How Canada fell so far behind in productivity
Canada’s poor productivity over the last eight years may have cost individual Canadians and families dearly, explained University of Calgary economist Trevor Tombe at a recent Public Policy Forum member event examining Canada’s productivity crisis.
“For the roughly 20 years prior to 2015, we had labour productivity growth per year on average of about 1.5 percent each year, which compounds to really large gains over that span of time,” Tombe noted.
Then things changed. “In the past eight years, both labour productivity and real compensation per hour has really slowed down considerably to about 0.2 percent per year. The gap between what could have been, had that earlier growth continued versus the anaemic growth Canada experienced, represents, he said, about 13 percent in missing growth. And along with it “the foregone potential income that we could have enjoyed,” he told event moderator Luiza Savage, Executive Editor for growth at POLITICO.
What happened? While the timeline for the drop-off aligns with a change in the federal government, other external factors are part of the story for the sudden shift in productivity gains, Tombe said.
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Among them were dramatic declines in areas related to oil and gas around 2016, with “large spillover effects right across the country,” and another change of government — in the United States. “We had for some time…a great deal of questions around how stable trade policy would be,” Tombe said. “It would be natural for any investor thinking about large projects in Canada tied to trade, in particular trade with the United States, they might have had some pause.”
But domestic policy choices have certainly played a role. Housing availability, for example, has dampened Canada’s productivity potential, Tombe said. While ideally people would pick the job that best aligns with their skills, inaccessible housing options can lead people to work in fields that are less suited for them in places where they can afford to live, leading to a misallocation of labour potential. And the federal government’s recent proposed changes to the capital gains tax structure could introduce more complexity. While the move is “sensible in the sense that it provides a more neutral playing field across income sources… there’s no getting around the fact that it will be a drag on investment at the margin,” Tombe said.
The answer to Canada’s productivity woes is not, however, to slash corporate taxes in half, Tombe said, but to find other ways to encourage investment that is less harmful to government revenues, like accelerated capital cost allowances or a restructuring of corporate taxes to lower the effective rate.
READ MORE: Ten ideas to help solve the productivity crisis
Government could also invest in sectors with the most promise for future productivity growth, like Artificial Intelligence, for which the spring federal budget has allocated $2.4 billion. But, Tombe warned, the government should adopt a neutral approach, backing basic research and development to foster the spread of ideas, rather than trying to predict which idea will win out in the end.
“Governments don’t make the best entrepreneurs, and I think we have to maybe keep that in mind when evaluating when public funds are being used to place bets on future sources of economic growth,” he said.
Finally, there are Canadian workers, whose skills need to be either better allocated or improved. That might mean removing provincial barriers for some professionals or rethinking skills development, including adopting “more modular types of credentials, rather than whole four year degrees” to make people more adaptable and responsive to changes in the job market.
“Productivity is this ‘P’ word that is shied-away from sometimes in political conversations,” Tombe said, but there is a pressing need to “force it to be a central issue in policy development.”
Reviving a national productivity council that could operate like the current Parliamentary Budget Office might be one way to do that, raising issues about public finances that wouldn’t otherwise become part of the public conversation — and with the added ability to access information from within government ministries. The idea was also floated by Tombe at the annual Growth Summit last month in Toronto.
But ultimately “there’s no silver bullet,” Tombe said. Addressing Canada’s productivity “involves thousands, tens of thousands, of little decisions that will accumulate into real gains.”
For more on Canada’s productivity problem, PPF Media’s live blog of the recent Growth Summit covered all the action and provocative conversations — over eight panels plus the annual Indigenous Ownership and Economic Reconciliation Breakfast.
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