Looking beyond productivity stats will improve outcomes for Canadians

Does Canada have a productivity problem? You would certainly think so, reading the handwringing by economists and business columnists over the past several weeks. The statistics bear this out: Canada’s labour productivity (its real output for each paid hour worked) has declined steadily over the past six quarters, and on an annual basis since 2020. It is now lower than it was in 2019 before the pandemic. Between 2019 and 2022, the last year for which comparable labour productivity data are available for all G7 countries, Canada had the worst performance, except for Italy and France. Few economists would disagree with Nobel Prize winner Paul Krugman that this recent poor absolute and relative productivity performance is a cause for concern. “Productivity,” he wrote in 2016, “isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living depends almost entirely on its ability to raise its output per worker.” While real output per paid hour of work is a good indicator of how much each paid worker is producing, it does not tell us what proportion of the potential workforce is employed in producing that output, or how equitably the income from that output is distributed. One can imagine two countries, both with the same level of output and the same working-age population. In Country A, only 60 per cent of the working age population works for pay full-time, and the highest paid 20 per cent of the population earns 50 per cent of total labour income. In Country B, 75 per cent of the working age population works for pay full-time, and the highest paid 20 per cent of that population accounts for 40 per cent of total labour income. Both A and B would have the same average standard of living, but Country A would have both a much higher level of labour productivity and a more unequal distribution of labour income than Country B. Most people would say that Country B had a much healthier economy despite A’s higher level of productivity. The same considerations apply when assessing the health of a given economy over time. For example, by far Canada’s best productivity performance in recent years occurred in 2020 when labour productivity rose by 8.8 per cent compared to 2019. And from 2017 to 2020, we led the G7 nations in labour productivity growth. But in 2020, our inflation-adjusted real output fell by 4.9 per cent, and the share of the prime working age population (aged 25 to 54) working full time fell from 73.9 per cent to 70.8 per cent, its lowest level since 2009. Total wages and salaries adjusted for inflation fell by 2.1 per cent. The explanation for this combination of worse outcomes and higher productivity was that paid hours of work fell more than real output. In contrast, between 2020 and 2022, Canada’s real output grew by 9.8 per cent, and the share of its population aged 25-54 employed full-time rose from 70.8 per cent to an all-time high of 75.9 per cent. Total wages and salaries adjusted for inflation rose by 10.6 per cent. But productivity fell by 6.9 per cent over this period, because paid hours worked rose at a faster pace than real output. Was the Canadian economy healthier in 2022 than in 2020, despite the decline in labour productivity? Most people would say that it was. Of course, the ideal situation would be if productivity, the full-time employment rate, and total wages and salaries adjusted for inflation were all rising. That is, the economy were becoming more efficient, the prime age working population were more fully employed, and wages and salaries adjusted for inflation were both higher and more equally distributed. But in a situation where Canada was absorbing and then recovering from the pandemic's shock, a drop in labour productivity in return for achieving an all-time high in the prime age full-time employment rate, and a substantial increase in inflation-adjusted wages and salaries does not look like a bad bargain for the Canadian economy or its people. Recall that Krugman does not say that productivity in every year is “nearly everything” even in terms of improving real GDP per person. It is only in the long run that this is the case. And rising real GDP per person is not all we expect from a healthy economy. We also want an increasing share of working-age people to have full-time, well-paid work. At the same time, we want to reduce the level of inequality in the distribution of total inflation-adjusted labour income. Having a bad short-term productivity performance since 2020 is a problem. Avoiding it at the cost of a continuing decline in the prime age full-time employment rate and increased inequality in the distribution of labour income would have been far worse. Labour productivity is a ratio. It can rise because workers are better organized, have better skills, and have more efficient tools with which to work. In that case, the quantity and quality of output improves, more people have paid work, and real wages increase. This is the kind of productivity improvement economists like Krugman have in mind when they extol productivity as “nearly everything.” But that ratio can also rise, as we have seen, simply because paid hours worked fall by more than output. That is nothing to celebrate. We need to focus less on whether productivity statistics are improving, rather than on why. That will lead us to policies that improve both productivity and outcomes for Canadians. Michael Hatfield is a retired senior economist from Human Resources and Skills Development Canada. He also used to work for Jake Epp when he was minister of health and welfare (1984-1989) and Barbara MacDougall when she was minister of employment and immigration (1989-1991). Prior to that, he worked as a researcher in social policy for the federal Progressive Conservative Caucus Research Office (1979-1984), Flora MacDonald's 1976 leadership campaign, and worked in the New Brunswick Progressive Conservative party office during part of the term of his uncle, Richard Hatfield (1974-1978). The Hill Times