Canadian incomes could be $7,500 higher with better productivity: think tank

Canadians could have about $7,500 more a year in disposable income if companies had only been able to keep up with their American rivals in productivity over the last decade or so. The startling number is part of a Conference Board of Canada report that tries to bring home the high cost the country is paying by continuing to lag in the obscure economic indicator of productivity.

Based on the premise that Canada’s productivity has lagged the U.S. by 0.8 percentage points annually from 1998 to 2008, the study suggested:

• Real per capita gross domestic product had fallen $8,500 further back in 2008 than where it would have been had the gap not existed.

• Corporate profits would have risen by about 40 percent and government revenues by 31 percent.

• Canadians would, on average, be much wealthier, allowing them to spend more and boost the economic performance of the country.

Economist Mario Lefebvre, who authored the report, said he tried to personalize what is at stake because he finds few people understand how productivity – which measures output in terms of hours worked – affects them.

“We felt it was time to put some dollars and cents on it to tell people, ‘This is what we’re leaving behind,'” he said. “If you boost productivity, you can take it to the bank.”

Lefebvre admitted that the most recent U.S. gains in productivity have stemmed from the fact that during the recession, employers laid off more workers than their Canadian counterparts and have been slower in hiring them back. But he noted that the period under study came before the most recent downturn and included a prolonged period of high U.S. employment.

“That’s the hypothesis people will challenge,” but high productivity has not meant high unemployment in the U.S., he said.

“We are basing (our assumptions) on the fact people would be richer, would therefore be able to buy more, retailers would have to hire more and we would gain share on the export front,” Lefebvre explained.

The report puts the blame for the gap squarely on the corporate sector, as does other research on the subject by the Ottawa-based think tank. Lefebvre said comparisons with other nations suggest the size of the country, population concentration, or firm size – Canadian companies tend to be smaller – are not the determinant factors.

The key reason, he said, is that Canadian firms have not kept up with their American counterparts in adopting the latest technologies, whether computerization or robotics or plant equipment, that boost the ability of their workers to produce more.

“Canada’s well-educated workforce has not had the proper tools to play with,” he said.

The Bank of Canada and Finance Minister Jim Flaherty have also urged firms in the past few years to take advantage of the high loonie to import new machinery and equipment to boost productivity.

But Bank of Montreal economist Douglas Porter said the problem may be more complicated than it appears. He noted that policy-makers have introduced a number of measures advertised as productivity enhancing, including lower taxes, the GST and free trade, and yet the gap remains.

“I wouldn’t put it all down to timidity of our businesses,” he said. “Why would our industries invest less – they are all presumably trying to maximize profits. There must be a strong structural reason they are not investing more.”

One contributing factor, he said, may stem from the fact many manufacturers in Canada are effectively branch plants. Another is that the high dollar may be “squeezing” out some of Canada’s most productive industries, particularly manufacturing. And he still believes the relative small size of Canadian firms is important, since they have fewer resources from which to modernize.

Lefebvre said the Conference Board has not concluded its research on the issue. The next report will focus on ranking sectors in terms of productivity in an attempt to isolate underlying factors for the gap.