Strategy

The puzzle of our productivity

New research says that business is mostly to blame for Canada's poor productivity.

Bank of Canada governor Mark Carney ruffled feathers earlier this year when he blamed the country’s “abysmal productivity record” on a lack of investment on the part of risk — averse CEOs, maintaining that while government has done its part, “business, thus far, has disappointed.” It’s an assertion, however controversial, that is supported by the findings of several recent Industry Canada studies.

In a presentation to the Canadian Association for Business Economics in August, Industry Canada economist Annette Ryan reiterated the familiar productivity lament: beginning in the 1980s, growth in Canadian labour productivity, defined as GDP per hour worked, has been steadily declining and now trails the U.S. and the majority of other G7 countries. That gap widened during the recent recession, with relative labour productivity in Canada’s manufacturing sector dropping to barely two — thirds of what it is in the U.S.

Somewhat predictably, the majority of the slowdown within manufacturing has been concentrated in transport equipment, which reflects the downturn in the auto industry, and information and computer technologies (ICT), a sector that took a big hit when telecom giant Nortel went belly up. The most striking illustration of the gap was in computer and electronics manufacturing, where the U.S. saw a 20% increase in annual productivity growth from 2000 to 2008, while the rate in Canada actually shrank by 3%.

But a closer look at what’s happening inside manufacturing plants shows that business decisions are playing a significant role in the productivity slump. According to Ryan, from 1997 to 2000 and 2000 to 2006, productivity growth in the electronic and electrical product manufacturing industry fell by 25% — two — thirds of which is attributable to lower productivity within existing plants. The remaining decline, meanwhile, is attributable to plant turnover, and a shift in resources from higher productivity plants to lower productivity plants.

Industry Canada declined a request for an interview, and in an e — mail, Ryan maintained that “it is difficult to draw general conclusions from the specific results obtained from the research on this sector, which faced significant fluctuations in demand.” But according to some experts, these findings, along with other studies highlighted in Ryan’s presentation, signal a cultural problem. Canada’s business community is investing less than other OECD countries in research and development, and in certain sectors, lacks the competitive pressure that would prompt productivity — enhancing innovation.

“Government policy is pro — productivity,” says Andrew Sharpe, executive director of the Centre for the Study of Living Standards. “[The problem is] linked to corporate culture.” According to Toronto economist Bruce Little, a lack of “global ambition” could be to blame: “There’s a lot of Canadian business people that start a company and as they grow, instead of saying, ???Damn, I want to be Bill Gates,’ they sell it and enjoy their wealth.”

But as United Steelworkers economist Erin Weir points out, “Corporate Canada’s goal isn’t to increase national productivity, it’s to maximize profits.” Rather than merely relying on corporate tax cuts, Weir says governments should be providing targeted tax credits to companies that actually invest in the province or country.

Either way, experts agree that this type of analysis is key to solving the productivity puzzle. Says Weir: “It’s really crucial to look at what goes on in specific plants.” The next, and far more difficult step: determining the how and why.