RESEARCH PAPER: Productivity and living standards in Canada and British Columbia
Posted Nov 16, 2018
This paper was prepared for B.C. Business Summit 2018: Canada 360 - Action to Win in the Global Economy by Jock Finlayson, Executive Vice President and Chief Policy Officer and David Williams, Vice President of Policy.
- Growth in Canadian real GDP per person – a key measure of living standards – has trended much lower since the 1960s. Prior to 2000, Canadian incomes were doubling in roughly 30 years (i.e. one generation). At recent growth rates, this feat would take four to five generations.
- There are only two ways to raise GDP per person: higher labour productivity (producing more GDP per hour of work); and working more hours per head of population. In other words, the choice is between "working better" and "working more."
- Since 1870, Canada has maintained GDP per person at roughly 80% of U.S. levels. To sustain this ratio in recent decades, Canada has increasingly relied on working more hours per head of population to offset faltering productivity growth. This strategy has limited further scope to raise living standards.
- Productivity is the efficiency by which inputs (capital and labour) are transformed into outputs. Slowing labour productivity growth in Canada since the 1970s has opened a sizable gap in productivity levels relative to other advanced countries. Canadian workers produce 26% less GDP per hour than American workers and 22-23% less than workers in Germany and France.
- The good news is that British Columbia has recently closed its longstanding labour productivity gap with Canada. B.C.’s improving productivity performance has enabled the province to narrow our gap in living standards with the rest of Canada. In 2001, B.C.’s real GDP per person was $6,600 less than the Canadian average. By 2017, the gap had fallen to $1,450 per person.
- The paramount focus of public policy in Canada and B.C. needs to be on raising GDP per person. To do this, we need productivity-driven economic growth.
- The key policy reforms we recommend to raise productivity are: (1) overhaul business taxation to incentivize firms to scale up, and to address the erosion of Canada’s tax competitiveness vis-à-vis the U.S.; (2) modernize regulatory regimes so as to attract rather than repel productivity-enhancing investments, and to reward innovation and good business performance; (3) promote intense competition in product markets; (4) make Canada and B.C. preferred locations for global talent; and (5) stimulate innovation and commercialization and the scaling up of home-grown technologies.