Productivity

Archived Topic Box from the 2005 Fifth Annual Benchmark Report

Productivity is a measure of the efficiency of an economy, or the amount of output that is produced for a given amount of inputs (land, labour and capital), and is critically important for its contribution to improving economic growth and living standards. Productivity growth and labour force growth are two key ingredients that can influence economic growth, generally measured as GDP per capita. Between 1956 and 2002, for example, output per hour (or labour productivity) growth accounted for 117 percent of GDP per capita growth. Labour force growth has not seen nearly as rapid an increase and has decreased at times due to declines in overall hours worked and employment rates in the post-war period. This relationship directly affects Canadian and BC living standards in terms of the total hours of work required for a given set of outputs, wage levels, and the level of social support the economy can provide.

Although Canada has had strong economic performance since 1995, its productivity vis-a-vis the US has deteriorated, especially since 2000. In 2004, Canada's business sector productivity was 74 percent of the United States, the lowest since the 1950s. Our productivity has been deteriorating in comparison with other jurisdictions as well; Canada was ranked 17th out of 23 OECD countries in terms of GDP per hour worked in 2004, down from 16th in 1990, 12th in 1980 and 5th in 1970.

A recent analysis of the labour productivity gaps in Canada relative to the United States for 31 industries¹ found that Canada had a large productivity gap in three of four industry groups in 2001: primary, manufacturing, and services and a large advantage in construction. At a finer level of detail, productivity discrepancies between Canadian and American industries ranged from a 54 percent disadvantage in the electronics and electrical equipment industry to a 50 percent advantage in primary metals. Other than transportation, productivity in Canadian service industries was lower than in the US. Canada enjoys a significant advantage in the resource-based manufacturing industries of wood products, paper, chemicals, non-metallic minerals and primary metals as well as in printing and publishing, motor vehicles and other transportation equipment. The productivity gap is large in labour intensive industries including: textiles & clothing, fabricated metals, machinery & computers, and electronic & electrical equipment.

British Columbia had a labour productivity advantage within Canada in several industries and industry groups but had a disadvantage overall in 2004. British Columbia's real GDP per hour worked was 96.9 percent of Canada's and was especially low in certain manufacturing industries such as clothing manufacturing (51.5%) and miscellaneous food manufacturing (59.0%). However, the manufacturing industry category as a whole in BC was 96.4 percent of Canada's, buoyed by strong performances in wood product (147.3%), meat product (149.3%), computer and peripheral equipment (192.6%) and miscellaneous non-metallic product manufacturing (201.0%).

British Columbia had a productivity advantage relative to Canada in several industry categories, including: agriculture, forestry, fishing & hunting (162.2%), mining & oil and gas extraction (145.0%), and transportation warehousing (112.1%). Particularly strong within these categories was forestry and logging at 159.9 percent of Canada. British Columbia had a productivity disadvantage in construction (83.6%), and wholesale trade (92.8%) among others.

As a small open economy highly dependent on international trade and mobile investment sources, BC competes aggressively for skilled labour, intellectual capital, technology, and investment with other jurisdictions world-wide. Closing the productivity gap with the US economy is of critical importance for both BC and Canada's attempts to attract and retain mobile resources.

Factors that influence productivity have received considerably study; several of the most important follow:

Capital Intensity: The amount of capital per unit of labour (per worker or per hour worked) is one potential factor in Canada and BC's lower labour productivity. Studies generally confirm that capital intensity is a factor in the productivity gap with the US, although the precise extent of the effect is openly debated. Generally Canada compares quite favourably on "structures to labour" measures, but less favourably on machinery & equipment ratios, with the latter generally having the more significant impact on overall productivity levels.

Technology Innovation & Diffusion: While measurement is exceedingly difficult, there appears to be an innovation gap between Canada and the US affecting the level of productivity enhancing innovations, the amount of research and development work being done, and the pace at which new technology and information is diffused in the economy. The level and rate of innovation and diffusion both have a positive impact on increasing production efficiency and productivity levels.

Human Capital: The level of education and the general skill of the labour force significantly impact a jurisdiction's ability to quickly adapt and use new technologies and best practices, to innovate, and to work efficiently and productively. While BC, Canada and the US are fairly comparable overall on educational attainment levels depending which measures are used, the US compares more favourably on important indicators such as the quality and number of research institutions and science graduates.

A number of other influences have potentially impacted productivity levels in both BC and Canada in recent years, including: limited presence of economies of scale due to smaller firm sizes and markets; the falling number of head offices, which generally have a positive impact on innovation and production levels; and the long-term effects of a low Canadian dollar which has allowed export oriented firms to compete on world markets without having to make productivity enhancing improvements, particularly during the last decade. The rapid escalation in the Canadian dollar during 2003, 2004 and 2005 has certainly changed this equation and will force firms to become more competitive if the dollar stays at high levels.

Productivity is closely linked to economic growth. Increasing BC's performance on this key measure while concurrently focusing on other "critical factors" and indicators identified elsewhere in this report should ultimately contribute to increasing British Columbian's standard of living.

Sources: ¹Rao, Tang and Wang, Measuring the Canada-U.S. Productivity Gap: Industry Dimensions, International Productivity Monitor, Number 9, Fall 2004; Centre for the Study of Living Standards, Aggregate Income and Productivity Trends: Canada vs. the United States and Labour, Capital and Total Factor Productivity Tables by Industry for Canada and the 10 Provinces (online databases, data accessed on October 25th, 2005); Rao and Tang, Productivity and Competitiveness Challenges Facing Canadian Industries, Micro-Economics and Policy Branch, Industry Canada, May 7, 2003; Rao, Sharpe and Smith, An Analysis of the Labour Productivity Growth Slowdown in Canada since 2000, International Productivity Monitor, Number 10, Spring 2005; Groningen Growth and Development Centre and The Conference Board, Total Economy Database, August 2005.