April 18, 2024
A lack of innovation and investments in businesses are key reasons why Canada’s labour productivity growth rate has declined in the past two decades, according to a new Statistics Canada study, and business leaders say the capital gains tax hike in the latest budget will only make things worse.
Labour productivity grew at about 1.8 per cent per year between 1980 and 2000, but it slowed to around one per cent from 2000 to 2015 and 0.8 per cent from 2015 to 2022, the agency said.
A lack of investment in businesses was a major reason behind the slower growth rate, as its contribution to labour productivity fell to about 0.4 per cent during the 2015–2022 period from about 0.9 per cent during the 1980–2015 period.
Innovation rates also declined in the past two decades compared to the 1980s. The contribution of Canada’s multifactor productivity growth — which the Statistics Canada study associates with technological or organizational change — in labour productivity declined to 0.1 per cent from 2015 to 2022 from 0.5 per cent per year from 1980 to 2000.
Wulong Gu, an economist at Statistics Canada, said Canada’s lower productivity growth after the 2000s is due to a lack of investment.
Productivity unaddressed
“What’s new for me is that the investment is a big part of the slowdown of the labour productivity growth,” he said. “We tried to emphasize that.”
But business leaders have criticized the federal government’s decision to increase the capital gains tax to 66.7 per cent from 50 per cent on capital gains of more than $250,000 per year.
“Canada’s productivity is in crisis and the best way to get it back up is to attract new investments,” Renaud Brossard, a spokesperson for Montreal Economic Institute said in a release. “And few are those who have been able to lure investments and job creators with promises of higher taxes. With this budget, the Trudeau government is shooting us in the foot.”
CPA Canada’s chief economist David-Alexandre Brassard said the changes announced in the budget leave longer-term challenges such as productivity and competitiveness largely unaddressed.
“This is not a game-changing budget,” he said in a statement.
Perrin Beatty, chief executive of the Canadian Chamber of Commerce, said Canada still doesn’t have a clear plan to promote productivity and restore economic growth.
“Our lagging productivity and stalled GDP growth mean Canadians are becoming collectively poorer and working harder to just remain where they are today,” he said in a statement.
Nathan Janzen, an assistant chief economist at the Royal Bank of Canada, said the change in the tax structure could make the country “look less competitive as a place to do business versus” its international peers.
Canada’s declining labour productivity has received plenty of attention in the past month after Bank of Canada senior deputy Carolyn Rogers said the country needs to tackle its poor efficiency numbers to inoculate the economy against future inflation.
“You’ve seen those signs that say: In emergency, break glass — well, it’s time to break the glass,” she said in a speech on March 26.
Rogers said Canada’s productivity has fallen from a “not great” record of producing 88 per cent of the value generated by the United States economy per hour in 1984 to just 71 per cent in 2022.
Prior to her warning, the federal government on March 21 announced it is placing caps on temporary residents in a bid to stem Canada’s record population growth in recent years. Economists said the move could potentially compel businesses to invest more on technology instead of relying on “cheap labour,” which in the long run could help boost productivity rates.
The new analysis from Statistics Canada said labour productivity has three components: capital intensity or investments from businesses, multifactor productivity growth or innovation, and labour composition, which measures the population’s skillsets.
Investment in capital declined following the collapse of commodity prices that started in 2014, and multifactor productivity fell to minus 2.2 per cent in 2021, although it grew 0.6 per cent in 2022.
Labour composition’s contribution to productivity declined to negative 0.1 per cent in 2021 and zero per cent in 2022, but it hasn’t changed much in the long term and remained at around 0.3 per cent from 1980 to 2022.
A positive labour composition would mean an increase in the number of workers in high-skilled or higher-paid jobs.
Use immigrant skills better
Avery Shenfeld, chief economist at CIBC Capital Markets, said it is important to figure out why labour productivity “has been even worse” in the period after 2022, which the study doesn’t cover, and why Canada trailed the U.S. in labour productivity even before the energy sector’s spending slowdown.
“Some attribute the more recent weakness to labour quality, with more of the growth in the workforce filled by temporary foreign workers and foreign students,” he said. “It might be overstated based on what little evidence we do have. We’re hoping it’s tied to weak economic growth, and that a pick-up in growth as interest rates fall will reverse some of the recent weakness.”
Shenfeld said it wasn’t surprising to see how a crash in oil prices in late 2014 weighed on labour productivity.
“We’ve significantly slowed the expansion of that sector of the economy since 2014, both due to softer energy prices and environmental policies, and it was a high-productivity sector,” he said.
RBC’s Janzen said Canada had a “pretty rough” two decades — which have included the financial crisis of 2008, the holdback in investment in the natural resources sector, the pandemic and high interest rates — during which time business investment has been low.
But he said productivity growth could be stronger if Canada better utilizes the skills of new immigrants, since that’s what’s driving population growth.
