Canada can boost productivity through investing in physical and human capital

OTTAWA, Ont. – The surest way for Canada to boost its productivity is through investment in physical and human capital, according to a recently released Conference Board of Canada study, Sluggish Productivity Growth in Canada: Could the Urbanization Process Be a Factor?.

“”Canada’s productivity growth is weaker than that of most other developed countries, which translates directly into lower standards of living,” said Mario Lefebvre, director, Centre for Municipal Studies. “Investment in physical and human capital is the best way to improve productivity growth. Canada must strengthen policies that encourage investment in new technologies, and help Canadians to enhance their skills and training.””

In 2005, Canada ranked 12th in productivity growth in the Conference Board’s sample of 21 countries, down from seventh place in 2000. Between 1981 and 2005, Canada posted an average annual increase in productivity of 1.3 percent, while productivity grew by 1.7 percent annually in the United States. Compounded over 25 years, the productivity gap helps explain why gross domestic product (GDP) per capita in the United States was $6,400 more than that in Canada in 2006, compared to just $2,300 in 1980.

Physical capital in this case includes everything from infrastructure to buildings, machinery and equipment. The study found that a 10 percent increase in the capital-to-labour ratio would boost productivity growth in Canada by five percent over five years (the capital to labour ratio is the average amount of capital made available to each worker). Such an increase in productivity growth of one percent a year would represent almost a doubling of Canada’s recent annual productivity growth (just over one percent).
Furthermore, if Canadians were to remain in school on average one extra year, productivity growth would improve by nearly two percent over five years.

The report set out to study whether urbanization, in and of itself, plays a role in Canada’s productivity performance. The empirical evidence suggests that neither the level of urbanization (the share of the urban population relative to the total population) nor urban concentration (the share of the urban population in the largest city – in Canada’s case, Toronto) have a significant impact on a country’s productivity growth. What really matters is investment in physical and human capital.

“Most investment in physical and human capital takes place in urban areas and thus, indirectly, one can then say that cities are where the lion’s share of productivity improvements is happening,” said Lefebvre.

Several other factors were also tested, including the average firm size, population density and country size. Country size was the only other factor having a direct impact on productivity, albeit a small negative impact. But Canada cannot use its geographic size as an excuse, since Australia and the United States are also large countries and their productivity performances have been much better.

The study was published under the banner of CanCompete, a three-year program of research and dialogue designed to help leading decision makers advance Canada on a path of national competitiveness. The report is publicly available at www.e-library.ca.