Business

Stagnant productivity remains economic threat

Canada's slumping productivity represents a threat to the country's long-term wealth, economists say.

Mention the word "productivity" on a television newscast and the clicking of channel changers would resemble a field full of crickets in the still of a warm summer night.

Too bad.

How many widgets each Canadian workers makes might just be the most important indicator of how well our economy will perform in coming years.

Indeed, many economists watch this figure with hawk-like vision because of its importance to the country's competitive position.

"In the future, more than in the past, labour productivity growth will be the key determinant of the rate of improvement in the living standards of Canadians," wrote senior Industry Canada officials Paul Boothe and Richard Roy earlier this year for the Ottawa-based Centre for the Study of Living Standards.

Essentially, unemployment, inflation, even gross domestic product all take a backseat to productivity when it comes to figuring out where Canada is headed.

And, unfortunately, according to this indicator, Canada is going in the wrong direction.

Recent slump

Canada has posted negative productivity growth for nine months, most recently in the second quarter of 2008 when labour productiveness slipped 0.2 per cent.

That followed the two previous quarters when productivity dipped 0.6 per cent in each period.

Those figures were bad, according to many analysts, because they indicate an economy becoming less, not more, competitive versus other countries.

"The complete stalling of productivity growth in Canada represents a major long-term economic risk to our future prosperity," said Canadian Auto Workers economist Jim Stanford in a recent paper undertaken for the Canadian Centre for Policy Alternatives.

But, while analysts generally agree on the importance of the number, they do not agree on what the number actually tells you.

A word with too many meanings

For too long, different groups have parsed different meanings from productivity numbers.

Pro-business types often use slumping productivity as a club with which to hit interventionist governments or recalcitrant workers.

"The improvement in labour market productivity ... can be as much as 25 per cent smaller than in a country in which product market regulation ... is the least restrictive in the OECD," wrote the Organization of Economic Co-Operation and Development in a 2006 report about scientific innovation and government regulation.

Others, however, point to the need for more government rules when productivity is dropping.

"The negative productivity growth which has been experienced ... does reflect that government's decision to endorse Canada's emerging specialization as an energy exporter, its effective endorsement of the record rise in the Canadian currency and its failure to arrest the dramatic decline in high-productivity manufacturing," said Stanford.

With mathematical certainty

Essentially, figuring out a country's productivity is simple math: take the national GDP and divide it by the number of workers and you get a figure for output number per person.

Right now, you have a number which tells how much stuff the average Canadian makes in a year.

Then, compare the difference between per-person GDP at two different time periods and, presto, now you have a growth rate for the measure. And it is the growth rate, or how much better a country is becoming at producing goods and services, that economists watch.

A negative growth number simply tells you that each person produces a bit less compared with last year or last quarter.

A country might still be able to boost its output by increasing the size of its workforce or some other factor.

During the 1970s, for instance, Canada experienced decent GDP growth despite relatively low productivity increases.  The difference was a 10 percentage point jump in the participation of women in the workforce.

A word with no meaning

The real problem with productivity, however, is that, even if you do the calculation, no one really knows what economic factors actually alter the result.

At various times, economists have pointed a bony finger at too much government intervention, too little government regulation, excessive taxes, insufficient capital investment and a lack of scientific research to explain sputtering productiveness.

In fact, a few enterprising economists even tried to tie sunspot activity to productivity growth.

That has left governments confused as economists throw solutions around like feathers in a pillow fight.

The latest example was the Competition Policy Review Panel, chaired by prominent Canadian industrialist Lynton Wilson, which released its report in the summer.

While well-regarded, the panel's 148-page treatise on Canada's flagging competitive position had something to please — or upset — just about everyone.

Recommendations covered the public policy waterfront, from the oft-cited and always disregarded idea of harmonizing the federal GST with provincial sales taxes across Canada to a request that the government suspend the Canadian Heritage Act in certain takeover situations.

So far, except for some promises by the Conservatives to loosen foreign investment rules, this report is gathering dust along with every other similar tome in some federal library.

What we know

Despite fierce arguments among economists concerning the sources of productivity and solutions for the lack of growth, they do agree upon at least two basics.

Spending money on new machines usually boosts productiveness. Basically, you can only get a person to work so hard with their bare hands. Thus, getting more output in an eight-hour work day means having that same employee operating a better piece of machinery.

Thus, in most cases, countries that exhibit improved productivity are the ones that invest in machinery or capital goods.

Canadian corporations, for instance, will spend in the range of nearly $121 billion on capital equipment in 2008. The national growth rate in this key category has been relatively strong for the past two years.

 Canada's capital spending

 $ amount

 Growth rate

 2006

 109.7 billion

 ---

 '07

 114.5

 4.4%

 '08

 120.9

 5.7

Source:  Statistics Canada

Generally, however, American business spends more per person on new equipment and machinery than any other country. As well, the rate at which the United States is expanding its capital pool is accelerating.

Between 2001 and 2005, U.S. corporations spent, on average, 1.6 per cent more annually.  The economic think-tank Global Insights predicts that between 2006 and 2010, these same companies will spend 6.4 per cent more per year on capital equipment. 

Education helps

Along with more machines, a better educated workforce can boost a country's productivity.

After all, the worker has to be able to operate that new piece of sophisticated machinery to make more goods.

Nations that pushed more of the population to become better educated have often boosted productivity.

India, for instance, has hiked the percentage of its children who finished the primary level of schooling to 86 per cent in 2006, up from 77 per cent in 1995.

That country has seen its gross national product per head almost double to $2,740 US in 2006 from $1,510 in 1995.

A never-ending argument

In the end, using a single answer to solve an economic problem as difficult as slumping productivity might be a bit simplistic.

For instance, people who complained about Canada's excessive unionization levels as a drag on the country's productivity still gripe about unions even though the percentage of the workforce that belongs to one has slid significantly.

Similarly, analysts who have cited Canada's relatively high unemployment rate as a weight on national productivity for 10 years might have trouble explaining why 30-year lows in joblessness has not boosted the number much.

Until governments and experts start singing from the same song sheet in terms of solutions to productivity problems, however, do not expect voters to tune in en masse to that TV news report.

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