December 5, 2016
Is low business productivity really an issue?
Estimation problems may be muddying the picture
Several hypotheses have been put forward in recent years to explain low productivity growth in Canada, and in several
other industrialized countries. While structural differences may partially account for some weaknesses, problems with
estimating production and price growth (due to the impact of new technologies, among other things) are also being
blamed. However, despite the estimation problems, the goal is the same: greater efficiency and competitiveness. This is
especially important given the many challenges created by the surge in protectionism and Canada’s ageing population.
Weak productivity growth (see the definitions in the box)
has been the focus of many stakeholder concerns in the
last few years. For example, annual labour productivity
growth—the simplest metric, and the most frequently
used—has been around 1% in Canada in recent years, well
below where it was in the second half of the 1990s and
early 2000s (graph 1).
Graph 1 – Productivity growth has weakened in Canada since the
early 2000s
% ann. change
Productivity growth is very important for a variety of
reasons. For one thing, productivity gains are often
considered a good way to offset a slowdown in the
demographics. Simply put, if the pool of available labour
shrinks due to population ageing, each worker must be
able to produce more to maintain the same targets for
the quantity of goods or services produced. Growth by
Canada’s working age population is slowing substantially,
a phenomenon that could persist until 2030. To offset that,
faster productivity would be a good thing. Unfortunately,
recent results are not yet showing that.
% ann. change
Canada – Labour productivity
6
6
5
5
4
4
3
3
2
2
1
1
0
0
-1
-1
-2
-2
Three-year moving average
-3
-3
-4
1980
-4
1985
1990
1995
2000
2005
2010
2015
Sources: Statistics Canada and Desjardins, Economic Studies
Moreover, productivity gains usually come with an increase
in remuneration for the different production factors. A
bigger increase in labour productivity therefore often
results in faster wage growth in real terms, and a rise in
household wealth.
Definitions of productivity:
• In general, productivity corresponds to the ratio between the output from a productive activity (goods and services)
and the production factors used to yield that output.
• Labour productivity is the ratio between the quantity produced and the number of hours needed to produce it.
• Capital productivity is the ratio between the quantity produced and the fixed capital needed to produce it.
• Multifactor productivity is the ratio between the quantity produced and the combined production factors used, i.e.
hours worked, capital, and the efficiency ratio between labour and capital.
François Dupuis
Vice-President and Chief Economist
Benoit P. Durocher
Senior Economist
514-281-2336 or 1 866 866-7000, ext. 2336
E-mail: [email protected]
Note to readers: The letters k, M and B are used in texts and tables to refer to thousands, millions and billions respectively.
I mportant: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that
are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group
takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. The data on prices or margins are
provided for information purposes and may be modified at any time, based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. The opinions and forecasts contained herein
are, unless otherwise indicated, those of the document’s authors and do not represent the opinions of any other person or the official position of Desjardins Group. Copyright © 2016, Desjardins Group. All rights reserved.
December 5, 2016
Economic Viewpoint
Lastly, productivity plays an essential role in an economy’s
international competitiveness. Among other things, the
potential implementation of a free trade agreement between
Canada and the European Union highlights the need to
increase Canadian business productivity to make it easier
for them to break into markets there.
www.desjardins.com/economics
Graph 3 – Investment continues to rise in sectors other than
natural resources
% ann. change
8
Canada – Capital spending by business
% ann. change
60
6
40
4
20
2
0
That being said, the low productivity growth seen in recent
years is not a phenomenon unique to Canada. According
to OECD data, the annual change in productivity is also
dwindling in most G7 nations (graph 2).
0
-2
-4
-6
Excluding natural resources
(left)
-20
Natural resources sectors*
(right)
-40
-8
% ann. change
5.0
G7 – Real GDP per hours worked expressed in US$
4.5
4.0
3.5
3.5
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
1980
1985
1990
1995
2000
2005
2010
2015
Sources: Organisation for Economic Co-operation and Development (OECD) and
Desjardins, Economic Studies
THE MYSTERY OF PRODUCTIVITY
The weakness in productivity growth in Canada and the
major industrialized nations is raising some questions.
