Labour productivity, hourly compensation and unit labour cost

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Labour productivity in Canadian businesses fell by 0.1% between July and September, slightly less than the 0.3% decline posted in the second quarter. This was the second straight decline following seven consecutive quarters of positive growth.

Productivity gains in mining, oil and gas extraction, financial, insurance and real estate services, and rental services, along with those in wholesale trade were completely offset by losses in the manufacturing and construction sectors.

In the first three quarters of 2006, productivity posted an average quarterly growth of 0.5% in the United States, while Canada's average growth remained at zero. A substantial slowdown in both countries in productivity growth was observed compared to 2005.

With the value of the Canadian dollar remaining unchanged against that of the US dollar, the increase in the unit labour cost of Canadian businesses moved closer to the increases experienced by their American counterparts.

Little gain in productivity in Canada in 2006

Increases in labour productivity occur when increases in the production of goods and services exceed increases in the labour inputs that are devoted to production. Labour productivity is measured here by the ratio of gross domestic product (GDP) to the number of hours worked. Growth in productivity over time is generally associated with improvements in the standard of living.

The situation in the third quarter of 2006 was similar to that in the second quarter in terms of the relative pace of output and labour growth. In the last two quarters, production advanced at exactly the same pace (+0.4%), while the number of hours worked grew at a more robust rate than production, increasing by 0.7% in the second quarter and 0.6% in the third quarter.

The 0.3% increase in employment between July and September occurred mainly in full-time work. The increase of the share of full-time workers explains the growth of 0.4% in hours worked per job during the third quarter.

Productivity declines in the United States

In the United States, the quarterly growth in labour productivity has slowed substantially since the beginning of 2006.

After posting robust growth of 1.1% in the first three months of the year, the labour productivity of American firms deteriorated, posting growth (revised) of 0.3% in the second quarter and almost zero growth in the third quarter (+0.1%).

Between July and September, the growth in the number of hours worked in American businesses remained steady while production slowed, leading to stagnation in US productivity.

Productivity stagnates in the third quarter in both countries

The third quarter saw real GDP in Canadian businesses grow at the same pace as in American businesses. Both countries have experienced a slowdown in their GDP growth since the first quarter of the year.

While GDP in Canada increased at the same rate as in the second quarter, GDP growth in the United States slowed slightly in the third quarter.

Contrary to GDP, growth in hours worked in both countries has not slowed over the course of 2006. And hours worked in the third quarter in both countries rose substantially at the same rate as in the second quarter.

Real Canadian GDP in the third quarter, which rose at the same pace as in the previous quarter (+0.4%), was substantially slower than in the first three months of the year (+0.9%). This was the weakest advance recorded in two straight quarters since the beginning of 2003.

The weak growth in Canada's GDP in the third quarter resulted mainly from a net slowdown in the rate of accumulation of business inventory compared with the second quarter. A further decline in residential construction also slowed growth in Canadian GDP.

For American businesses, growth in their GDP continued to slow in the third quarter, mainly as a result of the collapse of household investment in real estate (-4.2%).

The 0.5% gain in GDP in the United States in the third quarter represents the weakest quarterly increase since the beginning of the year. American GDP grew a robust 1.6% in the first quarter and slowed to 0.7% growth in the second quarter of 2006.

On the labour market front, hours worked in Canadian companies climbed 0.6% in the third quarter, an increase similar to that of the previous quarter (+0.7%). All of the advancement in employment between July and September occurred in full-time work.

At the same time, hours worked in American businesses increased 0.4% in the third quarter. Growth in hours worked in the United States in the last four quarters has continued, on average, at a pace of 0.4% per quarter.

Stable Canadian dollar contributes to the improved competitive position of Canadian companies

Unit labour cost, a major indicator used to measure labour compensation per unit of economic output, continued to climb more rapidly in Canada than in the United States during the third quarter when measured in their respective national currencies.

However, American companies maintained less of an advantage over Canadian companies in terms of the change in their unit labour costs in the third quarter of 2006, even when the exchange rate is taken into account.

Unit labour costs have been rising in both countries. Without taking the exchange rate into account, the labour cost per unit of output for Canadian businesses rose 1.0% in the third quarter, compared with zero growth in the second quarter. In comparison, American businesses saw their unit labour cost rise by 0.6% in the third quarter. This represents a net acceleration from the 0.6% decrease in the second quarter.

During the previous four quarters, the Canadian dollar's appreciation had a strong impact on unit labour costs in Canada. Measured in US dollars, the unit cost of Canadian businesses rose on average 3.2% over this period.

However, unit labour costs in Canada, expressed in US dollars, slowed substantially from July to September as the Canadian dollar remained stable.

Since the value of the Canadian dollar compared to the US currency appreciated 0.1%, the Canadian unit labour costs in US dollars increased 1.1% in the third quarter compared with a 0.6% advance in the United States.

Available on CANSIM: tables 383-0008 and 383-0012.

Definitions, data sources and methods: survey number 5042.

A more comprehensive analysis, including additional charts and tables, can be found in the third quarter 2006 issue of Canadian Economic Accounts Quarterly Review, Vol. 5, no. 3 (13-010-XWE, free), which is now available from the Publications module of our website.

Fourth quarter data of 2006 for labour productivity, hourly compensation and unit labour cost will be released on March 12, 2007.

To order data, contact Client Services (productivity.measures@statcan.gc.ca). For more information, or to enquire about the concepts, methods or data quality of this release, contact Jean-Pierre Maynard (613-951-3654; fax: 613-951-3292; maynard@statcan.gc.ca), Micro-economic Analysis Division.

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