Solving (almost) Canada's productivity puzzle

Raise the issue of Canada's productivity levels roughly, the amount Canadians produce per hour of work and the two sides line up pretty quickly.

Some groups, both conservative and not-so-conservative, lay the blame squarely at the feet of Canada's tax regime.

"One of the primary reasons for Canada's poor productivity growth is an economic environment that penalizes, rather than promotes, capital investment," two analysts for the pro-business think-tank the Fraser Institute, Niels Veldhuis and Jason Clemens, opined back in 2006.

Aless-trumpeted but seemingly popular argument is that highwage rates and unionization levels anywhere hamper a productive economy.

"Forced unionism festers "hate-the-boss" class warfare and stifles productivity, rendering many businesses uncompetitive and sending huge numbers of working people to the unemployment office," according to the National Right to Work Committee, a U.S. group based in Springfield, Va., that argues for an end to closed-shop union laws.

On the other side of the productivitydivide are those who blamepoor management thinking as a big factor in lousy national competitiveness.

"A left productivity program would challenge the failure of Canadian business to invest (in real capital and in technology), especially in high-productivity tradable sectors," said Jim Stanford, economist with the Canadian Auto Workers, writing in January 2005.

Into this foray jumped John Baldwin, director of economic analysis at Statistics Canada, and Wulong Gu, an analyst with Canada's statistical agency.

In August, theyissued a report on the country's long-term productivity performance, showing that Canada's ability to produce things has suffered in the past 20 years.

Baldwin, a former Queen's University academic, and Gu went deeper in defining the sagging results and said the fault was mainly in the corporate boardroom.

"The slowdown in labour productivity after 2000 was almost entirely accounted for by the factors that determine multifactor growth technology, innovation, firm organization, scale and capacity utilization effects," said Baldwin and Gu in their study.

That is econo-speak for the fact that Canadian companies did not fightthe competition hardenough, did not spend as much on new equipment,and could not grow to big enough to cut their overheadcosts.

And that is music to the ears of some experts in the esoteric field of what makes one economy grow faster than another.

"I agree that weak investment, particularly in information technologies and innovation, largely account for our relatively poor productivity growth," said Andrew Sharpe, executive director for the Ottawa-based Centre for the Study of Living Standards.

Anever-ending race

In its simplest form, a country's productivity measures how many goods and services that nation produces per person per hour.

What economists reallyfocus on, however,is the rate of productivity growth,essentially equating a big improvement in that figure with an increasingly competitive economy and, by implication, rising living standards.

"Much of the difference in countries' living standards reflects differences in their productivity. Usually, the higher productivity is the better," according to an online dictionary of business terms published by the Economist magazine.

In general terms, a country that can manufacture products and delivery services effectively is richer than a nation that is not as productive.

Canadians lag

In Canada's business culture, it is commonly believed that the country is less productive than its American neighbour. Statistics Canada's Baldwin and Gu went about testing that notion.

Then theylooked at a more contentious question why does efficiency lag?

That the United States boosted its overallproductivity faster than Canada did appears to be borne out by the latest Statistics Canada report .

(Productivity discussions are often framed in terms of output per worker. However, the Statistics Canada report uses more sophisticated modeling to include how management manages among other, non-labour-related factors.)

Overall, between 1961 and 2008, the U.S. economy hiked its efficiency by 4.5 per cent per year. Canada pushed its productivity up at a slower clip four per cent per annum.

Different eras

Of course, a 47-year period cannot really be boiled down to a single figure.

In this case, Baldwin and Gu broke uptheir examinationinto three different periods, 1960-to-1980, 1980-to-2000 and 2000-to-2008.

In only two of the three timeframes, however, did U.S. productivity outstrip Canada's. Between 1961 and 1980, Canada's annual efficiency improvements topped out at 5.8 per cent, compared withfive per cent for the United States.

An economy can still grow faster than its productivity rate might imply. In that case, you might have more employees entering the workforce or each man or woman working longer hours.

Statistics Canada noted that, over the 1961-to-2008 period, the country's overall GDP rose by 3.7 per cent. Between 1961 and 1973, Canada'syearly average growth rate was even higher, at 5.6 per cent.

Expertsattributed muchof Canada'sbetter GDP performance during a large portionof these 47 years tomore women entering the workforce.

In 1976, for instance, almost 78per cent of adult males were either working or looking for a job. By 1995, the portion had slipped to 72.5 per cent, according to Canada's statistical agency.

Over the same years, working women as a percentage of Canada's female population rose to 57.2 per cent from 45.7 per cent, a gain of one-quarter.

Groping for an answer

What makes the Baldwin-Gu study more importantis the reason it gives for this country's lagging productivity.

Usually at least in pro-business circles high taxes and overly-pushy unions get cited as the reasons for the national efficiency gap.

"(High rates of unionization and too many labour strikes) negatively impacts new investment in the province, which both weakens economic growth and reduces our ability to compete with other jurisdictions, since new investment invariably increases productivity," noted the Vancouver Board of Trade in a 2006 discussion paper on the British Columbia economy.

While worker shutdowns definitely hurt an area's productivity, Baldwin and Gu have joined the growing number of experts who citebusiness factors as the main culprit underscoring Canada's productivity woes.

"Since 2000, Canadian businesses experienced some major shocks," they write. "First, the high technology growth spurt of the late 1990s was reversed after 2000. Second, the Canadian dollar experienced a strong appreciation against the U.S. dollar after 2003. Third, commodity prices increased substantially because of strong global demand for energy and other primary commodities."

As a result, Canadian companies just did not invest enough to keep their operations up-to-date, the report noted.

The authors were careful, however, not to point the finger at management's decisions in explaining the country's slumping productivity.

"We only observe that the choice of combinations of capital as opposed to labour differed in Canada as opposed to the United States. Others have asked why," Baldwin explained.

In a 2003 study, Sharpe, of the Centre for the Study of Living Standards, came to a similar conclusion as did Baldwin and Gu but broke slumping productivity down even further. He argued that five factors drove down company productiveness:

• An under-investment inequipment by Canadian business.
• Less innovation north of the Canada-U.S. border.
• A tiny high-tech sector in this country versus the U.S.
• Less worker training.
• Smaller plants.

Whatever the definitive answer, however, some apparent causes of Canada's relatively poor productivity can be ruled out, Sharpe said.

"Our research has found that high taxes and unionization rates are not barriers to productivity growth in Canada, he said.

Even Baldwin, however,might not be prepared to go that far.

"There are no doubt a number of causes. (High taxes of business machinery) is a potential candidate though we have not tested whether it is more or less important than a host of other explanations," he said.