Productivity problems worsen

In the mid-80s, Canada was still quite competitive with most developed countries in terms of productivity, but it has been all downhill since then – with productivity declining significantly after 2015. Photo credit: Flickr/Arild


Canada has had challenges keeping up with other countries in terms of its productivity performance for decades, but recent indicators suggest those problems have significantly worsened. Productivity can seem like an esoteric concept, but what it basically comes down to is our standard of living, something that should be of major interest to all Canadians. A recent study by TD Bank economists highlighted the serious issues Canada faces and identifies some of the reasons for our poor performance. The full TD report can be found here.

In the mid-80s, Canada was still quite competitive with most developed countries in terms of productivity, but it has been all downhill since then. We usually compare ourselves to the US, which has always had a leg up on Canada in terms of productivity, but the gap between the two countries has become much wider in recent years. For instance, in the year 2000 the average Canadian worker was about 82 per cent as productive as their US counterpart. By the year 2020, that had declined to about 77 per cent. Not only that, but we also compare unfavourably to the UK, Australia and France. Years ago, the European economies were defined as “sclerotic” because of their overwhelming anti-business red tape and regulations that were generous to employees but costly to business. Yet now, Canadians trail even some of those countries. 

The TD study notes how Canada’s overall GDP growth has been relatively decent coming out of the pandemic, but that does not necessarily imply an improved standard of living. Indeed, the fact that immigration levels have been quite high in recent years means even with a moderately expanding total GDP, the ratio of GDP per person has been declining, hence a reduced standard of living. Sizeable population increases will boost GDP to some extent but can also mask the fact that we are actually worse off on a per capita basis. The TD study also highlights how Canada’s performance has declined significantly after 2015. Since then, Canada’s real (accounting for inflation) GDP per capita has increased at a sluggish rate of about 0.4 per cent annually, as compared to 1.4 per cent on average in comparable advanced economies. 

As with most analyses of productivity, the TD study identifies a lack of innovation and low research and development (R & D) spending as one reason for the stagnation. In 2021, Canadian R & D spending was only about 1.7 per cent of GDP, which is half of the US number and less than most other countries. As a country that has long relied on its wealth of natural resources for economic growth, it may not be surprising that Canadian businesses do not invest in these areas as much as others. 

Canada also has a large number of industry sectors that are protected from competition by various forms of government regulation. Banking, telecommunications, airlines, broadcasting, some food sectors such as dairy and poultry, among others, do not face foreign competition. An earlier study by the Fraser Institute estimates that about 35 per cent of the Canadian economy is in this protected position. Why would any business be compelled to invest in R & D if their market share is virtually guaranteed? 

Canada’s high rate of unionization as compared to the US also plays a role. The current port strike in BC is a classic example. One of the union’s key demands is that the employer not adopt modern robotic technology which is utilized in most other modern ports around the world. Unions regularly try to stymie the adoption of new technology that would enhance productivity because jobs will be replaced. Using antiquated technology to satisfy union demands is a great way to ensure further economic decline as Canadian businesses become less competitive than their counterparts who adopt innovations. Canada’s extremely high rate of unionization in the unproductive public sector has led to high levels of compensation and benefits for government workers that outstrip those in comparable private sector jobs which further constrains productivity growth. 

The intangible impact of culture can also be an important factor. Although Canada does have a healthy entrepreneurial sector, they are not accorded the same respect among Canadians as in other countries. When a Prime Minister calls small businesses “tax cheats” and the NDP leader constantly goes on about how companies are the main source of inflation because of their greed despite all evidence to the contrary, it reinforces the anti-business mindset. Among many Canadians, profit is a dirty word yet if there is no profit a business will not survive, taking all the jobs and tax revenues they’ve provided with them. A little more celebration of hard work and business success would be welcome. 

There are significant productivity differences among the provinces pointed out in the TD report as well. The highest GDP per capita is found in the resource-heavy provinces such as Alberta, Saskatchewan and Newfoundland. Ontario and BC are next and roughly tied, followed by Manitoba and Quebec. The three remaining Atlantic provinces have the lowest productivity in the country. 

While it is true that Canada has had a productivity problem for decades, it has clearly worsened in recent years. The TD study was too polite to pin the blame on the Trudeau government and, although previous governments also must take some responsibility, the decline since the current Liberal government came into power has been much more serious than in previous eras. Per capita GDP under Trudeau lags that of the governments of Harper, Martin, Chretien and Mulroney. 

Considering the Trudeau government has focussed on redistributing existing wealth rather than creating wealth for the future, digging a giant debt hole for Canada that will have to be paid off and growing inefficient government at the expense of the much more productive private sector, it really isn’t surprising that our standard of living is declining so substantially. Industrial strategies that involve government picking winners to the tune of tens of billions of tax dollars that penalize efficient businesses have always failed, and will do so again. Although politicians such as Finance Minister Chrystia Freeland have bemoaned our productivity shortfalls, they are continuing the big-spending, big-government, big-taxing policies that are a main cause of the problem. 

The TD study also notes that there is nothing on the horizon right now that will reverse our poor productivity performance. In fact, the study notes it is likely to get even worse if current policies are continued. With no better approach expected from the current federal government and a recession expected in the coming months, it appears that a change of government and a radical shift in our economic approach will be the only thing to rescue Canada from further declines in our standard of living. 

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