In particular, many analysts are wondering whether the
method currently used to compile productivity is adequate.
Among other things, the last few years’ weak productivity
growth is hard to explain in a context in which business
investment has gone up, at least in sectors other than natural
resources (graph 3). Growth by household income and
spending does not seem to indicate problems associated
with weaker growth by household wealth, either, something
that should normally come from lacklustre productivity
growth. Household debt has, of course, gone up in the last
few years, but this is primarily due to the impact of higher
home prices on outstanding mortgage credit.
For Canada, one potential explanation comes from its
industrial structure. The natural resources sector has a
much bigger weight in Canada’s economy than it does in
most other industrialized countries. The natural resources
sector makes more intensive use of production factors. For
example, the average annual change in labour productivity
in Canada’s mining and oil and gas extraction sector has
been -0.6% since 1997.1 In comparison, average annual
growth by labour productivity in other Canadian industries
is 1.8%. The weaker productivity in the natural resources
2
2009
2010
2011
2012
2013
2014
2015
2016p
5.0
4.0
1975
2008
* Forestry, forestry operations, mining, quarrying, and oil and gas extraction.
f: Forecasts
Sources: Statistics Canada and Desjardins, Economic Studies
% ann. change
4.5
1970
-60
2007
Graph 2 – The slowdown in productivity growth is not unique to Canada
sector therefore plays against Canada in relation to the other
industrialized nations.
The economic literature has put forward a number of other
hypotheses in recent years to explain the apparent weakness
in productivity. For example, some analysts wonder whether
the current production metric—real GDP—is missing a
proportion of what is actually being produced. For one thing,
given the unceasing development of new technologies (see
the box on page 3), it is hard to keep an accurate count of an
economy’s supply of services. If the quantity of goods and
services produced is underestimated for the same number
of hours worked, productivity is estimated to be lower than
it actually is.2
Some new technologies that influence production:
• Free wireless networking.
• Person-to-person service websites:
- Airbnb (accomodation)
- Uber (transportation)
- Upstart (financing)
- Lending Club (financing)
- Etc.
• Transactional websites:
- Apple Pay
- PayPal
1
This Statistics Canada data set begins in 1997.
2
However, some analysts are sceptical about this explanation. For
example, a professor at the University of Chicago (Chad Syverson) recently
hypothesized that productivity growth is cyclical. Periods of stronger
productivity growth would thus be followed by periods in which new
technologies are assimilated, characterized by weaker productivity growth,
as is now the case.
Economic Viewpoint
December 5, 2016
www.desjardins.com/economics
Another issue concerns changes in the quality of goods
or services. For example, technology is progressing
very rapidly and the new devices made today are often
much more powerful than previous generations. Yet, the
movement by retail prices does not properly reflect these
technological changes. For example, prices for television
sets have not really changed in the last few years, although
the TVs sold now are of much better quality than earlier
versions. In theory, the statistics agencies make corrections
to factor in such changes in the quality of goods or services.
That being said, new technologies are evolving so fast
that many analysts think the statistics agencies are not
managing to adjust prices enough to fully factor in changes
in the quality of goods or services. The result would be that
growth by goods and services prices would be overvalued
in comparison with reality. The real GDP used to estimate
productivity in fact comes from the nominal GDP (GDP in
current dollars) from which price growth has been removed.
An overvaluation of price growth could therefore yield
weaker real GDP growth. Considering a given number of
hours worked, the result would be a smaller increase in
labour productivity.
KEEPING AN EYE ON THE GOAL
Unfortunately, there is no clear answer to the mystery of
productivity at this time. That being said, even though
many doubts are raised about the validity of productivity
estimates, the goal remains the same: becoming more
efficient and competitive.
This is a particularly important issue in the context of
the surge in protectionism in the world. Constraints on
international trade could therefore increase substantially in
the next few years. To overcome them, businesses will have
to be even more competitive on the global stage. Otherwise,
they will be increasingly restricted to their local market.
That means the efforts made in recent years to stimulate
faster productivity growth must be maintained.
Benoit P. Durocher
Senior Economist
3