Although the business community is very concerned about Canada’s productivity problem — and wants to see an extensive strategy to fix it — there are some who question whether a problem even exists.

Those who maintain there is a problem point to statistics comparing Canada with other countries. Those on the other side of the argument say that measurement problems make it difficult to compare productivity among countries. Further complicating the issue is whether short-term fixes are possible, or if the problem is tied to the long-term economic environment, which changes slowly.

The first thing requiring clarification is that productivity growth is not, in and of itself, a meaningful goal. Productivity growth is beneficial for a country only if it results in a higher standard of living through more jobs and higher wages. If it results only in higher profits, without spilling over into employment and wage gains, it will have no impact on the standard of living.

Nor will it raise the standard of living if companies acquire more machinery and equipment only to avoid hiring additional workers. (This may be partly the case in Europe, where companies don’t hire more people than absolutely necessary because labour laws make it very hard to lay off or dismiss workers.)

Productivity is usually measured by output per person employed. However, this is not an ideal measurement; it doesn’t capture the increase or decrease in output resulting from changes in the number of hours employees work. The problem is data on hours worked aren’t available for all sectors. There are also productivity measures that attempt to adjust for changes in the amount of other inputs used — such as machinery and equipment or energy — but these, too, leave a lot unexplained.

Those who believe there’s a clear-cut problem point to the slowing of labour productivity growth in Canada to less than 1% so far this decade from 3.6% in the 1960s. They admit this is part of a global trend; for example, in 2004, only 16 of 24 Organization for Economic Co-operation and Development countries had higher output per person employed — way down from 1960, when it was 23.

But in 1960, Canada was the third-highest; it is now 17th. Critics also cite slower productivity growth in the 1980s, 1990s and, especially, so far this decade when compared with the U.S.

But comparisons among countries are fraught with problems. Many relate to the structure of economies. For example, productivity growth in resources, which is a much bigger sector in Canada than in most countries, can be weak or even negative because companies have already extracted the easy-to-get-at oil, gas and metals. This isn’t an issue if prices are high enough to compensate, as they currently are. Nor does the discovery of new deposits show up in productivity numbers, although it certainly adds to companies’ assets and a country’s wealth.

Self-employment is another issue. Canada has a high number of self-employed, many of whom don’t work as many hours as full-time employees, according to Statistics Canada analyst John Baldwin in Ottawa. Canada also has a very large number of small businesses, more than most industrialized countries. These businesses usually don’t have the money to buy new machinery and equipment and/or the time to adopt new processes.

StatsCan has done a study comparing productivity levels in Canada and the U.S. that made a number of adjustments to the data. The results suggest that, in 1999, Canadian productivity was about 94% of U.S. levels — way above what unadjusted comparisons suggest. Baldwin, one of the study’s authors, says productivity growth also has to be looked at over full economic cycles. And because Canada has a more open and volatile economy, it tends to have weaker productivity growth at the beginning of cycles but catches up later. Over the 1980s and 1990s, he says, Canadian productivity growth closely tracked that of the U.S. This may not happen in the present cycle, he admits, but at this point, he considers it “a concern, not a worry.”

Second issue

The second issue is how much productivity growth is rooted in the economic environment in which decision-makers cut their teeth. Don Drummond, chief economist at TD Bank Financial Group in Toronto, thinks this is very important: “Anyone over 50 grew up in a protected economy — and still thinks in those terms.”

@page_break@People under 50 have spent more of their adult lives in free trade regimes with the U.S. and Mexico, under the North American free trade agreement. This experience will be reflected in their decisions as they move into decision-making roles. Drummond says this is already happening. At TD, “It’s hard to come across a commercial client who doesn’t have foreign exposure through suppliers and/or customers,” which he doubts was the case 15 or even 10 years ago.

Not everyone buys into this theory, however. Wojciech Szadurski, a senior economist at Toronto-based Global Insight Canadian Macro Economic Service, thinks the current environment, not past ones, determines decisions. “Companies are driven by greed. The business person will do whatever he or she can do to improve productivity and the bottom line,” he says.

Others sit somewhere in the middle. Nancy Hughes Anthony, president and CEO of the Canadian Chamber of Commerce in Ottawa, says the past environment may have some influence, but, she believes, it’s the lack of a comprehensive government strategy to improve productivity that is the main stumbling block. Investors, foreign companies with Canadian subsidiaries, potential immigrants and bright young Canadians thinking of moving to the U.S. need to see that Canada is serious about increasing productivity before they invest their money — or lives — in this country.

Despite these different perspectives, there is a good deal of unanimity about the measures that should be taken to increase productivity. Where opinions diverge is how quickly those measures can be effected. And that affects the salability of the measures to voters. If you can persuade voters that they will see more jobs and higher wage gains within a year or two of lowering corporate tax rates, it’s an easier sell tax decreases than if they were told their children would benefit.

The main difference in the recommended actions lies in the use of subsidies and incentives. Drummond argues that investment in machinery, equipment and training is in the self-interest of companies. If they don’t do it on their own, taxpayers shouldn’t be paying them to do so. (Companies currently have the money, given that retained earnings are at record levels.)

More foreign ownership

Lowering corporate taxes is at the top of most lists of what’s needed to boost productivity, including Drummond’s. Canada has the second-highest effective marginal tax rate on capital investments among 36 industrialized and high-growth developing economies, according to a study by the C.D. Howe Institute in Toronto.

Another key recommendation is increasing competition by eliminating barriers to foreign ownership in financial services and telecommunications. The financial services sector is particularly critical because of its size and because bankers can influence the decisions of corporations to which they lend. In the same vein, analysts recommend reducing regulations and barriers to interprovincial as well as international trade.

More investment in infrastructure and education is also important, and the impact of this is long-term by its very nature.

But exactly where education dollars go is another area of disagreement. Some think the emphasis should be on increasing the number of university graduates, particularly at the master’s and PhD levels.

Others say the emphasis should be on skills, both at the public- and secondary-school levels, as well as at community colleges. The argument here is that you get a much bigger impact by increasing the productivity of low-skill workers than by encouraging already educated individuals to get more degrees.

Canada already has proportionately more community college graduates than most and, when combined with university graduates, it shoots ahead of the U.S. But some, like Drummond, think we should be increasing enrolment at colleges as well as universities and point to the impending skill shortages as baby boomers retire.

The C.D. Howe’s current director of research and soon-to-be president and CEO, Bill Robson — he assumes the post on July 1 — takes a somewhat different tack, saying that Canada needs to look at ways to keep baby boomers in the workforce longer. When they retire, this country will be faced with a shortage of both university-educated and skilled workers, and that will have an impact on productivity. If boomers can be encouraged to work a little longer, he says, the impact could be delayed. IE