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Posthaste: Poor productivity hits Canadians where it hurts — their paycheques Back to video

Canada’s lagging productivity isn’t just bad for the economy, it’s also hitting Canadians where it hurts — in their paycheques, says a report from the C.D. Howe Institute.

Workers here are now only 70 per cent as productive as their counterparts in the United States, and our productivity growth lags that of the United Kingdom, Germany and France.

Economists have been aware of the problem for a while, but “we need a broader audience,” reads a recent intelligence memo from the institute.

“Public support can help solve the problem, and this requires showing Canadians how productivity gains improve their lives,” said authors Martin Eichenbaum, Michelle Alexopoulos and Jeremy M. Kronick.

“The lack of reform is costing Canadians where it hurts – their paycheques.”

Productivity gains have been linked to real wage gains throughout history. Since 1994 the growth rates of productivity and wages have increased by the same amount, about 35 per cent, said the report.

“That is not a coincidence. As workers become more productive, firms compete for their services, generating upward growth in real wages,” said the authors.

In recent years though, productivity has sunk to its lowest point since the end of 2018, while it has grown 9 per cent in the United States.

As productivity fell so did wages. In 2020 the national median real weekly wage was $1,103. By the end of 2023 it was $1,078.

“Put bluntly, our dismal productivity performance means we are getting poorer, relative to our U.S. neighbours and absolutely as well,” said the report.

TD Economics chief economist Beata Caranci also thinks Canadians should be paying attention to productivity.

“It’s no coincidence that falling real median wages coincides with falling productivity,” said Caranci in a recent report.  

Many reasons have been cited for the country’s poor performance, over-regulation and barriers to competition and interprovincial trade among them.

But a lesser-known contributor to the problem is Canada’s focus on investment in the construction industry which tends to have weaker productivity than other industries, said Caranci.

Along with regulation barriers, the industry contains a large number of small companies, which are slower to adopt new technologies.

It’s a problem in many countries “but its effects are amplified in Canada by the disproportionately large amount of resources dedicated to the sector,” said Caranci.

Canada’s plan to put more resources into residential construction over the next five years will exacerbate the problem.

And there’s a lot riding on getting productivity back in shape.

TD’s baseline forecast is for productivity to return to 1 per cent growth over the next three years, after declining by 0.5 per cent over the past three.

Under this scenario, their forecast for average gross domestic product between 2025 and 2027 is 1.7 to 2 per cent, with the Bank of Canada policy interest rate settling at 2.25 to 2.50 per cent and the Canadian dollar ranging between 76 and 78 US cents.

But if productivity remains flat, GDP growth could fall to 0.7 to 1 per cent; the Bank of Canada could cut its rate to between 1.25 and 1.5 per cent and the loonie could sink to 68 to 70 US cents, said TD.

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Shoppers shifted into low gear this summer, with retail sales down 1 per cent in the second quarter, data showed Friday.

“That will leave the BoC on track to cut interest rates at each of the remaining three meetings this year,” wrote Katherine Judge, an economist with CIBC Capital Markets, in a note after the data.

Sales dropped in four of nine areas, with discretionary purchases like sporting goods and hobbies down 0.8 per cent. Furniture sales plunged 3.4 per cent.

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McLister on mortgages

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Today’s Posthaste was written by Pamela Heaven, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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