1% south of the border.
In 2007, labour productivity rose by 0.7% in the goods producing businesses, compared to 0.8% for the service producing businesses.
As in 2006, wholesale and retail trade accounted for most of the increase in productivity among service producing businesses in 2007. For wholesale trade, productivity rose by 2.4%, and for retail, by 3.5%. The 1.5% increase in productivity in the financial industry also contributed to the growth in this sector.
The main engines of growth in productivity among the goods producing industries were manufacturing and utilities. In fact, with an increase of 5.3%, the latter had the strongest boost in productivity among all industries. Whereas the number of jobs fell in the manufacturing sector, the hours worked per job remained more or less the same, rising by only 0.1%.
Labour productivity in the mining and oil and gas extraction sector fell by 1.2%. The increase in economic activity was relatively weak compared to the rise in the number of hours worked in this sector.
In most industries, the unit labour cost rose more in 2007 than in 2006. This cost rose by 2.7% for goods producing businesses, and by 3.2% for service producing businesses.
Even though unit labour cost increased for all industries in 2007, the mining and oil and gas extraction industry was one of the hardest hit, with an increase of 8.2%. However, this increase was less than the 13.0% posted in 2006.
Retail trade, with an increase of 0.7%, and utilities, with an increase of only 0.5%, were the industries with the smallest increases in unit labour cost in 2007. These two industries were also among those with the strongest improvements in labour productivity in 2007.
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