For the first time in three decades, Canada’s labour productivity slipped during a recession, a report released Thursday from Statistics Canada report said.

The findings paint a troubling picture for Canada’s export-rich economy as a growing productivity gap with the United States, which has seen its productivity spike during the recession, could make things even more difficult for Canadian businesses trying to compete on the international stage while dealing with a high loonie.

Philip Cross, chief economic analyst with Statistics Canada and author of the report, said this was the first time in eight recessions over the past 30 years that Canada has seen its productivity decline.

“What makes it really noticeable is that the United States, which has presumably the same access to technology and other things that affect productivity, has seen terrific growth consistently since 2003,” he said. “I think what it clearly says is that the underperformance of productivity in Canada relative to the U.S. is continuing, and the gap is widening.”

Between the fourth quarter of 2007 and the third quarter of 2009, productivity in Canada dropped 1.2% while the same figure rose 4.9% in the United States.

What really worries Mr. Cross are the possible reasons behind the shift.

Traditionally, when an economy enters recession businesses will choose to pull back their work hours to save money before making layoffs. However, once that happens the remaining workers tend to pick up the slack and actually boost productivity because each employee is expected to do more.

However during the current recession, a few unique factors have come up.

First, employers are likely resistant to firing employees, even the less-efficient ones, because they still remember the labour shortages that existed during the boom years just before the recession. This was especially true in Alberta. Another problem is more jobs are coming from “marginal” sectors such as the oil sands, which are still in the development phase and not generating much in the way of concrete goods or even growth opportunities.

As a result, while productivity slipped employment actually went up. Employment in Canada actually did not begin falling until two quarters after output began to recede.

Contrast this with the United States, where the more severe recession forced companies to slash payrolls right away, instead of trying to get by on shorter work weeks. In fact, employment in the United States actually started falling in early in 2008, before output receded. Considering both Canada and the United States are forecasted to see similar GDP growth in coming years, it appears Canadians are doing less with more.

Dale Orr, a respected economist who has long followed labour productivity issues, warned that the productivity gap could lead to a lower standard of living for Canadians in the next five years.

“There’s a shoe out there waiting to drop because this is not sustainable. How do we make sales in competition with the Americans if our productivity is lower and falling?” he said. “Here in Canada people are euphoric we don’t have the unemployment rate they do, but there’s another side to this.”

He argues that between 2008 and 2010, Canada will likely lose about 6% in labour productivity compared with the United States. The net effect is Canada’s real GDP per capita figures, which are used as a measure of standard of living, will decline by roughly the same amount.

“You can get away with a quarter of declining growth, maybe a year, but three years is a problem,” he said. “You’ll see less government goods, less private goods, less tax collected so less services, less disposable income, less spending. That’s why this is so important.”

Financial Post

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