Business productivity a key issue for Canada

Canadian business-sector productivity increased at a higher rate than that of the United States in 2011 – the first time that’s happened since 2006. The jump halts the widening of a productivity gap between the two countries, an issue that has worried Canadian policymakers.

Business productivity in Canada rose 0.8% in 2011 over 2010, compared with a 0.2% increase in the United States, according to Statistics Canada figures released this month.

The results come five months after a Deloitte report cautioned that Canada must find a way to drive higher productivity or face a declining standard of living.

“To some extent, governments have been listening,” said Peter Dungan, an economist with the Rotman School of Management at the University of Toronto. “There have been some major movements in Canada to increase the tax incentives for business investment. Because one of the ways you get higher productivity is by getting more investments, like more capital and especially new capital, for workers to work with.”

Canada has cut its corporate tax rate from 21% to 15% since 2008. Dungan said provinces also have added business tax incentives in recent years for the purpose of increasing productivity.

In the early 1980s, Canadian productivity was comparable to that of the United States. But Canadian output per worker shrunk to 86% of US output by 2009, according to the Deloitte study, “The Future of Productivity: An Eight-Step Game Plan for Canada”, which chronicled the decline. The study measured productivity by the ratio of GDP per hours worked.
 
From 2001 to 2009, Canada’s annualised productivity growth of 0.7% trailed that of nations such as Australia (1.1%), Israel (1.3%) and Austria (1.4%), according to the report.

Scepticism about the productivity gap

Dungan is sceptical about the intensity of concern about Canada’s failure to keep pace with US productivity in recent years. He said US productivity increased more rapidly during the recent recession in part because US employers shed jobs more quickly, and that’s not necessarily a sign of a healthier economy.

The longer-term widening of the productivity gap is more troublesome, but it can be explained in part by environmental factors, according to Dungan. He said US productivity surged in relation to Canada’s over a longer period partly because Canada has failed to match the United States in producing high-tech goods such as computers and cell phones.

In addition, Dungan said, Canada’s economy relies more on exploiting natural resources, and productivity declines as gold and oil, for example, become increasingly difficult to extract. But if those resources fetch high prices, he said, the concerns about productivity can be overstated.

“There are some problems,” Dungan said. “But some of it, in my opinion, is overdone, or it’s inevitable. It’s just the nature of the economy relative to that in the US.”

Risk, machinery gaps

Deloitte’s report lists other reasons for the growth of Canada’s productivity gap. Its survey of 902 North American business leaders showed that Canadian business leaders are more risk-averse than their US counterparts.

The survey also showed that venture capital is less available in Canada; so-called “angel investors” who provided capital for business start-ups measured 0.36% of the population in Canada, compared with 0.62% in the United States. And the Canadian business sector’s investment in machinery and equipment has long trailed that of the United States, according to the report.

—Ken Tysiac (ktysiac@aicpa.org) is a CGMA Magazine senior editor.