Canada's Productivity

There is always lots of discussion about how Canada’s productivity lags other developed economies. Sometimes this criticism is warranted, other times it is not. In order to get a better idea of how Canada’s productivity has changed over the past 20 years I compared Canada with the other G7 countries.

An aggregate production function is specified with three inputs: capital, labour and energy. Output is measured by GDP (constant 2000 US$), capital is measured by gross fixed capital formation (constant 2000 US$), labour is measured by the number of people in the labour force, and energy is measured by energy use (kt of oil equivalent). The data set covers the period 1990 to 2010. All data are from the World Bank online data base. Data envelope analysis is used to estimate the efficient frontier and Malmquist total factor productivity (TFP) indices. Malmquist index values greater than one indicate a productivity improvement. 

The chart shows total factor productivity (TFP) for the G7 (average across countries) for each year. Between 1993 and 1998, TFP was trending downwards. During this time period there was lots of discussion about how information technology was re-shaping our lives, and presumably making us more  productive, but the effect was not showing up in the productivity numbers. Productivity recovered somewhat during the early 2000s. Between 2006 and 2009 there was a big increase in TFP but this increase was lost in the face of the Great Recession. For the sample period as a whole, however, TFP is around 1 which indicates no increase in productivity over this 20 year period. This is not good for economic wealth creation.

Looking at the individual country performance shows Canada to be the laggard in TFP (but not by much). Canada was ranked last in 9 out of the 20 years studied. Canada’s average value for the Malmquist index was slightly below 1 indicating, on average, a slight drop in productivity. For the other G7 countries, the average value was 1 or greater, but overall, none of these countries showed much in the way of productivity growth. What is interesting about this table is that, while Canada might be expected to be the laggard, some other countries would be expected to be leaders. This does not appear to have happened. 

Either the message on the importance of productivity isn’t getting through to business, or not enough high value jobs are being created, or high value workers are not getting paid their marginal productivity of labour. Moving forward, productivity growth needs to increase if we are to enjoy high living standards.

Are Companies Hoarding Cash?

Bank of Canada Governor Mark Carney created a stir on August 22 when he said that too many Canadian companies are hoarding cash rather than putting it to productive uses to help create economic growth.

Bank National has responded with their own report on the cash holdings of 327 publicly traded Canadian  companies that the bank follows (see here). Their research finds that these companies are holding about $55 billion in cash. A lot of money, but no where near the $500 billion or so that has been quoted by skeptics.

South of the boarder, we have a much clearer picture on how much cash US companies are hoarding. Thanks to publicly available Federal Reserve data we know that US companies are sitting on a little over $2 trillion in cash (see here). The interesting thing is that, in an historical context, this is not that much. Cash as a percentage of total assets actually bottomed in 1981.

R&D Spending in Canada

In relation to my previous post on global competitiveness, and how important R&D spending is for global competitiveness, here is a chart showing R&D spending as a percentage of  GDP for some OECD countries.


According to the OECD (see here):
"Expenditure on research and development (R&D) is a key indicator of government and private sector efforts to obtain competitive advantage in science and technology."

As the chart shows, Canada spends less than the OECD average on R&D. Canadian spending on R&D peaked in 2001, just before Nortel Networks imploded. Since then, however, the trend has been down. In 2010, R&D expenditure as a % of GDP was 1.8% for Canada and 3.8% for Finland. The private and public sectors in Canada need to spend more on basic R&D. With the recent troubles that RIM is having I fear that private sector spending on R&D in Canada is about to take a further hit.

Canada Slips in Global Competitivness

The World Economic Forum has released their latest global competitiveness ranking. As was the case last year, Switzerland  tops the list followed by Singapore. Switzerland's top ranking is due to strong innovation performance, labour market efficiency, and a well functioning business sector. Switzerland has some of the best research institutions in the world and their is strong collaboration between the research centers and business. Switzerland has the second highest rate of patenting per capita.

Canada is ranked 14, two spots lower than last year. Canada  has slipped 5 places since 2009.Canada scores high in health and primary eduction but investment in education, research and development and entrepreneurship are weak. Since these factors are key drivers to the wealth creation process, Canadian governments and businesses would do well to invest more heavily in education, R&D, and entrepreneurship.

European countries do fairly well in this ranking which is a bit surprising given all of the debt problems in the Euro zone. Among the BRICs, China ranks 29, Brazil 48, India 59, and Russia 67.

More Holidays Please, We're Canadian

The Economist has an interesting chart showing employee holiday entitlement in different countries. Workers in Austria, Greece, France and Spain enjoy the most number of holidays per year, while workers in Canada have the fewest.

Fewer holidays might mean that Canadian workers are more productive. According to the Conference Board, however, Canadian productivity is downright dismal. There are several reasons for Canada's low productivity including low investment in machinery and equipment, low R&D intensity, weak innovation record, and a low number of Canadians with advanced degrees in science and technology. There is also some evidence that workers in Canada are paid less than their marginal product of labour.  So, Canadian workers enjoy fewer holidays and are less productive than workers in many other countries. Perhaps, we need more holidays.

Euro North vs Euro South

The great divide between Euro countries in areas like unemployment, productivity, competitiveness, and investment makes it seem rather obvious why a common currency makes little sense.

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.