A construction worker makes his way through a site in Ottawa on June 27.Sean Kilpatrick/The Canadian Press
Canada risks a further deterioration in living standards if its lacklustre performance in productivity does not improve, economists at Toronto-Dominion Bank warn in a new report.
Business sector productivity – output per hour worked, adjusted for inflation – grew by a “respectable” annual average of 1.2 per cent over the decade before the pandemic, TD chief economist Beata Caranci and senior economist James Marple write in their report, published Thursday.
But since then, productivity growth has ground to a halt. The slowdown has been driven by a contraction in the goods sector, the report notes, and the decline is especially bad in the construction industry, where productivity has tumbled to levels last seen in the 1990s.
“Canada has seen its productivity go from bad to worse since the pandemic,” the TD report says. “Without improved productivity growth, workers will face stagnating wages and government revenues will not keep pace with spending commitments, requiring higher taxes or reduced public services.”
Canada’s productivity woes have become a hot topic of discussion over the past couple years. In March, Bank of Canada senior deputy governor Carolyn Rogers said the country was facing a productivity “emergency.”
Several weeks after her speech, Statistics Canada published a report that said national per capita output had fallen 7 per cent below its long-term trend – a decline of roughly $4,200 a person.
In aggregate, gross domestic product (GDP) is continuing to grow, in large part because the population is expanding at decades-high rates. But on a per capita basis, real GDP has dropped to levels seen in 2014.
Real GDP per capita is often used as an indicator of living standards. Residents of countries with higher per capita output tend to enjoy higher wages and live longer. Even so, it’s not a flawless measure: While Canada’s per capita output lags well behind that of the United States, average life expectancies are higher in Canada.
The federal government argued in its spring budget that the influx of newcomers – who typically earn less than Canadians upon arrival – was weighing on average incomes and productivity. “This should not be misinterpreted to imply that those already in the country are becoming worse off,” the budget read.
However, the TD economists say in Thursday’s report that policies to boost the ranks of temporary residents have contributed to the malaise.
“For service industries, greater reliance on non-permanent residents appears to have contributed to the productivity deterioration since the pandemic,” the report says. “This may seem counterintuitive amidst an aging labour force, but the concentration of non-permanent residents in low paid work has worsened Canada’s productivity performance.”
Many economists have noted that sluggish business investment has played a key role in the productivity slump. A Statscan report from February found that investment per worker in 2021 was 20 per cent lower than in 2006. This period was characterized by a drop-off in the rate at which new businesses were being created, leading to weaker competition between companies and less incentive for them to invest.
Business investment is a crucial aspect of improving productivity, because that capital spending gives workers the tools – such as software and equipment – to boost their output.
“Reforming the tax code more broadly to reduce the cost of new investment should be a policy priority,” the TD report says.
The TD economists also singled out the construction sector for its moribund productivity. The home-building industry faces a number of particular headwinds, including red tape that hampers activity and a preponderance of smaller firms that lack the capital needed to make investments.
“The rising importance of construction increases the urgency to improve productivity in the sector,” the report says. “But this requires more outside-the-box thinking, including moving to more prefabricated or modular building, developing a reskilled workforce around it, and rethinking the building code to allow for more flexibility in the sources of materials used that maintain the same results in terms of safety and durability.”
In July, the Bank of Canada forecast that real GDP per capita would grow and accelerate over 2025 and 2026. The central bank is lowering interest rates as inflation subsides, and this is expected to help the economy grow at faster rates, with consumers and businesses facing less onerous borrowing costs. At the same time, population growth is poised to slow as the federal government brings in restrictions on temporary migration.
“It’s a hard sell for policymakers to get Canadians fired up on the concept [of productivity], let alone to make the necessary financial sacrifices and policy adjustments toward solutions,” the TD economists write. “Yet, healthy growth in productivity is key to a dynamic, prosperous, and resilient society.”