Three Policies to Improve Productivity Growth in Canada

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III. Policies to Improve Productivity in Canada

This section of the paper lays out three specific public policies to improve
productivity in Canada. As noted earlier, the three policies are: foster the diffusion of
best-practice technologies; remove the provincial sales tax on purchases of machinery
and equipment; and promote interprovincial movement of workers improving labour
market information, removing professional barriers to labour mobility, and establishing a
tax credit for interprovincial job search. Before examining these three policies, it is useful
to review some general principles for the application of productivity policy.

A. General Principles for Productivity Policy

As already noted, productivity is determined, either directly or indirectly, by
many factors, including the education and health of the workforce, all types of
investment, and technological change, among others. This means that many, if not most,
public policies have some link to productivity. Interest groups can often use this
“productivity hook” to make the case that the particular policies they advocate foster
productivity growth and hence serve the overall public interest.

This does not mean that these policies are necessarily bad from the point of view
of the overall societal interest. But any argument for a particular policy, such as lower
taxes or more spending, made by an interest group that is rationalized or justified by the
productivity impact of the policy should be viewed with suspicion and thoroughly
evaluated before it is accepted. It can be a very effective strategy for interest groups to
cloak their policy objectives in the blanket of the general interest of productivity
improvement, even though narrow interests may be largely served. The general interest or
benefits principle should be applied in any assessments of policies to improve
productivity.

It is the private sector that is directly responsible for the productivity performance
of the business sector through its decisions affecting innovation, physical capital
investment and human capital investment. As noted earlier, government of course plays a
crucial role in setting the framework for these private sector decisions. But in the short to
medium run there is little government can do to increase business sector productivity as
changes in framework policies take time to have an impact on productivity. In the long
run, of course, having the appropriate macro-economic and micro-economic frameworks
in place is essential if a country is to have a strong productivity performance.
Consequently, one should have low expectations for any impact of policy on
productivity, particularly in the short term. One should not expect to see productivity
improvements in 2007 or even 2008 or 2009 arising from policies put in place to improve
productivity in 2007. A longer term time perspective is needed for public policy to have a
significant impact on productivity growth.

As a general principle, the most important framework policy that the government
can pursue to foster productivity growth is to ensure a competitive marketplace. There is

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