The current trade frictions with the United States and their potential to significantly disrupt the Canadian economy have had one positive side effect. The pressing issue has forced politicians, business leaders and ordinary Canadians to look closely at how we can strengthen our economy by removing some of the obstacles that have stood in the way of reaching our full potential as a major economic force.
One of those obstacles is Canada’s lagging productivity. While that may sound like a technical term only economists would care about, productivity is a key factor in determining whether the standard of living experienced by a country’s people will increase, remain stagnant, or even decline.
And productivity has been a problem for Canada for some time, lagging that of our trading partners and competitors.
In a world of shifting trade alliances and economic uncertainty, increasing our productivity is one of the ways to boost Canada’s economy and standard of living.
Below is a primer on productivity from the Scotiabank Economics team – who say it is the most important economic variable we have – and other sources.
What is productivity?
At a high level, productivity is the amount of goods or services we produce per working person; it’s a measure of an economy's ability to produce things in a more or less efficient way. Using a company as an example, a company that is more productive – that produces more widgets per hour worked – will do better, generate more profit and be able to pay its employees more than a less-productive company. At a more aggregated level, when a country is more productive than its trading partners, that country is going to gain market share, be more profitable, pay higher wages, ultimately driving a higher standard of living.
How is productivity measured?
Put simply, productivity is economic activity divided by the number of hours that people work in the economy. But there are tremendous complexities in calculating productivity, especially as our economy becomes more service oriented. The service economy is much more difficult to measure than the goods part of the economy as its outputs are more difficult to quantify. But despite the inherent complexities that exist in the measurement of productivity, there's enough science behind it to be reasonably confident that what they're capturing is giving you a good sense of where things are going.
Why is productivity important?
It’s probably the most important economic variable we have. It’s a measure of efficiency and innovation, so higher productivity means more profit, more growth, and higher real wages. If we want to raise the standard of living, you’ve got to raise productivity. If productivity is falling, then it is very difficult to sustain increases in the standard of living. A more vibrant business community also provides a stronger revenue base for government, which may choose to invest in better services for its citizens, reduce its level of taxation, or pay down its debt.
How does Canada’s productivity compare to other countries’ productivity?
We are less productive, and we’ve not been able to really close that gap because our productivity isn’t rising at the same rate as it is in other countries. In 2023, Canada’s labour productivity – a measure of real GDP per hour worked – was the worst in the G7 group of rich countries; Canadian productivity in 2022 was about 72% of that in the United States.
Why does Canada lag in productivity?
There are several possible reasons. One of the most important is that business investment in machinery, equipment, and technology in Canada has been below the average among OECD countries for decades. Canadian firms also hire fewer STEM graduates and professional managers, such as MBAs, compared to American or European firms. And there may be fewer opportunities for workers to learn new skills. Scale is another factor: Canada is a relatively small market, and it tends to have smaller companies and fewer export-oriented ones.
How long has Canada struggled with productivity?
This has been a longstanding issue. We’ve been less productive for a number of years and have not been able to really close that gap. There has been much focus on recent declines as the immigration surge meant Canada was adding workers faster than it was equipping them with tools or training. Another notable widening of the gap emerged in the aftermath of the 2014-15 oil price crash, as investment in this highly productive part of the economy never recovered.
It is worth noting that recent productivity data have shown some modest improvement. Part of that is mathematical as immigration flows have slowed. There should be further gains as newcomers better integrate into the labour market and acquire the skills and training needed on the job. But it won’t be sufficient to close the long-brewing gap as ultimately business investment in capital (the non-labour inputs) has been underwhelming and current geopolitical uncertainty risks dampening it further.
What are the consequences of low productivity?
One of the consequences of stagnating or declining productivity is it has an impact on real wages – a person’s purchasing power when inflation is factored in – so there is a very real impact on people. If your economy is stagnating because it's difficult to trade, because you're not competitive on global markets, then there are fewer growth opportunities than otherwise would be the case. That has a knock-on effect for wages. The simple math is that historically Canadians have benefited from annual wage gains averaging 3%: 2% to account for inflation and 1% from productivity gains. These productivity gains enable business to pay higher wages. Absent those productivity gains, business cannot sustainably pay higher incomes.
It's a combination of those things that makes it more difficult to sustain significant and long-term increases in economic activity and jobs and wages and our standard of living if we're less productive than other countries.
How can Canada improve its productivity?
Part of the challenge that exists in the productivity landscape is that, for a long time, productivity was thought of as a bad word: you increase productivity by firing people. So, there's a bad connotation historically associated with productivity. The first thing to do is to get people to think differently about it. Productivity is actually about increasing our standard of living and making us better off. The second thing is you need politicians to say, ‘Listen, we know that we've got a productivity issue. We don't really know how we're going to solve it, but we're going to try all kinds of things. We're going to talk to labour, we’re going to talk to business, see if there are ways for both businesses and labour unions to come up with some ideas that they collectively think might work in terms of advancing productivity.’
It really requires a shift in mindset away from being worried about the costs of transformation to one of seeing the opportunities that are available if we were to increase productivity. It's going to require trial and error. But that's the nature of productivity itself. You have to take chances to innovate, and you’re not always going to get it right.
What role does government play in improving productivity?
Governments have tried to do many things in the last 20 years – from broad-based tax cuts, to targeted investment tax credits, to investments in R&D, among others – but very few have had a lasting impact on productivity. But it is clear that creating an economic environment that supports innovation, streamlines regulation, encourages investment, trade and education can be helpful.
Why should Canadians care about productivity?
It’s difficult to overestimate how important productivity is to our well-being. An unproductive economy will not produce the increases in standard of living that the population expects. Productivity has a direct impact on standard of living.
For a deeper dive and crash course on Productivity, listen to the Perspectives podcast: Why Canada's lagging productivity could harm your standard of living
