Three Policies to Improve Productivity Growth in Canada



Executive Summary

Since 2000, labour productivity growth in the Canadian economy has been weak.
Yet increased productivity growth is by far the most important determinant or driver of
increased material living standards for Canadians. It is also the most important means by
which any fiscal pressures arising from the demographic challenges associated with an
aging population can be met. The objective of this paper is to put forward three concrete
policy proposals to improve the productivity performance of the Canadian economy.

Context for the Productivity Debate in Canada

Economic growth can be decomposed into labour input growth, measured by
hours worked, and labour productivity growth, defined as output per worker. With the
ageing of the baby boom cohorts and their retirement from the workforce, labour force
growth in Canada will fall significantly. This means that the importance of hours worked
as a source of economic growth will fall in the future. Productivity growth will hence
assume a greater relative importance as a source of economic growth. In the future, if
Canada wants to increase GDP, it will have to increase labour productivity.

Since 2000, Canada’s labour productivity performance has deteriorated relative to
our performance during the second half of the 1990s. Canada’s productivity growth has
also been very weak relative to that experienced in the United States and in other OECD
countries. In fact, Canada’s productivity growth rate is sub-par and we are falling further
and further behind other OECD countries. In this context, reviving productivity growth is
indeed the biggest and most important economic challenge facing this country.

Capital investment, human capital, and technological change can be considered
the proximate sources of labour productivity growth, but they themselves cannot explain
why productivity growth actually takes place. Rather, it is the decisions of business to
invest and innovate and of workers to acquire human capital which are the driving force
behind business sector productivity advance. These decisions are affected by many
factors such as the state of business confidence, the entrepreneurial spirit of the business
class, and government policies. The latter are the focus of this paper.

Why Productivity is a Tough Sell

There is an elite consensus in Canada that productivity is very important, but few
governments or political parties directly address or talk about the productivity issue. This
behaviour in a way is understandable because politicians know that productivity does not
poll well or resonate as an issue for Canadians.

People associate productivity increases with working longer hours. Many also
fear that higher productivity at the industry or firm level translates into layoffs. This can
be true in an industry or firm characterized by strong productivity gains and limited
potential for increases in demand for output. But at the total economy level, there is no
long-run negative relationship between productivity and employment. Productivity



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