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Tuesday, December 9, 2003

Study: Canada and Australia: A comparison of economic performance

1980 to 2000

Despite a labour productivity gap in favour of Australia, Canada's standard of living grew at the same pace as Australia's during the late 1990s, according to a new study comparing the two countries.

This is a significant achievement, given that the OECD has identified Australia's as one of the "miracle economies" of the 1990s.

Canada and Australia have many similarities, which allow a ready comparison. Australia, like Canada, is a net importer of production technology. Machinery and transportation equipment represent about one-half of total imports of both countries. The bulk of high tech equipment of both countries is imported from the United States.

Both countries have abundant natural resources and the structures of their economies are dominated by the primary sector: 55% of Australia's exports are in the form of raw materials, compared with 46% for Canada.

From 1995 to 2000, gross domestic product (GDP) per capita in Canada increased at an annual average rate of 3.0%, just marginally above the average of 2.9% in Australia.

Gross domestic product per capita and its sources of growth
  1983 to 2000 1983 to 1988 1988 to 2000 1988 to 1995 1995 to 2000
  average annual growth rate in %
GDP per capita          
1.9 3.0 1.4 0.4 3.0
2.4 3.0 2.1 1.6 2.9
Labour productivtity          
1.2 0.9 1.3 1.2 1.5
1.7 1.3 1.8 1.2 2.5
Labour utilization          
0.6 2.1 0.1 -0.9 1.5
0.8 1.7 0.4 0.5 0.3
Average hours          
0.0 0.3 -0.1 -0.3 0.2
0.2 0.7 0.0 0.0 0.0
Employment rate          
0.4 1.6 0.0 -0.7 0.9
0.3 0.5 0.2 0.3 0.0
Participation rate          
0.2 0.2 0.2 0.1 0.4
0.3 0.5 0.2 0.2 0.3

This occurred despite a widening gap between the two countries in terms of labour productivity. In Australia, productivity rose at an average annual pace of 2.5% during this five-year period, compared with only 1.5% in Canada.

How could Canada increase its standard of living as fast as Australia, but be less productive? The answer related primarily to differences in their labour markets.

Canada's performance in terms of the growth in its living standard comes largely from a significant increase in the growth of labour utilization, that is, the combination of higher average hours worked and a higher rate of employment relative to the total population.

Note to readers

This release is based on analysis in a report titled Prosperity and productivity: A Canada-Australia comparison.

Prosperity is measured as gross domestic product per person. This measure is subject to a number of well-known criticisms as a welfare indicator, but is a meaningful indicator nonetheless. The growth of GDP per person can be broken down into growth of labour productivity (real GDP per hour worked) and growth of labour utilization (hours worked per person). The latter is composed of average hours worked per job, the employment rate (the number employed relative to the working age population) and the participation rate (the ratio of labour force to total population).

This study used the March 2003 vintage of the data. Future revisions in the data produced by Canada and Australia may change the magnitude of some of the numbers reported in this study. However, they are not expected to result in significant changes in the story on the performance of the two countries.

Despite its lag in productivity growth, Canada's growth in living standard kept up with Australia's, since Canada put in relatively more working time per person.

In 2001, GDP per capita in Canada was about $28,900, slightly higher than $27,300 in Australia. Australia's population was roughly 20 million, about two-thirds of Canada's population of nearly 31 million.

Performance also similar during the 1980s

Canada's prosperity also compared favourably with Australia's during the 1980s. However, it fell behind afterwards, primarily as a result of the deep recession in Canada in the early 1990s and of the major restructuring of the Canadian economy following implementation of the Canada-United States free trade agreement.

From 1983 to 1988, GDP per capita advanced at an average of roughly 3.0% a year in both countries, though as a result of different forces. Canada outperformed Australia in terms of labour utilization, but Australia posted faster productivity gains.

Labour productivity rose 1.3% in Australia, compared with 0.9% in Canada. However, labour utilization in Canada rose at an annual average pace of 2.1%, compared with only 1.7% in Australia.

In addition, Canada put people to work much more rapidly during the 1980s. Canada's employment rate (employment to the working age population) increased 1.6% a year from 1983 to 1988, three times the rate of growth of 0.5% in Australia.

The last five years of the 1990s marked the impact of information technology on economic growth. Prosperity growth in both countries vaulted to an average of about 3% a year.

As a result of the strong productivity growth in the 1990s, Australia raised its ranking on GDP per capita to seventh in the world in 2001, up from 15th in 1990.

Marked differences in performance by industry

The gap in the growth in labour productivity in favour of Australia was primarily attributable to the fact that capital-labour intensity grew less rapidly in Canada.

While capital formation grew less rapidly in Canada, hours at work increased more rapidly than in Australia. As a result, capital per hour - a key factor behind labour productivity growth - increased more slowly in Canada. A similar result was found in a recent comparison of Canada and the United States (The Daily, July 12, 2002).

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The 1980s and the 1990s witnessed marked differences between Canada and Australia in terms of their performance by industry.

During the 1980s, Canada outperformed Australia in about half of the sectors which account for the bulk of the business sector's GDP, that is, in transportation, trade, manufacturing and mining.

Australia outperformed Canada in the remaining sectors: communications, public utilities, agriculture, construction and finance.

During the 1990s, Canada's advantage over Australia was confined to two sectors: agriculture and retail trade. This does not, however, mean that Canada performed poorly in the remaining sectors; the productivity of other sectors was high by historical standards.

Canada experienced rapid productivity gains in the finance sector (+3%) and communication sector (+4%), compared with a modest 1.5% in transportation and wholesale trade.

From 1995 to 2000, all Australian sectors outperformed their Canadian counterparts.

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The report Prosperity and productivity: A Canada-Australia comparison (11F0027MIE2003018, free) is now available online. From the Our products and services page, under Browse our Internet publications, choose Free, then National accounts. More information on papers related to productivity is also available online (/english/studies/eaupdate/prod.htm).

For more information, or to enquire about the concepts, methods or data quality of this release, contact Tarek M. Harchaoui (613-951-9856) or Faouzi Tarkhani (613-951-5314), Micro-Economic Analysis Division.

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Date Modified: 2003-12-09 Important Notices