Executive summary

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This paper summarizes Canada's long-run productivity performance, with an emphasis on how the post-2000 experience compares to that of previous decades. In doing so, it asks a set of questions.

Over the period 2000-2008, business sector GDP grew at 2.2% per year, less than the 3.0% of the period 1988-2000. The contribution of the growth in labour productivity to the growth in GDP declined after 2000 while the contribution of the growth in hours worked to the growth in GDP increased. The contribution of labour productivity accounted for 34% of GDP growth after 2000 compared to the 56% contribution in the previous decade. Labour productivity grew at 0.7% per year versus 1.7% in the previous period. In contrast, hours worked increased to 1.4%, slightly more than the 1.3% previously.

Over the entire 1961-2008 period, average annual real labour compensation increased by 1.8%, while labour productivity increased by 2.0%. The growth in average annual real hourly labour compensation over the 2000-2008 period (0.9%) tracked labour productivity (0.7%) closely, while it was slightly below in the 1990s.

Over the period from 1988 to 2000, increases in capital intensity contributed 1.0 percentage points of the 1.7 percentage points annual increase in labour productivity; higher labour skills, 0.4 percentage points; and multifactor productivity, 0.3 percentage points. Over the post-2000 period, growth in capital intensity contributed 1.1 percentage points, labour composition some 0.3 percentage points, but MFP turned negative. The slowdown in labour productivity after 2000 was almost entirely accounted for by the factors that determine multifactor growth—technology, innovation, firm organization, scale and capacity utilization effects.

The post-2000 slowdown in aggregate business sector labour productivity growth was mostly accounted for by the slowdown in productivity growth of two major industry groups: Mining, Oil and Gas Extraction; and Manufacturing. The Finance, Insurance and Real Estate (FIRE) industry also made a small contribution to lower productivity growth after 2000.

Across all industries, the slowdown in productivity growth was positively correlated to output growth. Where output growth slowed the most, so did productivity growth.

Labour productivity grew more quickly in Canada from 1961 to 1985, then less quickly until 1990, by which time the two countries had returned essentially to their 1961 relative levels. The relative growth rates were about the same throughout the 1990s. Since 2000, Canada has fallen considerably behind.

The small labour productivity growth difference in favour of the United States over the period from 1961 to 2008 owes much to higher MFP growth in the United States, which persisted throughout the period. Over the period from 1961 to 2008, annual labour productivity growth in the Canadian business sector was slightly, but not significantly, lower (0.3 percentage points) than in the U.S. business sector. The annual growth of MFP in Canada was 0.9 percentage points lower than in the United States.

In contrast, there was no continuous gap in the growth of capital intensity between Canada and the United States over the period from 1961 to 1996. Indeed, early in the period, the growth of the contribution of capital deepening to business sector productivity growth was higher in Canada than in the United States, and this generated higher labour productivity growth. Starting in the late 1970s and early 1980s, the Canada/United States capital intensity growth difference became smaller only to see the two countries follow much the same growth path in this component over the late 1980s. As in the previous period, this change in capital intensity was primarily responsible for the change experienced in relative labour productivity in the two countries during this period. A significant gap in the growth in capital intensity opened up in Canada after 1996, which was reversed in recent years.

The contribution of labour composition to business sector labour productivity growth was higher in Canada than in the United States over much of the period from 1961 to 2008—although the differential narrowed later in the period. From 1961 to 2008, the shift towards more educated and more experienced workers occurred more rapidly in Canada than in the United States, which raised labour productivity growth by 0.2 percentage points per year in the Canadian business sector relative to that of the U.S. business sector.

Over the 2000-2008 period, labour productivity growth in the Canadian business sector was much lower than that in the U.S. business sector. The Canada-U.S. labour productivity growth gap was 1.9 percentage points per year.

The chief contributor to the increase in the Canada-U.S. labour productivity growth gap in the period 2000-2008 was the slower growth of MFP in Canada. The effect of changes in capital intensity and labour composition was similar between the two countries.

Over the post-2000 period, Canada had much slower labour productivity growth than the United States in three sectors: Manufacturing, Information and Culture and the Finance, Insurance and Real Estate sector.

Canada's labour productivity level in the business sector has been lower than in the United States since 1961. The difference was relatively small in the mid-1980s when Canada's labour productivity was 10% below the U.S. level. After the mid-1980s, Canada's labour productivity declined. By 2008, Canada's labour productivity was only three-quarters of the U.S. level.

In 2008, the Canada/U.S. output gap in favour of the United States was 16% in terms of GDP per capita. The relatively lower level of Canadian labour productivity accounted for 14 percentage points of this output gap. The lower level of hours worked per capita in Canada than in the United States accounted for the remaining 2 percentage points of the output gap.

This is a substantial change from the 1990s when the majority of the difference came from hours worked. GDP per capita in Canada has remained virtually unchanged compared to the United States after 2000, despite the fall in relative labour productivity. This is a result of the increase in labour utilization (hours worked per capita) in Canada relative to the United States that offset the decline in relative labour productivity. The post-2000 period was marked by a much more robust labour market in Canada than in the United States.

Evaluating an economy's performance usually is done using a volume measure of GDP, which represents the constant dollar income (labour income plus profits) that an economy generates through domestic production, with the volume or constant dollar indices being calculated from the prices of domestic goods and services produced. When the concept of real income is widened to include changes in the purchasing power of earned income that is generated by the changing relative prices of exports and imports, the relevant measure is real Gross National Income (GNI). Changes in purchasing power come from changes in relative prices of exports and imports—one of which is the terms of trade.

Since 2000, prices of Canadian exports have increased markedly relative to the price of imports. Canadian receipts of income from abroad have also increased relative to payments abroad. These two events led to a sharp increase in measures of real income growth that take into account changes in the terms of trade and income from foreign investments. This has implications for Canada–United States comparisons. Canada had a strong terms-of-trade improvement from 2002 to 2008, due to rising commodity prices, an appreciating currency and falling world prices for manufactured goods that contributed greatly to real income growth. The U.S. measures of real income were much less affected by changes in their terms of trade.

As a result, comparisons of the relative per capita performance of the two countries hinges on whether or not the terms of trade and international income flows are incorporated into the analysis. If the terms of trade are excluded and relative real GDP per capita growth (or relative productivity growth) is the focus, Canada appears to have performed worse than the United States from 2002 to 2006, when U.S. real GDP per capita grew 9.3% while Canadian GDP per capita rose 7.0%. Once changes in the terms of trade and international investment income are taken into account, real income per capita in the United States increased by 8.6%, which is similar to its GDP per capita growth. However, the adjusted Canadian measure of real income per capita growth rose 15.6%, more than twice the per capita real GDP growth in Canada, and nearly double the U.S. rate.