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Labour productivity, hourly compensation and unit labour cost

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The Daily


Friday, September 14, 2007
Second quarter 2007

Labour productivity in the Canadian business sector grew moderately (+0.2%) between April and June, following the strong gain (+0.7%) in the first three months of the year.

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This slowing in productivity in the second quarter was directly attributable to an acceleration in hours worked that were dedicated to production. Hours worked for businesses increased at more than double the pace in the second quarter than in the first. At the same time, the pace of economic growth remained about the same.

In the United States, labour productivity among American businesses surged 0.9% between April and June after edging forward (+0.1%) in the first three months of the year. This was its strongest performance since the third quarter of 2005, when the indicator reached 1.2%. The recovery in American productivity in the second quarter reflected a notable acceleration in economic activity.

On a quarterly basis, labour productivity growth in Canada and the United States has been very volatile, but on average these indicators have evolved at a similar pace since the third quarter of 2004.


Note to readers

This release contains a brief analysis of detailed data on labour productivity growth and other related variables. A more thorough analysis, including additional charts and tables, is available in the Canadian Economic Accounts Quarterly Review.

Labour productivity is a measure of real gross domestic product (GDP) per hour worked. Businesses make productivity gains when their production of goods and services grows faster than the volume of work dedicated to this production. Rising productivity over time generally contributes to a higher standard of living. For more information, consult The Canadian Productivity Review: Productivity Performance in Canada.

The term "productivity" herein refers to labour productivity. Calculations of the productivity growth rate and its related variables are based on index numbers rounded to one decimal place.

For more information about the productivity program, see the National Economic Accounts module accessible from the home page of our website. You can also order a copy of a technical note on the quarterly estimates of productivity by contacting Client Services (productivity.measures@statcan.gc.ca).

Revisions

With this release, Canadian estimates have been revised back to the first quarter of 2007 at the aggregate level and to the first quarter of 2006 at the industry level.

In the United States, the Bureau of Labor Statistics recently made revisions to its labour productivity estimates for the years 2004 to 2006, incorporating recent revisions to the US National Accounts by the Bureau of Economic Analysis.


In Canada, the increase in the number of hours worked between April and June was concentrated in full-time work, which led to a 0.3% increase in hours per job. Hours per job declined during the two previous quarters.

Growth in output comparable, but labour market more dynamic in Canada

Productivity in the United States and Canada moved in opposite directions in the second quarter compared with the first. While second-quarter productivity growth in Canada cooled, it heated up sharply south of the border.

In Canada, economic output among businesses recorded a second consecutive quarter of strong growth (+0.9%). Driven by rising incomes, personal expenditure on goods and services continued to sustain economic activity. Spending accelerated to 1.2%, led by a pick-up in consumer outlays on durable goods.

Production rose at a comparable pace among Canadian and American businesses between April and June. However, after stagnating in the previous quarter, economic activity in the US business sector rose strongly (+1.1%)—the strongest since the first three months of 2006. This rebound helped American businesses achieve better productivity gains than those in Canada.

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The rebound in American gross domestic product (GDP) growth is essentially attributed to the strong recovery in net exports (exports minus imports of goods and services) and the acceleration in business investments (mainly in infrastructure investment).

Unlike in previous quarters, consumer spending played a very small part in American GDP growth. The slowdown in consumer spending occurred amidst high gasoline prices and a continued slowing in the housing market.

Differences in labour market performance in both countries also played a role in the faster productivity growth among American businesses. In Canada, the growth in economic activity was accompanied by a more dynamic labour market.

Hours worked devoted to production in Canadian businesses grew 0.8% in the second quarter, more than twice as fast as the 0.3% rise in the first quarter. Full-time work was the main component in the increase in hours worked between April and June. The rise in hours worked in the second quarter was concentrated in administration and support services, accommodation and food services and other commercial services, where productivity levels are relatively low.

By comparison, hours worked in American companies rose only 0.2% in the second quarter, after remaining unchanged in the first three months of the year.

Canadian businesses watch their competitiveness weaken as the loonie soars

As with productivity in the second quarter, the United States had an advantage over Canada in terms of unit labour costs, particularly when exchange rate appreciation is taken into consideration.

