Canada’s standard of living has increased more than expected over the last decade, outpacing the United States, but the gain has been due to employment growth not productivity improvements, according to economic research firm Global Insight.

Global Insight says that economic data reveal that Canada’s standard of living has increased more than the firm expected over the past 10 years. Moreover, it has increased more than the U.S. standard of living, allowing us to narrow the Canada/U.S. standard of living gap.

In 1998, Global Insight forecasted that, over the upcoming decade, Canada’s population would grow 12%, but it actually grew only 10%. However, economic growth over the period was a cumulative 38%, beating the forecast of 27%. As a result, GDP per capita grew an average of 2.6% per year, relative to the forecast of only 1.4% per year. “Thus, today Canada’s standard of living is a full 10% higher than we forecasted it would be a decade ago,” it reports.

Compared with the U.S., Canada’s standard of living has improved more. In 1997, Canada’s standard of living was almost 82% of the U.S. level. That has narrowed to 84.4% in 2007, with a peak of 86.0% in 2002.

“With matching population growth in both countries, clearly it was Canada’s stronger GDP growth that closed the standard of living gap. The base for this was not labour productivity (GDP per employee), which grew about 12% over the decade in Canada, compared with 18% in the United States. Instead, the powerhouse behind Canada’s higher GDP growth was employment growth, which soared by 23% over the decade, compared with just 13% in the United States,” it notes.

Canada’s employment growth was stronger because the labour force participation rate increased in Canada, while it fell slightly in the U.S., and Canada reduced its unemployment rate significantly.

“In 1997, Canada’s labour force participation rate and unemployment rate left significant room for improvement. Today, labour markets are operating much more effectively. Thus, over the next decade, to increase its standard of living, Canada cannot count on such a high level of employment growth. The only way to increase the standard of living on a sustained basis will be to increase labour force productivity,” it concludes.