Canada’s poor productivity growth a result of low machinery and equipment investment

Decades of inadequate investment in machinery and equipment (M&E) may explain why Canada’s labour productivity growth is one of the poorest among its global peers, according to a Conference Board of Canada analysis.

Canada’s average M&E investment as a share of GDP in the 1970s, 1980s and 1990s was the second lowest among peer countries assessed in the Conference Board’s How Canada Performs analysis — only France had a poorer investment record. In the 2000s, Canada ranked 11th among 16 peer countries, a modest improvement that reflects lower investment shares in other countries rather than an increased investment share in Canada, the Conference Board said.

“On the surface, Canada seems to be doing well. We came out of the recent economic crisis relatively unscathed compared with our neighbour, the United States,” said Glen Hodgson, senior vice-president and chief economist. “But we remain at the back of the class on labour productivity, which is a key economic challenge for Canada. Labour productivity can be a confusing concept. It’s not about working harder, longer hours. It’s about working smarter and getting higher value for the same hours worked.”

Historical data for the peer countries reveal a strong positive relationship between investment in M&E and labour productivity. However, Canada’s labour productivity growth ranks 12th among 17 countries in the Conference Board’s How Canada Performs analysis.

By investing in M&E, companies provide their workers with the latest technologies, allowing them to produce more and higher-quality goods and services. Firms can contain their costs and increase their output, while substituting capital for labour — important as labour markets become tighter in Canada.

In the past, Canada’s under-investment in M&E was attributed to the low value of the dollar. When the loonie rose relative to the U.S. dollar, real M&E investment grew by 13.8 percent in 2005 and 10.7 percent in 2006. Despite this recent growth, Canada’s M&E investment as a share of GDP, as of 2009, remains below that of most of its peers.

Canada’s shortfall in M&E investment – specifically information and communications technologies (ICT) – has been a key contributor to the labour productivity gap between Canada and the United States. In the late 1980s, the U.S. invested $500 more per worker in ICT. By 2009, the U.S. was investing $1,500 more per worker.

How Canada Performs is a multi-year research program at The Conference Board of Canada to help leaders identify relative strengths and weaknesses in Canada’s socio-economic performance. The How Canada Performs website presents data and analysis on Canada’s performance compared to 16 peer countries in six performance categories: Economy, Innovation, Environment, Education and Skills, Health, and Society.

www.conferenceboard.ca