At first glance, the 0.2% decline in labour productivity in second-quarter 2008 does not appear that large. However, together with back-to-back 0.6% drops in the previous two quarters, productivity in Canada is down by 1.4% over the past three quarters, its largest three-quarter fall since 1990.

According to Statistics Canada, the major contributors to this persistent weak productivity growth were labour-intensive industries such as mining, oil and gas extraction and construction.

At the same time, productivity in manufacturing increased by 0.8% in the second quarter, its largest quarterly increase since second-quarter 2007. Also, output per worker increased sharply in transportation and warehousing (+3.2% quarter over quarter) and at a more measured pace in administration and support services (+0.8%), information services (+0.6%), wholesale trade (+0.6%) and retail trade (+0.3%).

In the United States, productivity increased by 3.2% year over year in the second quarter, whereas in Canada it fell 1.4% year over year. This retreat in productivity growth has pushed labour costs in Canada up by 5.5% over the past year, compared to a 0.7% increase in the United States.

Canada’s weak productivity growth effectively lowers the ceiling on the country’s production capacity, i.e., the maximum rate it can grow without getting overheated and generating inflation. A lower production ceiling increases the risk that the central bank will be forced to keep interest rates high for an extended period of time, in order to ensure that core inflation stays at the midpoint of its 1% to 3% target range.

While programs such as improved worker training are viable approaches to long-term improvements in labour productivity, the most efficient short-term approach, by far, is to reduce personal and corporate income taxes. These taxes are major impediments to saving and investment and a higher standard of living for the country as a whole.

Member Comments