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The Daily. Wednesday, December 20, 2000

Labour productivity, hourly compensation and unit labour cost

In a period of impressive growth in real domestic demand and in labour hours, labour productivity in the Canadian business sector grew at an annual pace of 2.1% from the third quarter of 1999 to the third quarter of 2000.

The labour productivity increase in the third quarter follows annual increases of 3.0% in the second quarter and 1.7% in the first quarter. In 1999, the average annual increase was 1.4%. The annualized rates of growth for the first three quarters of 2000 largely exceed the average growth of 1.0% observed since 1988.

Calculated on an annual basis, Canadian business productivity has been positive for the last 17 quarters - since early 1996. During the period, productivity growth was highest in 1997. After slowing down in 1998, productivity growth increased steadily in 1999 and 2000.

Note to readers Quarterly series on labour productivity growth and related variables are available today for the first time. These series are available from the first quarter of 1987 up to the third quarter of 2000. In the future, these data should be published two months after the end of the reference quarter. The new quarterly data complement the regular program of productivity statistics that has until now produced only annual estimates. The quarterly estimates are meant to help those who are more focused on the analysis of the short-run relationship between output, employment, remuneration and hours worked. In this release, the use of the word "productivity" refers to labour productivity. These productivity estimates are based on the value-added concept of output. To ensure consistency with annual data, the quarterly index of productivity growth based on real value added is benchmarked to the annual estimates that are derived from a Fisher chained index up to the most current year for which the input-output tables are available, currently 1997. After 1997, it is constructed from a Laspeyres volume index with 1992 as the base year. More precisely, it is based on the growth of the industry real GDP index at factor cost for the business sector from which the GDP arising from owner-occupied dwellings is subtracted. The quarterly estimates provided here are limited to the overall business sector. This aggregate excludes all non-business production activities as well as the rents of owner-occupied dwellings. Corresponding exclusions are also made to labour compensation and hours worked to make output and labour input data consistent with one another. In 1992, the value added by the business sector accounted for around 71% of Canadian economy. Labour productivity, or real GDP per hour worked, is the ratio of output to labour input (hours worked). Economic performance as measured by labour productivity must be interpreted carefully, since these estimates reflect changes in the other factors of production in addition to growth in productive efficiency. Labour compensation includes all payments in cash or in kind made by domestic producers to persons at work as remuneration for work. This includes the salaries and supplementary labour income of paid workers, plus an imputed labour income for self-employed workers. Unit labour cost is the labour cost per unit of output. It is calculated as the ratio of labour compensation to real GDP. It is also the equivalent of the ratio between labour compensation per hour worked and labour productivity.

Quarterly growth rates are sometimes quite volatile. Between 1995 and the third quarter of 1998, labour productivity growth fluctuated more than it did in the last two years. The quarterly growth rates alternated between declines or only small increases in most quarters of 1995, the whole of 1996 and the first three quarters of 1998 and dramatic growth during the second quarter of 1995 and the whole year of 1997. In the short run, productivity is pro-cyclical. Productivity grows more slowly when economic growth is low and it frequently declines during a recession; it increases during a recovery and the subsequent period of expansion.

Wage costs are under control in the business sector

The growth in unit labour cost is derived by comparing the pace of growth in hourly compensation with the increase in labour productivity. Unit labour cost grows when hourly compensation grows faster than the rise in labour productivity. The growth in unit labour cost is frequently used as an indicator of inflationary pressure that arises when wage increases are growing faster than labour productivity growth. These wage increases can increase the labour costs of businesses and, eventually, prices.

In the third quarter of 2000, the growth of hourly compensation was 3.1% relative to the third quarter of 1999. But, over the same time period, unit labour cost increased by only 1.0%, owing to the substantial increase of labour productivity (+2.1%). Since the first quarter of 1999, unit labour cost has been relatively stable, growing in a range of 0.5% to 1.5%. This is considerably below the rates of increase seen in 1997 and 1998.

Available on CANSIM: matrix 9484.

For more information, or to enquire about the concepts, methods or data quality of this release, contact John Baldwin (613-951-8588; fax: 613-951-5403; baldjoh@statcan.gc.ca) or Jean-Pierre Maynard, (613-951-3654; fax: 613-951-5403; maynard@statcan.gc.ca); Micro-economic Analysis Division.

Business sector: Labour productivity and related variables