Labour productivity, hourly compensation and unit labour cost

Labour productivity in Canada's business sector grew 0.5% between January and March, a similar pace to the quarterly average in 2005.

At the same time, unit labour costs, a key measure of inflationary pressures on wages, slowed for the first time in more than a year. Unit labour costs of businesses increased only 0.3% during the first quarter of 2006, compared with a gain of 1.1% in the previous quarter. It was the slowest rate of growth since the third quarter of 2004.

The 0.5% increase in productivity came as economic output rose at three times the pace of hours worked. This rate of growth was equivalent to the average quarterly gain for the entire four quarters of 2005.

Labour productivity, as measured by real gross domestic product (GDP) per hour worked, is important because it has a direct impact on the population's standard of living in the long term. Unit labour costs represent the cost of wages and benefits of workers per unit of economic output.

Growth in GDP in Canada has exceeded that of hours worked since the third quarter of 2004, resulting in productivity gains during the last seven quarters. During this period, productivity among Canada's businesses has increased at an average quarterly rate of 0.7%.

On the other hand, labour productivity in the US business sector increased 1.0% between January and March, twice the rate of growth in Canada. The first-quarter gap in favour of the United States was due mainly to stronger growth in economic output south of the border.

For 2005 as a whole, labour productivity in Canada rose 2.3%, the best annual performance since 2000. This was just slightly slower than the growth of 2.6% for the year in the United States, its slowest gain since 2001.

Economic growth accelerating in Canada and the United States, but pace slower here

Economic growth is accelerating in both Canada and the United States, but the pace is slower in Canada.

The upward trend in hours worked continued in both countries in the first quarter. But it was mainly the net change in GDP south of the border that allowed American businesses to post better gains in productivity.

After stagnating in the fourth quarter, productivity among US businesses rebounded in the first quarter, rising 1.0%, which was double the 0.5% gain in Canada. In the last quarter of 2005, Canada's productivity growth out-distanced that of the United States.

In Canada, growth in real GDP hit 0.9% in the first quarter of 2006, after increasing 0.6% in the last three months of 2005. This increase was almost identical to the average growth of 0.8% recorded during the four quarters of 2005.

Canada owed its strong first-quarter economic activity largely to household consumer spending. Canadians spent heavily on durable goods, such as household appliances, and on semi-durable goods, such as clothing and footwear. A strong recovery in investment in residential construction also contributed to economic growth.

South of the border, real GDP rose 1.5% in the first quarter of 2006, compared with only 0.5% in the previous quarter. This was the strongest quarterly gain in GDP in the United States since a 2.3% increase in the third quarter of 2003.

Virtually all components of American economic output that had slowed in the fourth quarter of 2005 rebounded in the first quarter. Consumer spending by households, which spent heavily on durable goods, rose 1.3% in the first quarter, after edging up only 0.2% in the last three months of 2005.

Hours worked in both countries continued to increase slightly, although more slowly in Canada.

In Canada, growth in economic activity went hand-in-hand with a relatively stable labour market. Hours worked on output in Canadian businesses rose 0.3% in the first quarter, compared to 0.2% in the last quarter of 2005. Increases in part-time labour (+0.8%) outstripped those in full-time jobs (+0.3%).

After climbing 0.4% in the fourth quarter of 2005, hours worked in the United States went up 0.6% in the first quarter, double the rate of growth in Canada.

Canadian unit labour costs in US dollars weaken

Excluding the exchange rate, unit labour costs in Canada and the United States rose at the same pace in the first quarter of 2006, that is, 0.3%. (Unit labour costs represent the cost of wages and benefits of workers per unit of economic output.)

In Canada, this represented a net slowdown in unit labour cost per unit of GDP for Canadian businesses, compared to the 1.1% increase recorded in the fourth quarter of 2005.

In contrast, for the United States, the first-quarter rate represented a slight acceleration from the last three months of 2005 when unit labour costs declined 0.2%.

Hourly compensation paid to workers in Canadian businesses increased 0.8% between January and March this year, only half the increase of 1.6% in the last quarter of 2005.

In comparison, the rate of growth in hourly compensation paid to workers in American businesses climbed from a decline of 0.2% in the last quarter of 2005 to an increase of 1.3% in the first quarter of 2006.

When the exchange rate is taken into consideration, the situation shifted even more to favour American businesses.

After levelling off in the first half of 2005, the Canadian dollar appreciated in the last three quarters. The Canadian dollar's appreciation of 1.5% compared to the American currency in the first quarter of 2006 resulted in the Canadian unit labour cost expressed in US dollars climbing 1.9% in the first quarter compared to an average increase of 4.0% in the previous two quarters.

Recent revisions in productivity figures in Canada had virtually no impact on the Canada/US gap

Data released today include annual revisions of Canada's GDP from 2002 to 2005. Revisions to American data are expected this September.

Overall, the revisions during this period had the impact of reducing the rate of growth in Canadian labour productivity in 2003, and increasing it in 2004 and 2005.

These revisions tended to cancel each other out. As a result, they had virtually no impact on the gap in labour productivity growth between Canada and the United States during the post 2000 period.

In 2005, labour productivity among Canadian businesses was revised upward from 2.2% to 2.3%. With this revision, the gap in productivity growth between the two countries was only 0.3 percentage points, the smallest it has been in the past five years.

Between 2000 and 2005, productivity in the United States increased at an annual average rate of 3.3%, more than three times faster than the 1.0% rate of growth in Canada. Over the 2000 to 2005 period, GDP growth in Canada was 2.5% on average combined with an increase of 1.4% in hours worked. In comparison, US GDP grew by 2.8% on average while hours worked declined by 0.5% during the same period.

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, is now available online in the first quarter 2006 issue of Canadian Economic Accounts Quarterly Review (13-010-XIE, free). From the Our products and services page, under Browse our free internet publications choose National accounts.

Second quarter data for labour productivity, hourly compensation and unit labour cost will be released on September 13.

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.