Improving Canada's stagnated productivity problem

By Wade Hemsworth, April 11, 2017

A McMaster researcher is warning that Canada’s economy is teetering on the edge of a hidden crisis, based on more than a decade of poor performance of a key indicator that has not yet been widely discussed.

Economist Pau Pujolas says the problem is that Canada’s Total Factor Productivity – the total output of the working-age population minus new additions of capital and labour – has stagnated for more than a decade, when it should have been growing.

“We are not getting more productive every year,” he said. “We should be very worried.”

It’s the same problem that preceded economic crises in Greece, Mexico, Spain and Italy, and may have been discounted in Canada’s case because the country’s income has increased during the same period. Ignoring the stagnation would be a mistake, Pujolas says.

“There are too many examples of countries that experience no growth in productivity for more than a decade and end up having a crisis,” he says.

Pujolas and Juan Carlos Conesa of Stony Brook University in New York discuss the stagnation in what will be the first in a series of working papers from the Partnership to Study Productivity, Firms and Incomes. The partnership includes researchers from several institutions, all analyzing the Canadian economy.

Its director is Michael Veall, a Professor of Economics at McMaster and former president of the Canadian Economics Association.

The authors found that after decades of Canadian productivity rising at a healthy rate – generally considered to be around 2 per cent – it halted in 2002 and remained stagnant until at least 2014.

Pujolas says preliminary data from 2015 and 2016 suggest the stagnation has continued. The authors could not find an explanation for the stagnation.

Canada’s productivity problem may have been obscured by favourable terms of trade, because the price of imports compared to exports has been falling during that same period, Pujolas says.

But terms of trade are no longer appreciating, and if productivity remains stagnant, Pujolas says Canada will be in serious trouble.

Canada could improve its productivity through such actions as eliminating inter-provincial trade barriers, doing more to attract and retain talented foreign students, and eliminating policies that limit productivity in the dairy or liquor industries, for example.

“Having productivity that is stagnating for 12 years is very dangerous by itself. If it turns out Canada was just very lucky to have a rising income, then the results of stagnating productivity could hit hard.”