Productivity and Income

Archived Topic Box from the 2005 Fifth Annual Benchmark Report

Economic well-being is often discussed in terms of statistical measures of Gross Domestic Product (GDP) per capita and real personal disposable income. Productivity growth drives both general economic and income growth. For individuals what matters is more basic: their own income, what the government takes in taxes and delivers by way of services in return, and the residual – how much money is left to buy both what one needs and what one wants.

Although many do not make the connection directly, the key to increasing individual material well-being is productivity growth. If an economy can produce more with the same amount of both capital and labour, quantified through increases in GDP per capita, personal incomes and consumption rise on average. In other words, productivity growth is fundamental to increasing the amount an individual has to spend or save.

In an October 2005 report, Statistics Canada assigned 80 percent of the growth in living standards in Canada from 1961 to 2004 to productivity growth. The other 20 percent came from increased 'work effort,' meaning an overall increase in the amount of hours worked in the economy. Productivity gains from increased work effort have a natural limit because there is a point where individuals can't increase their work hours further and employment rates reach as high as can be sustained in the long-run. In contrast, productivity growth is limitless and sustainable. The correlation between growth in labour productivity and growth in real hourly labour compensation can be seen in the chart below.

Unfortunately, productivity levels and productivity growth in Canada and BC relative to other jurisdictions have been lagging in recent years. Canada is 17th out of twenty-three OECD countries in terms of overall productivity, down from 3rd in 1960. Real GDP per hour (labour productivity) in BC is below the national average, and overall growth in productivity in both Canada and BC is stagnant.

If British Columbians want to increase their standard of living for the long term, increasing productivity through more public and private capital investments, new funding for and focus on research, training and academics need to be priorities. As well, favourable tax, immigration, and regulatory policies also must be at the forefront of public policy.

Sources: Statistics Canada (2005), Four Decades of Productivity Performance in Canada, cat. #15-206; TD Economics (2005), Canada's Productivity Challenge; BC Stats (2005), Probing the Productivity Puzzle; The Conference Board of Canada (2005), Performance 2005: Productivity, Employment and Income in the World's Economies.