17
policy that could effectuate such an increase in wealth should be strongly encouraged and
funded.
Two additional factors also influence productivity growth and levels. The first is
the reallocation of labour and capital across the sectors of the economy. As a general rule,
workers leave firms, industries, sectors, and regions characterized by below average
productivity levels and enter those characterized by above average levels. This produces
a bonus to aggregate productivity growth above the contribution from within sector
productivity gains. The best known historical example of this source of aggregate
productivity growth was the movement of workers out of low productivity agriculture in
the decades following WWII.
The other factor affecting productivity relates to the natural resource sector. The
discovery and exploitation of new natural resources deposits can spur productivity
growth through composition effects as average productivity of natural resources
industries is generally much above the industrial aggregate. Since 2000, the development
of diamond mines in the Northwest Territories and the offshore oil deposits in
Newfoundland has resulted in these two jurisdictions having the two fastest rates of
productivity growth of any jurisdictions in the country. Higher natural resource prices
also increase the relative productivity levels, expressed in current dollars, of resource rich
provinces. Higher energy prices raised Alberta’s nominal GDP per worker from 111 per
cent in 1999 to 144 per cent of the national average in 2005 (Chart 3)
E. Productivity Trends
The Canadian economy has performed well on almost all indicators in recent
years. Output and employment growth have been strong, inflation and unemployment are
low, the federal government deficit has long been eliminated, public debt is falling in
both absolute terms and relative to GDP, and the Canadian dollar has appreciated. As the
OECD remarks in its 2006 country report on Canada (OECD, 2006:9) “The Canadian
economy has continued to deliver excellent results in nearly all respects.” A recent IMF
report on Canada (IMF, 2007) reached a similar conclusion.
The one area where Canada has performed poorly, from both an historical and
international perspective, is productivity growth. Ironically, as discussed above,
productivity growth is of paramount importance to future living standards. Not
surprisingly, both the OECD and IMF reports highlight this area of weakness and
recommend policies to rectify it.11
Since 2000, Canada’s labour productivity performance has deteriorated relative to our
performance during the second half of the 1990s. Business sector output per hour
advanced at only a 1.0 per cent average annual rate in Canada between 2000 and 2006,
only about one third the annual rate of advance of 2.9 per cent recorded in Canada
11 The OECD country report (2006:10) says that a challenge for all levels of government is to raise
productivity and that boosting productivity growth depends on improving the overall business environment.
For an OECD perspective on Canada, also see Cotis (2006).