The Productivity Challenge in Canada: Navigating Post-Pandemic Realities

Chart 1 shows the decline in annual average growth in productivity in Canada from 2019 to 2023, reflecting a concerning trend for the economy.

Hearing the term "productivity" often conjures negative feelings about working harder with fewer resources. However, a robust productivity growth rate is fundamental for a thriving society, driving wage increases and supporting quality public services. The current state of productivity in Canada, particularly after the pandemic, raises urgent concerns about the living standards and economic future of Canadians, especially younger generations.

A Deteriorating Performance

According to recent statistics, Canada’s standard of living, represented by real GDP per person, was lower in 2023 than in 2014. This stagnation in productivity—evidenced by an annual growth rate that plummeted to 0% between 2019 and 2023—highlights a trend where workers face wage stagnation, with government revenues straining to meet increased spending commitments.

Prior to the pandemic, Canadian business sector productivity grew at a commendable pace of 1.2% annually. However, the pandemic pulled the brakes, with Canada now sitting among the worst-performing advanced economies. The drop-off starkly contrasts with the United States, where productivity has continued to rise.

The Broad Impact Across Industries

While one might hope that productivity issues are isolated to a few sectors, they are instead pervasive. A notable exception—goods-producing sectors—has witnessed productivity decline since 2019. This means businesses now require more hours from workers to achieve the same output, a troubling sign in our digital age.

The Construction Sector’s Scarlet Letter

No sector exemplifies the downward trend quite like construction. Despite enjoying a continually expanding foothold in the economy, this sector has seen its productivity wane dramatically. With a high proportion of small firms that are slower to embrace technological advancements, construction is emblematic of the inefficiencies plaguing Canada.

Service sectors have not been immune but have generally suffered less than goods-producing industries. Financial services have seen noteworthy productivity, yet stark contrasts remain when compared with the U.S.

Addressing Canada’s Productivity Crisis

Fixing Canada’s productivity woes is complex and requires a confluence of strategies. Some of the proposed solutions include:

• Encouraging Competition: Enhancing competition across industries could yield numerous benefits.
• Retaining Skilled Workers: Strategies must be implemented to cultivate a highly skilled workforce.
• Reducing Trade and Investment Barriers: Both domestic and international barriers need addressing for smoother commerce.
• Improving Technology Adoption Incentives: Fostering an environment conducive to technological integration is crucial.

Special attention should also be directed towards the construction sector. Streamlining regulations and harmonizing building codes across provinces could significantly enhance productivity, allowing companies to scale operations more effectively.

The Imperative for Services

Greater reliance on non-permanent residents in service sectors has also contributed to Canada’s productivity decline. To bolster productivity in services, supportive tax and regulatory frameworks are necessary to spur technological advancements and investments.

The Goods Sector: A Productivity Deficit

While the economy today is more service-oriented, the goods sector has traditionally yielded higher productivity levels, particularly in capital-intensive industries like mining and manufacturing. However, the post-pandemic climate has not been kind.

Productivity growth has reversed in most goods-producing industries, with overall declines since 2019. The construction sector, notably, has not generated any productivity growth over the past forty years, suggesting deeper, systemic issues that hinder progress across the board.

The Rising Importance of Construction

Despite its long-standing productivity challenges, the construction sector is gaining share in the economy. Representing over 12.6% of all labor hours worked in Canada as of 2023, its deteriorating productivity becomes a significant drag on national growth.

Addressing the productivity in this sector is critical. Rethinking construction methods, implementing modular building strategies, and reevaluating regulatory frameworks can pave the way for better productivity outcomes that resonate through the broader economy.

The Oil and Gas Sector: A Complicated Landscape

Interestingly, the oil and gas sector, which has historically experienced high productivity, faces its unique challenges. Despite an influx of capital, multifactor productivity (MFP) in this sector has declined. This counterintuitive trend emerges from the correlation between oil prices and MFP, where increased prices lead to investments in tougher-to-extract resources, inflating the cost of productivity improvements.

Flickers of Hope: Service Industry Gains

Yet not all news is grim. Certain service industries have seen productivity growth post-pandemic, notably in trade and accommodation services. Real wage growth in these sectors has also risen, indicating that even amidst overall stagnation, pockets of improvement may lay the groundwork for future growth.

The U.S. Comparison: A Benchmark to Strive Toward

The comparative data against the U.S. is sobering. American productivity growth has not only remained positive post-pandemic but significantly outpaced Canada across nearly all major industries. This underscores the urgent need for deliberate policies aimed at revitalizing the Canadian economy and enhancing productivity across sectors.

Navigating Toward a Productive Future

Canada’s productivity journey involves a multifaceted approach — comprehensive strategies to drive competition, investment incentives, and reduced regulatory burdens are vital.

As we move forward, it is crucial not just to recover lost ground but to aspire for competitive productivity levels. If Canada fails to innovate and enhance its productivity, the specter of continued declines in living standards, stalled wage growth, and compromised public services looms large. Building a resilient, prosperous Canadian economy necessitates an unwavering commitment to productivity enhancement — a challenge we must collectively undertake.