Labour productivity, hourly compensation and unit labour cost

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Second quarter 2008

Labour productivity note to readers

Canadian business labour productivity declined 0.2% in the second quarter of 2008, after declines of 0.6% in each of the previous two quarters. This is the longest series of consecutive quarterly declines since 1990.

Chart F.1 Productivity in Canadian businesses declines

Chart F.2 Hours worked remain almost unchanged in Canada, while it continues to decline in the U.S.

In the second quarter, declining exports contributed to the second consecutive quarterly drop in real gross domestic product (GDP) of Canadian businesses. The number of hours worked in the Canadian business sector edged up 0.1% for the second consecutive quarter. This is a slowdown from 2007, when hours worked grew by 0.5% per quarter, on average.

Labour productivity in the goods producing industries fell for a fifth consecutive quarter. Mining, oil and gas extraction industries, as well as construction, were the major contributors to the overall decline. In contrast, labour productivity in manufacturing grew 0.8%, its first gain since the third quarter of 2007.

In the United States, business labour productivity grew 1.1% in the second quarter, after an increase of 0.6% in the previous quarter.

Growth of unit labour cost moderates

The growth rate of labour costs per unit of production, a barometer of inflationary pressure, decelerated to 1.2% for Canadian businesses in the second quarter, after increases of 1.6% and 1.9% in the previous two quarters. This reflects the deceleration in the growth of hourly compensation (+0.9%) compared to the first quarter (+1.4%), and the smaller decline in productivity.

Chart F.3 Canadian unit labour cost (ULC) in U.S. dollars increases

On average, the Canadian dollar depreciated against its U.S. counterpart in the second quarter, but at a much slower pace than the first quarter. Consequently, after declining by 0.3% in the first quarter, unit labour cost of Canadian businesses expressed in U.S. dollars grew by 0.6% in the second quarter. For U.S. businesses, unit labour costs declined by 0.1% in the second quarter, following two quarters of increase.

Annual Canadian productivity growth similar to U.S. since 2004

In 2007, productivity in U.S. businesses was 4.4% higher (revised down from 5.0%) than it was in 2004. Productivity in Canadian businesses grew 4.3% over the same period.

Revisions of U.S. data (GDP and hours worked) have reduced the growth of labour productivity in the United States for each of the three previous years (2005 to 2007). With those revisions, average annual productivity growth in American businesses over the period of 2004 to 2007 was 1.4% (compared to 1.6% before revisions), the same growth rate as in Canadian businesses.

Table F.0 Comparison of annual labour productivity growth in the business sector before and after revision

Period	Canada	United States
		Before revision	After revision
	annual % change
1981-2007	1.4	2.1	2.1
1981-2000	1.6	1.9	1.9
2000-2007	1.0	2.6	2.5
2004-2007	1.4	1.6	1.4
2004	0.2	2.9	2.9
2005	2.0	2.0	1.8
2006	1.6	1.0	0.9
2007	0.6	1.9	1.5
Source: U.S. data are from the Bureau of Labor Statistics, Productivity and Costs - Second quarter 2008, published in NEWS, September 4.

However, there was a substantial difference in average annual productivity growth between Canada and the United States from 2000 to 2004, with U.S. productivity growing almost five times faster than Canada’s.

Between 2000 and 2004, the average annual growth in U.S. productivity was 3.3%, compared to the 0.7% posted in Canada.

Productivity growth accelerates in the United States in the second quarter

In the United States, the growth in business labour productivity reached 1.1% in the second quarter, after a jump of 0.6% in the previous three months.

This acceleration essentially reflects the biggest rise in U.S. production posted since the third quarter of 2007. At the same time, U.S. businesses continued to adjust their work force downward.

Chart F.4 U.S. productivity growth accelerates

The strength of net exports (exports minus imports of goods and services) was the main factor behind the strong 0.8% growth in the U.S. GDP in the second quarter, with the U.S. economy benefiting from the depreciation of the greenback compared to other currencies. Consumer spending on non-durable goods also contributed to the growth in the U.S. GDP.

Hours worked devoted to production in U.S. businesses continued to decline for a fourth consecutive quarter, with a drop of 0.3% in the second quarter.

Analysis by industry

Rebound in manufacturing productivity

Business productivity declined for a third consecutive quarter, falling 0.2% in the second quarter. Mining, oil and gas extraction, as well as construction, were responsible for almost all of the decline.

As with the previous quarter, the drop in productivity among Canadian businesses in the second quarter was mainly due to the goods-producing companies. On a quarterly basis, productivity in the goods sector fell 0.9%, and rose 0.3% in the services sector.

In the second quarter of 2008, manufacturing productivity rose 0.8%, after falling in the previous two quarters. This recovery was in part attributable to the rebound in production in the automobile sector. Manufacturing production shrank for a fourth consecutive quarter, posting a drop of 0.6% in the second quarter. During the quarter, hours worked fell 1.4%, almost the same as in the first quarter.

Chart F.5 Manufacturing productivity advances following two quarters of decline

In construction, a slight decline in activity (-0.4%) combined with a rise in the number of hours worked resulted in a downturn in productivity in this sector for a fifth consecutive quarter.

Productivity rises again in the service sector

Productivity in services-producing businesses rose for a second consecutive quarter, fuelled by the continuing economic expansion in this sector.

After rising 0.1% in the first quarter of 2008, labour productivity rose by 0.3% in the second quarter. In the service sector, transportation and warehousing was the main contributor to this expansion.

Chart F.6 Main industries’ contribution to percent change in labour productivity in the business sector, second quarter 2008

At the same time, accommodation and restaurant services posted a significant decline in productivity in the second quarter of 2008.

Unit labour cost continues to rise faster in the goods producing sector

Unit labour cost in the business sector decelerated in the second quarter, growing 1.2%, down from 1.9% in the first quarter. Most of this increase came from the goods producing sector, which saw its labour unit cost rise 1.5%, half of the first quarter. This increase in costs of this sector was mainly attributable to mining, oil and gas extraction and to construction.

In addition, unit labour cost moderated in the manufacturing sector in the second quarter, rising only 0.5%, compared to 3.4% in the first quarter. This slowdown was attributable to the recovery in its productivity, along with the slowdown in hourly compensation.

Mirroring the change for the economy as a whole, inflationary pressure from wages continued to rise in the mining, oil and gas extraction industry, while unit labour cost rose 3.9%, compared to 4.4% in the first quarter.

In transportation and warehousing, which was particularly hard hit by the harsh winter and rising fuel prices, unit labour cost dropped 0.4% in the second quarter of 2008, after posting a 2.1% rise in the first quarter.

Statistical tables

• Table F.1 Business sector - Labour productivity and related variables for Canada and the United States, quarterly
• Table F.2 Business sector - Some related variables for labour markets
• Table F.3 Indexes of labour productivity by industry
• Table F.4 Indexes of unit labour cost by industry

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