How high productivity helps fight inflation

Most productivity increases are achieved when we work smarter. By investing in the right tools and equipment, companies can help workers produce more with the same amount of effort—but workers need the right education and training too. When productivity is high, it is better for businesses, workers and consumers. It propels the economy.

When productivity increases, businesses can produce more for each dollar they invest in their operations. That leads to higher profits, which benefits other participants in the economy. Higher productivity helps businesses adapt to cost increases without having to raise their prices. It also enables them to pay higher wages. When there is more output per worker, the supply of goods goes up, and workers have more money to spend. Together, these factors drive economic growth and, over time, improvements in our standard of living.

Learn how investing in tools and equipment can help a business do more, with the same amount of effort.

How productivity is measured

Productivity measures the economic value of a good or service produced against the amount of work it took to produce it. Measuring productivity requires an estimate of both the total value of an economy or industry and the total number of hours the employees in that economy or industry worked. The ratio between these is then reduced to its simplest form: the number of dollars of value produced for a single hour of work.

Productivity can vary a lot in different sectors of the economy. It depends on the value of what is produced and the amount of labour required to produce it. There is room for productivity growth in every sector of the economy. The adoption of innovative technologies like artificial intelligence and robotics can make businesses more efficient, but even with new tools and technologies, Canada’s productivity growth has stalled.

The amount the economy is producing has continued to increase, but this is because companies are employing more workers. The amount produced by each worker hasn’t been growing as much because many companies haven’t been investing enough in research and development, or the training and equipment that workers need to boost their output.

Why productivity growth is important right now

Higher productivity means the economy is producing more value for the same amount of work. That increased production drives improvements in our standard of living. Aging populations, rising trade tensions, geopolitical instability and the economic impacts of climate change could all cause inflation to increase. But higher productivity can help protect us from the worst effects because:

• when workers produce more for each hour worked, companies are more profitable and can absorb higher costs, including higher wages, without having to raise their prices
• more efficient production of goods and services means a greater supply, which helps keep prices and inflation lower
• more productive companies can withstand the economic disruptions that can be caused by events like geopolitical conflict and extreme weather

Canada has all the right ingredients to increase productivity. Our workforce is well educated, our universities have a strong research culture, and our trade agreements give Canadian companies access to international markets. Each of these is an advantage, but we also need to:

• invest in equipment and technology
• train and educate workers to build skills for the future
• ensure that Canada’s business and regulatory environment encourages competition, which helps keep prices down

The Bank of Canada also has a role to play in increasing productivity. By keeping inflation around 2%, we support the economic stability businesses need to invest in themselves. Low, stable and predictable inflation creates the best investment climate because it allows businesses to plan for the future with confidence.