The productivity problem

Senior Deputy Governor Carolyn Rogers talks about some of the reasons for Canada’s poor productivity track record, and what we can do to turn the tide.

A healthy economy depends on high productivity

Strong productivity—which leads to faster growth, more jobs and higher wages—is an important way to protect the economy from the risks of high inflation.

Canada has seen no productivity growth in recent years. And over the past four decades, we have actually slipped significantly compared with some other countries. In fact, relative to the United States, among G7 countries we are now second only to Italy when it comes to productivity decline.

This is important because a number of factors threaten to drive inflation persistently higher in the future. These include global trade tensions, changing demographics and the economic impacts of climate change. We need to ramp up our productivity now, as a buffer against these and other forces down the line.

What’s behind highly productive economies

Three elements contribute to stronger productivity:

• capital intensity—giving workers better physical tools like machinery, and using new technologies to improve efficiency and output
• labour composition—improving workers’ skills and training
• multifactor productivity—using capital and labour more efficiently

Considering these, there are two basic strategies to improve productivity: focus the economy on industries that add greater value, and be more efficient with the work we’re currently doing. Canada generally hasn’t performed well on either front. This needs to change if we want to ensure a stable and prosperous economy for everyone.

Canada needs to do better

When we look at the factors that drive high productivity, we see some clear areas for improvement.

Canada can focus more on making sure the training and education we provide teach the skills we need for jobs today and in the future. This includes post-secondary learning and apprenticeship programs that better respond to what employers are looking for. It also involves leveraging the skill sets of the many new Canadians who immigrate here.

A more competitive business environment would also help drive greater innovation and efficiency. This is particularly important for small and medium-sized businesses that can’t take advantage of the economies of scale afforded to larger companies.

Perhaps most importantly, Canada’s investment levels are nowhere near as high as they should be in the areas of machinery, equipment and intellectual property. In fact, investment levels have decreased over the past decade.

Everyone has a role to play in encouraging a strong investment climate that will help boost productivity. With stronger productivity, everyone can enjoy robust growth and better wages without high inflation. And in a healthy economy, we are better positioned to manage inflationary pressures without having to rely so much on raising interest rates.