Canada’s productivity problem has been decades in the making, but there are a number of easy steps that policymakers could take to start reversing the trend and improve prosperity for the economy.
That’s according to Nathan Janzen, assistant chief economist with RBC, who spoke with BNN Bloomberg recently about his recently published report on how best to solve the problem that policymakers say is perhaps the biggest thing holding back Canada’s economy and standard of living.
Canada has lagged behind the U.S. on this metric since at least the 1980s, but as things stand today Canada’s economy is about 30 per cent less productive than its southern neighbour. That works out to about $20,000 per worker and it’s trending in the wrong direction, he said.
“We haven’t been seeing the same growth in efficiency and the way we use hours worked in Canada versus other economies particularly relative to the U.S. and that is having significant consequences,” Janzen said.
Many factors are to blame, from an inefficient regulatory system and needless barriers to trade within the country combine with infrastructure chokepoints and unnecessary red tape.
They’re all combining to cause Canadian businesses to invest less than policymakers and economists would like to see. Canadian businesses invest about half as much per worker in aggregate than U.S. firms do, Janzen noted. Even worse, recent investment trends suggest further underperformance in the decade ahead.
“Lower business investment has been one of the big drivers of Canada’s productivity underperformance, but it’s not just as simple as just saying Canadian businesses aren’t investing as much.”
Of all the reasons that can be blamed, a lack of capital isn’t one. Janzen says Canadian businesses are still sitting on a large cash stockpile worth almost a third of GDP. However, he notes that the backdrop of inefficient project approvals is making investing in Canada relatively expensive. This results in many Canadian businesses remaining small and in turn less productive.
Canada’s tax system is a major factor. Janzen notes that Canada has the highest taxes in the G7 on distributed profits from Canadian companies. He says that, along with large government deficits, makes Canada less attractive to business expansion.
Lack of investment
At the same time as Canadian firms are investing less domestically, they are putting more of their cash into work overseas. Canada’s stock of net assets held abroad has increased to about $1.7 trillion. That’s more than half the value of Canada’s entire GDP, Janzen notes. That investment helps improve productivity in other countries, not Canada’s.
“Underperformance in productivity means that earnings power in the economy is lower, and that also means that wages are lower in Canada than in the United States. And that’s ultimately why productivity matters, it’s not about automating people out of their jobs, it’s not about replacing workers it’s actually about creating more jobs in the future and ensuring that those are well-paying jobs.”
Easy wins
So what is the solution? In addition to cutting red tape, reducing trade barriers and fixing the tax system, Janzen identified a few actions Canada can take to increase productivity including making better use of the influx of skilled immigrants and getting better at adopting new technologies.
Although the challenge is great, it’s winnable, Janzen says and he adds that there’s no better example of what’s possible than looking at Canada’s agricultural sector.
No industry in Canada has seen more disruptive technological advancement over the last century or two than food production. He points out that agricultural production per farm acre in 2016 was three and a half times the level in 1941, and output per agricultural worker is about 12 times what it was in 1941.
Taking steps to fix obvious problems like reducing red tape can go a long way in fixing the problem and helping boost prosperity for all.
“The idea of reducing red tape and reducing complexity just makes sense logically even if we had the strongest productivity levels in the world,” he said.
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