Canadian Productivity Revisited

I have often written about productivity here in Canada  (here, here and here).  Part of the problem is that with the U.S. economy next door, Canada's performance has almost always lagged, and no one seems to know why this occurs.  there are many theories, and I know for a fact that the are hundred of articles in Canadian literature as to why it lagged and how it can be improved by the "right policy".

In fact, provincial and federal governments have tried all kinds of policies to get productivity to rise with little success, and when it does suddenly rise (as it did early in 2009) the reason is unexplained and it is evident that no policies were in place.

There are four factors which drive productivity; Canada has structural weakness in two of the four:

(1)               Innovation and Technology:  Canada is a small open economy.  Its small size, labor market inflexibility and stronger union make this force weaker in Canada.

(2)               Specialist knowledge workers;  Canada is a country of generalist, specialists are often attracted away from Canada to other markets

(3)               Reallocation of resources:  Canada has suffered far fewer, and less severe recessions – creative destruction has had less impact here.

(4)               Globalization as a tool of market expansion: Canada, is one of the world’s most open economies, and should be able to improve productivity because of its growing markets.

Canada’s disadvantage because of a stronger currency can only be alleviated by better productivity.  A constant headache for Canadian policy makers, who have noted that for years Canadian labor productivity has lagged that of the US.  The number of studies on Canadian productivity’s shortfall is too numerous to count. 

Policy has tried to accommodate the needs of industry, remove impediments to increased productivity.  Maybe the treat of a stronger dollar is the only real incentive to Canadian entrepreneurs to increase productivity.

As an example, in 2009 the province with the "best score" in terms of increased productivity was Quebec, and yet it is the province that saw the lowest fall in employment, and the mildest recession (mainly because in 2005 the Quebec government enacted a massive infrastructure spending program).  One aspect of the data available from StatsCan is that at time they give you information that allows you to infer trends.  Quebec entrepreneur have been wary of the strength of the Canadian dollar for some time, and have made a decision to invest in technology (you can see the increase in imports of machine tools), that helps a growing economy.

It could be that because of this decision to invest in their business, they were able to multiply labor productivity.  Although as can be seem from the chart above, we still have a long way to go.