Three Policies to Improve Productivity Growth in Canada

11

Economic growth, defined as real GDP growth or real output growth, can be
decomposed into labour input growth measured by hours worked and labour productivity
growth, defined as output per worker. Summary Table 1 and Chart 1 show that
productivity growth accounted for 63 per cent of economic growth over the 1947-2006
period. The contribution from labour productivity was larger in the 1947-73 period than
from 1973 to 2006 (77 per cent versus 45 per cent).

Notes:

1. From 2006-2026, labour productivity is assumed to grow at 1.5 per cent per year; average hours worked per
week are held at the 2006 level; employment is assumed to grow at the same rate as that of the labour force; and
labour force growth is based on projected 15-64 years old population growth with 2006 labour force
participation rate for the 15-64 age group held constant.

2. Numbers might not add up to 100 due to rounding

Source: Table 1

The size of the working age population (15 to 64) is the primary driver of trends
in hours of potential labour supply, which is in turn determined by employment trends. In
theory, declines in the unemployment rate, higher labour force participation rates, and
increases in average annual hours worked could offset the decline in the size of the
working age population. But the magnitude of any changes from these sources are too
small to offset demographic developments.

Consequently, with the ageing of the baby boom cohorts and their retirement from
the workforce, which will start in a few years, labour force growth in Canada will fall
significantly (Chart 2). Net labour force growth will turn negative around 2023.⁵ This

⁵ Immigrants will account for a large proportion of the new entrants into the labour force.

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