Policies driving economic growth could solve productivity emergency

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One way to resolve Canada’s declining productivity may be to just drop the “technical term” from conversations and simply focus on creating policies that can help the economy grow, according to one Royal Bank of Canada economist.

These policies include things such as cutting red tape and internal trade barriers, making better use of immigrants’ skills, adopting new technologies and making tax policies more attractive for investment, said Nathan Janzen, the bank’s deputy chief economist, who published a report on Tuesday that detailed ways to improve the country’s productivity levels.

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“Looking at some of the solutions to Canada’s productivity gap, you don’t really need to talk about productivity,” he said. “These are the kinds of things we should be doing even if we had the strongest productivity levels in the world.”

He said productivity is a technical term that economists worry about as opposed to the general public, so “some of the urgency gets lost.”

Canada’s declining labour productivity has received plenty of attention after Bank of Canada senior deputy Carolyn Rogers in March 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.

Statistics Canada defines labour productivity as a measure of the country’s gross domestic product (GDP) per hour worked. GDP measures the value of goods and services produced during a specific time frame.

But other metrics are also used. For example, some economists define productivity as GDP per capita, which divides the GDP figure by the country’s total population.

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Rogers said Canada 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.

Canada has stopped growing

Royal Bank of Canada report

But Canada’s falling productivity can be attributed to its declining economic growth, according to Janzen’s report.

“Canada has stopped growing,” the report said. “Our economy, when adjusted for inflation and immigration, is smaller than it was before the pandemic — and pretty much in the same place it was a decade ago.”

It wasn’t always this way, however. Canada’s productivity grew at around five per cent per year in the 1950s as wartime technologies were adapted for civilian use, which powered the country’s economic growth during that decade, the report said.

Productivity growth remained at about 3.5 per cent per year in the 1960s due to the automation of the manufacturing sector.

“That trajectory faded during the turbulent economic times of the 1970s and 1980s, although innovations like container shipping and expanding global trade led to further gains in growth and productivity in the 1990s,” the report said.

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But since the turn of the century, productivity growth has stagnated at one per cent per year on average. The challenges Canada faces are not unique, the report said, but the slowing economy here has been more significant than elsewhere.

“Canada’s investments in education and training, and our efforts to attract skilled immigrants, are not generating the expected economic returns,” the report said.

Despite the daunting challenges, though, the solutions are “clear and attainable” and don’t require many trade-offs, it added.

“One of the most powerful tools is not a tool at all; it’s a mindset,” the report said. “If Canadians developed a collective focus on the economy of the future — one that rewards innovation, celebrates competitiveness, invests in both people and technology, and efficiently delivers returns — the productivity puzzle may become easier to solve.”

• Email: nkarim@postmedia.com

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