Earlier this year, a senior Bank of Canada official took the unusual step of publicly referring to Canada’s stagnant productivity as an “emergency.” It is encouraging that the issue is now in the national spotlight. Boosting productivity is the only way to deliver sustainable increases in real incomes and improvements in living standards, particularly in the long-term. Canada has been struggling to make gains on this core indicator of prosperity. From 2019 through the end of 2023, the level of productivity in Canada diminished slightly, while advancing by a hefty six per cent in the United States. Today, we rank 18th globally in the level of overall productivity.
In 2023, labour productivity (real GDP per hour worked) in Canada was $63.60 per hour; B.C. roughly matched the national average. Industries with above-average productivity levels include mining, oil and gas, pipelines, utilities, lumber manufacturing and telecommunications; those with comparatively low levels include accommodation and food services, retail trade, personal and household services, and much of the public sector.
Within the broad business sector, there is a strong positive linkage between productivity and the wages and non-wage benefits paid to employees across most private sector industries. The most productive industries, on average, pay their workers more—an empirical relationship documented in recent Canadian research by my former colleague David Williams. As noted in a February 2024 RBC Economics report, productivity growth is “essentially the only way that business profits and worker wages can sustainably rise at the same time.”
Until approximately 2000, Canada generally held its own against the United States on productivity in the overall “business sector.” Since then, we have been losing ground vis-à-vis the U.S. By 2022, labour productivity in the Canadian business sector stood at just 70 per cent of the U.S. benchmark.
A continuously growing productivity gap has negative implications for future gains in real wages and incomes in Canada, compared to the United States. Among other things, it heightens the risk of a further widening of disparities in the economic returns to skills, the acquisition of credentials, entrepreneurial effort and capital investment on our side of the border, relative to our principal trading partner and competitor for talent and capital.
Turning around our lacklustre productivity performance is a key challenge for Canadian policymakers, including B.C.’s re-elected NDP government. There is no silver bullet or short-term fix. However, a review of Canadian and OECD studies published over the last five to 10 years suggests the following steps can help to put us on a better productivity growth trajectory:
• Increase business non-residential investment in productive assets and activities, including both tangible and “intangible” capital. Canada scores poorly relative to other advanced economies on non-residential capital formation, notably investment in the categories of machinery, equipment and advanced technology products; intellectual property; and research and innovation.
• Increase investment in trade-enabling infrastructure such as ports, highways, railways and other transportation assets that link Canada with global markets and facilitate the efficient movement of goods and services within the country.
• Overhaul federal and provincial tax policies to strengthen incentives for capital formation, innovation, entrepreneurial wealth creation and business growth.
• Streamline and reduce the cost and complexity of government regulatory frameworks affecting all sectors of the economy—particularly natural resources, construction, manufacturing, transport, digital services and infrastructure development.
• Foster and nurture competition across the economy and scale back government monopolies and government-sanctioned oligopolies.
• Eliminate interprovincial barriers to trade, investment and labour mobility to bolster the Canadian common market.
Jock Finlayson is chief economist at the Independent Contractors and Businesses Association.
