growth increases potential real income, which in turn increases demand, resulting in
employment opportunities in new industries. There is therefore no reason why
productivity growth should have negative long-run consequences for total employment.
Given that Canadians have already achieved a high standard of living relative to
other countries, some feel that productivity gains may be less important than they once
were. Yet, productivity does lead to greater income which can in principle be used to
raise economic well-being. More importantly, many measures that can be taken to foster
productivity are related to changes in policy regimes and the government costs associated
with such policies are minimal. Any free lunches that can be obtained through more
intelligent public policy should be sought.
Productivity growth is of course associated with economic growth and economic
growth is often associated with environmental degradation and climate change. Yet, rich
countries are better positioned to take the steps needed to preserve the environment than
poor countries. Productivity growth, which transforms poor countries into rich countries,
can therefore potentially be more a part of the solution to environmental degradation than
a cause of this degradation.
Strong productivity growth is key to the financing of higher health and pension
costs associated with the growing proportion of the population 65 and over. The message
that Canadians must hear is that productivity growth is vital to their economic destiny.
Policies to Improve Productivity in Canada
1. More Rapid Diffusion and Adoption of Best Practice Technologies
Technological progress is the most important determinant of productivity
advance. At any given time, only a small number of firms or countries are on the
technological frontier, defined at the set of technologies that are the most advanced,
efficient, and cost effective. Other firms or countries can experience very rapid
productivity growth by adopting these best practice technologies and moving toward the
technological frontier.
The federal government and provincial governments in Canada devote significant
resources to subsiding the research and development (R&D) activities of the private
sector. Indeed, the federal scientific research and experimental development tax credit in
2007 is projected to cost $2,675 million. To be sure, R&D is important for innovation,
particular in certain high tech sectors such as communications equipment and
aeronautics, and governments must contribute to support R&D activities. But in 2002,
less than 1 per cent of firms performed R&D in Canada. If the term “innovation” were
reserved for these, very few Canadian firms would be considered innovative.
However, an innovative firm is more appropriately defined as one which
introduces new production processes and products. By this criterion, 81 per cent of
manufacturing firms in Canada can be considered innovative according to the 1999