Canada’s productivity has been declining. Why that’s a problem for the economy

Canadians feeling like they weren’t as productive as they could’ve been in 2023 can take solace. Neither was Canada’s economy.

Labour productivity — a broad measure of real gross domestic product by hours worked across the economy — has declined nationally in six consecutive quarters, Statistics Canada said last month.

Economists who spoke with Global News say this metric is critical for improving Canadian quality of life, and recent declines will be particularly worrying to the Bank of Canada as it gauges where to set its benchmark interest rate next.

“What it really boils down to is a sense that if we are able to generate more income with each hour worked, then we’re better off for it,” says Pedro Antunes, chief economist at the Conference Board of Canada.

Canada is in the middle of the pack of countries in the Organisation for Economic Co-operation and Development (OECD) when it comes to productivity, according to a November analysis from BMO chief economist Doug Porter.

While the country outperforms Mexico and Spain on labour productivity, Canada trails the United States and a swath of Scandinavian nations by a fair margin. Porter notes that while OECD figures only go up to 2021, Canada’s productivity has only fallen since then.

Rising productivity allows a workforce to do more with the same or even fewer resources, which fuels growth in wages, the tax base and the general wealth of a nation. This key metric also has a bearing on inflation, and it’s something the Bank of Canada has flagged that it’s watching closely.

Though the central bank has held its benchmark interest rate steady in its last three decisions, amid signs of slowing in the economy, one of the areas it’s tracking in gauging where inflation is heading is wage growth. The Bank’s policymakers have flagged that average hourly wage growth in the range of four to five per cent is not consistent with achieving the central bank’s two per cent inflation target — unless it comes with associated gains in productivity.

Antunes explains that if businesses are raising their wages, they can either pay for it by raising their prices and passing costs on to the consumer, thereby fuelling inflation, or by bringing in more money by improving their output — boosting productivity.

“If wage increases are too strong, then we’re just going to end up with that vicious, vicious cycle where prices have to increase to accommodate them,” he says. “And then we end up with that wage-price spiral that central banks really want to avoid.”

As productivity stalls, Friday’s jobs report from Statistics Canada shows that average hourly wages accelerated to a 5.4 per cent annual gain in December. Tu Nguyen, an economist with RSM Canada, said in a note Friday that the hot wage number could give monetary policymakers pause when they’re weighing interest rate decisions.

“The weaker-than-expected job report might accelerate the Bank’s decision to slash rates, but the hot wage growth does not ease concerns about sticky inflation,” she wrote.

Russia’s war in Ukraine is stymying supply chains and among the factors that have contributed to stalled global productivity. A boom in working from home post-pandemic hasn’t delivered the productivity gains that some economists predicted.

Why productivity is falling in Canada specifically, however, is not straightforward.

In Porter’s November report, he lists myriad macro-factors that are commonly cited as contributing to Canada’s productivity lags: high levels of concentration in Canadian industries; interprovincial trade barriers; weak private sector R&D; and a “lack of entrepreneurial spirit.”

Those issues compound with some structural challenges that policymakers would find it hard to respond to with legislation. Canada’s geography and harsh winter weather contributes to inefficiencies in transportation, Porter says.

Among the main issues, according to Antunes, is that Canadian workers just don’t have the capital at their disposal that counterparts in other nations do.

Canadian employers are “significant laggards” relative to nations like the U.S. when it comes to capital stock available to workers, he explains. This can refer to infrastructure like roads, machinery to accomplish a task, research and development funding or even leveraging software — anything that makes a job easier and more efficient to perform.

“Imagine if I were working in construction with a shovel versus somebody working with a backhoe,” Antunes says. “The capital stock per worker is very important in driving output per hour worked.”

Since Canada’s productivity has stalled over the past year and a half, the economy has had to rely largely on importing new workers to sustain output. But these new workers, while critical to keeping the Canadian economy’s head above recession waters, often find themselves landing, at first in less productive industries like retail or food and accommodation.

Statistics Canada highlighted a subset of this trend in its Friday jobs report. Amid a boom in Canadians working in food delivery or ridesharing last year, landed immigrants accounted for nearly 60 per cent of the workers in this sector in 2023.

Nguyen said in her note that the proportion of new workers landing in the sharing economy is evidence of “underemployment of their skills.”

“This exacerbates Canada’s productivity challenge, as many of these workers have the potential to work in positions with higher productivity,” she said.

Antunes says he expects productivity to rise among recent immigrants in the years to come, as it “takes time” for people to become fully engaged in the workforce after arriving.

“There’s a shock to the system here with this really strong growth in our demography that is going to take some time to resettle,” he says.

Porter said in his November report that there’s no easy solution for Canada’s productivity problem, adding that policymakers have been grappling with the issue for at least 40 years.

“If there was a straightforward formula to dealing with Canada’s perennial productivity problem, it would have been long since unleashed,” Porter wrote.

He argues that a more efficient tax system could be a part of the solution, but notes “it’s no silver bullet.”

“However, at the very least, a broader re-examination of the tax system is long overdue — the last full review was carried out by the Carter Commission in the mid-1960s,” he says.

He also urges policymakers to look at why businesses are reluctant to invest in Canada, rather than “force-feeding capital spending through heavy-duty subsidies.”

Canadian workers could also benefit from an injection of innovation, and Antunes says that much-talked about advancements in artificial intelligence over the past year are likely to play a role in fixing Canada’s productivity problem.

While the generative capabilities of AI tools like ChatGPT have stirred consternation among some about possible job losses, Antunes says those concerns are common every time a new technology emerges that streamlines work.

“What we’ve seen from these innovation and productivity gains time and time again, is that what it just does is add to our productive capacity,” he says. “There’s no doubt in my mind that the future of AI will help us generate more of that income and allow us to do more with less.”

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