Unit labour cost, a measure of the cost of wages and benefits of workers per unit of economic output, once again rose more in Canada than in the United States between April and June, when measured in their respective national currencies.

The cost of labour per unit of production for Canadian companies was up 1.0% in the second quarter, following a 1.1% increase in the previous quarter. This slight slowdown in unit labour cost in Canada observed over the April-June period is attributable to the strong deceleration in the increase in hourly wages, which fell from 1.8% in the first quarter to 1.1% in the second quarter.

Since the third quarter of 2006, the growth in this indicator has been at or above 1.0%. The increase in labour compensation during the first two quarters of 2007 stems, in part, from pay equity payments in Quebec and special contributions to the Newfoundland and Labrador pension fund.

Since 2006, these payments have had a significant effect on unit labour cost. Excluding these special payments, unit labour cost for the overall economy increased 0.9% and 1.0% in the first and second quarters, respectively.

For American businesses, unit labour costs were up only 0.5% in the second quarter, decelerating from 1.3% in the first quarter and 2.4% in the last quarter of 2006. In the meantime, hourly compensation in the United States picked up, in the second quarter at the same rate as in the first (+1.3%), considerably slower than in the last quarter of 2006 (+2.8%).

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The competitive position of American businesses looked even better when the unit labour cost was adjusted for the exchange rate. The loonie rose sharply (+6.3%) over the American greenback in the second quarter, following two quarters of depreciation. The strength of the Canadian dollar in the second quarter led to a 7.6% jump in the Canadian unit labour cost in US dollars after two quarters of decline.

Despite this deterioration in cost competitiveness, exports of Canadian goods and services still rebounded 0.7% in the second quarter, following a mere 0.2% rise in the first three months of 2007. Canadian businesses capitalized on the dollar's strength by investing in machinery and equipment, boosting their acquisitions in this area 1.5% between April and June, after allowing them to fall in the first quarter.

Downward revisions in productivity growth in the US for each of the three previous years

The United States recently revised their estimates on labour productivity in the business sector. The data released today incorporate these revisions to the American data that affected the GDP between 2004 and 2006. The latest revisions for Canada's four-year GDP are available in The Daily on June 12, 2007.

Overall, the American data revisions lowered the annual rate of growth in American labour productivity for each of the three previous years (2004 to 2006). Throughout this period, American business productivity grew 2.0% on average, or 0.3 percentage points less than previously estimated.

For 2006, US productivity growth was revised downward from 1.7% to 1.0%, a rate now identical to that in Canada during the same year. With these revised data, productivity growth has been on average similar in both countries since the third quarter of 2004—a marked improvement in Canada's case.

Comparison of annual labour productivity growth in the business sector before and after revision
  Canada United States
    Before revision After revision
  annual % change
1981 to 2006 1.5 2.2 2.1
1981 to 2000 1.6 1.9 1.9
2000 to 2006 1.0 2.9 2.7
2003 0.3 3.8 3.8
2004 0.0 3.1 2.9
2005 2.5 2.1 2.0
2006 1.0 1.7 1.0
Source:US data are from the Bureau of Labor Statistics, Productivity and Costs - Second quarter 2007, published in NEWS, September 6.


However, the revisions had almost no medium-term impact on previous estimates. Between 2000 and 2006, annual average growth in American productivity was revised downward, from 2.9% to 2.7%. Despite this revision, the growth in American productivity remained almost three times higher than that in Canada, which came to 1.0% for the same period.

During this period, GDP growth was similar on both sides of the border, but hours worked rose much more in Canada. More precisely, the annual average growth in GDP was 2.5% for Canada and 2.6% south of the border. On the other hand, hours worked increased an average of 1.5% per year in Canada while they declined 0.1% south of the border over 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, can be found in the second quarter 2007 issue of Canadian Economic Accounts Quarterly Review, Vol. 6, no. 2 (13-010-XWE, free), which is now available from the Publications module of our website.

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

To order data or obtain general information, send an e-mail to the following address: 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: 613-951-3618; maynard@statcan.gc.ca), Income and Expenditure Accounts Division.

Tables. Table(s).