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Oil and gas drives productivity in Newfoundland but is a drag in Alberta

06/10/2011 by John Clinkard

While it is difficult for economists to agree on anything, in Canada they generally agree that one of the country’s major challenges is its abysmal productivity growth.

This shortcoming is frequently highlighted by the Bank of Canada, the Organisation for Economic Cooperation and Development and the International Monetary Fund and mars an otherwise very positive economic report card.

Although Canada’s overall productivity performance is definitely sub-par, a recent analysis by economists Ricardo de Avillez and Chris Ross at the Centre for the Study of Living Standards reveals that over the period 1997 to 2007 productivity in some parts of the country was significantly better than it was in others.

For example, among the ten provinces, annual growth of labour productivity in Newfoundland and Labrador averaged 4.8%, almost three times faster than the 1.7% rate recorded by the country as a whole.

This rapid increase in output per hour was primarily achieved in mining and oil and gas extraction (+15.3% per year) which more than offset sub-par productivity growth in most of the province’s other industries.

As a result of this sustained strong pattern of productivity growth over the past ten years, output per hour in Newfoundland and Labrador rose from $24.7 in 1997 to $39.6 in 2007 — the highest in the country and 9.7% above the national average.

In sharp contrast to Newfoundland, productivity growth in Alberta, at 1% per year, was the lowest in Canada due to persistent declines (-4.3%) in output per hour in mining and oil and gas extraction caused by the shift from low cost conventional oil extraction to higher cost/capital intensive non-conventional (oil sands) petroleum production.

The study also provided estimates of the three key factors which determine productivity growth in Canada. These include labour quality (i.e., level of education, years of experience), capital intensity (i.e. the size and composition of the capital stock) and multi-factor productivity (i.e. technological improvements and returns to scale).

Based on these estimates, the major contributor (57%) to the growth of productivity in Canada over the ten years has been capital intensity due to increased investment in both machinery and equipment and non-residential construction.

This significant contribution that investment has made to productivity growth in the recent past clearly indicates how essential business investment, both domestic and foreign, is to prospects for productivity improvement in the future.

Labour productivity growth, Canada and provinces – 1997 to 2007
Labour productivity growth, Canada and provinces – 1997 to 2007
Data Source: Statistics Canada/Chart: Reed Construction Data, CanaData.

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