Comparing Labour Productivity in Canada and the US

Statistics Canada recently released the results of a new study comparing productivity in Canada and the US.


"The productivity of the unincorporated sector relative to the corporate sector is much lower in Canada than in the United States. As a result, when the unincorporated sector is removed from the estimates for the business sector of each country and only the corporate sectors for the two countries are compared, differences between Canada and the United States are much lower.

The Canada–United States ratio for labour productivity in the business sector as a whole was 88.0% in 1998 while the productivity ratio for the corporate sector (after removing unincorporated businesses) was much higher, at 99.2%. From 1998 to 2005, the level of productivity of the unincorporated sector in Canada relative to the unincorporated sector in the United States remained about the same; however, the relative productivity of the corporate sector fell. By 2005, the overall Canada–United States ratio for the business sector had declined to 81%, and the productivity ratio for the corporate sector fell to 89%."

My take away from this is that 1) yes, Canada has a large number of small unincorporated businesses that are less productive than their counterparts in the US but the productivity ratio for unincorporated businesses between Canada and the US remained the same over the period 1988 to 2005, and 2) productivity in the Canadian corporate sector has fallen a lot (relative to the US) over the period 1988 to 2005. Falling productivity in the corporate sector is not good for economic wealth creation in Canada. So, what is going on? Here are two possible explanations.

1. Corporations are not stressing the importance of productivity enough. The Canadian dollar was relatively weak over the period studied and the weak Canadian dollar may have been viewed as a competitive advantage that distracted away from productivity improvements.

2. Highly productive workers are not being paid real wages equal to their marginal productivity. In this case, there is not much point for a worker to be more productive if he or she is not being appropriately compensated.

Sector Rotation for July 31, 2011

At the end of each month, I rank a selection of  Canadian ETFs according to their price strength. The ranking is based on a simple average of three month returns, six month returns and twelve month returns.

Canadian size portfolios

iShares S&P/TSX 60 Index (XIU.TO)

iShares S&P/TSX Completion Index (XMD.TO)

iShares S&P/TSX SmallCap Index (XCS.TO)

Canadian industry sectors

iShares S&P/TSX Capped REIT Index (XRE.TO)

iShares S&P/TSX Capped Energy Index (XEG.TO)

iShares S&P/TSX Global Gold Index (XGD.TO)

iShares S&P/TSX Capped Financials Index (XFN.TO)

iShares S&P/TSX Capped Info Tech Index (XIT.TO)

iShares S&P/TSX Capped Materials Index (XMA.TO)

International portfolios

iShares S&P 500 Index C$-Hedged (XSP.TO)

iShares MSCI EAFE Index C$-Hedged (XIN.TO)

iShares MSCI Emerging Markets Idx (XEM.TO)

Claymore BRIC (CBQ.TO)

Commodities

iSHARES GOLD TRUST (IGT.TO)

Ticker	XCS	XEM	IGT	XEG	XFN	XGD	XIT
Rank	6	9	1	12	11	8	14
Above ma(10)?	No	No	Yes	No	No	No	No

Ticker	XMA	XRE	XIU	XMD	XSP	XIN	CBQ
Rank	5	2	10	3	4	13	7
Above ma(10)?	No	Yes	No	No	Yes	No	No

Here is What Happens if there is no Deal on the US Debt Ceiling

According to David Walker -- the former Comptroller General of the United States and head of the Government Accountability Office, here is what happens if the federal government cannot reach a deal.

1. $4 billion-plus a day will come out of the economy.
2. Government and civilian military workers will be laid off temporarily. That will result in penalties for late payment, to be paid by taxpayers.
3. Social security payments will be delayed.
4. No one knows how bad the reaction will be, but Walker is confident it will be negative for the stock and bond markets and the economy.
5. Interest rates will rise. For every 1% rise in interest rates, taxpayers will be on the hook for an additional $150 billion in debt payments.

The Effect of A US Downgrade On Stocks

For those of you trying to figure out what the effect of a US debt downgrade would mean for stocks, here is a calculation from Contrarian Musings showing that a debt down grade would lead to a 6.5% drop in US stocks. Intrade Prediction Markets indicates that there is currently a 60% chance that Standard and Poor's will downgrade US debt from its current triple A rating.

Forget About Cost Cutting: RIM Needs to Increase Sales

Research in Motion (RIM) announced that it is cutting 2,000 jobs. Job cuts are cost cutting measures and even in the best of times, job cuts are disruptive. Cost cutting is operational. RIM needs to think strategically. What RIM needs to do is stop worrying about cutting costs and instead focus on increasing sales.RIM needs to role out its new operating system and get some cool new products in the stores for the fall.

Here is Who Owns the $14 Trillion US Debt

While Washington is bogged down in how to raise the US debt ceiling, people around the world are asking questions like "who owns this debt?". The Atlantic has a graph answering this question. More than half of the total national debt is owed to the US Federal Reserve. Debt owed to a country's own citizens is not as big a problem as debt owed to foreigners.

More Aid to Greece

The BBC has a good story summarizing what is known about the latest aid package to Greece. The story also has a link to the original EU press release which is a short 4 page document short on specifics.

According to the BBC story:

"Debt relief
The Institute of International Finance - a global trade body representing big banks and other major lenders - said the planned debt restructuring would target participation by 90% of Greece's private sector lenders.
French President Nicolas Sarkozy said private lenders will contribute a total of 135bn euros of financing to Greece.
The plan is expected to provide some 50bn euros of debt relief to Greece.
Three of the four options offered to lenders to swap or relend existing debts would extend Greece's repayment terms by 30 years, while the fourth would do so by 15 years.
They all offer a much lower interest rate than Greece's current 15%-25% cost of borrowing in financial markets.
Two of the options would also involve "haircuts" - reducing the principal amount of debt Greece has to repay.
The terms of the deal imply a loss to Greece's lenders equivalent to 21% of the market value of their debts, said the IIF."

This sounds like a short-run band aid solution to buy some time before a new round of financing is required. The voluntary target participation by 90% of Greece's private sector lenders is a way to stop credit default swap (CDS) payouts. Which brings up an interesting question. What then is the point of purchasing CDS if payouts can be voluntarily suspended?

While the aid package is designed to soften the blow of Greece's current debt situation, it is unlikely that the austerity measures imposed in Greece are going to do anything except plunge the economy into a deep and long recession (see here). In Greece, tax collection is too low (or too lax, since tax evasion is prominent) relative to government spending. Realistically, the EU needs to consider the option of allowing Greece to default on their debt obligations and a possible strategy for allowing Greece to exit the Euro.

Spiegel Online International has really good coverage of the European debt crisis.