Labour productivity, hourly compensation and unit labour cost

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In the first quarter of 2008, the labour productivity of Canadian businesses declined for a second consecutive quarter, in a context of inclement weather, reduced working hours, and a widespread drop in manufacturing output, especially in the motor vehicle industry.

Productivity of Canadian businesses edged down 0.3% in the first quarter of 2008, slowing from the upward revised 0.7% decline in the fourth quarter of 2007. The back-to-back declines followed four quarters of growth.

After reaching a plateau in the final quarter of 2007, gross domestic product (GDP) experienced its first quarterly decline in nearly five years in the first quarter of 2008.

At the same time, employment continued to expand, despite job losses in manufacturing. Total hours worked remained almost unchanged, however, as the sustained growth in employment was completely offset by a drop in average hours worked (hours worked per job).

The quarterly decrease in average hours worked was partly due to the particularly harsh winter and production cutbacks in the Canadian automotive sector, as some assembly lines underwent retooling and others were affected by a labour dispute involving a major auto parts supplier in the United States. Overall, 12 of the 15 industries composing the business sector registered a decline in hours worked per job during the first quarter of 2008.

With a decline in the value of the Canadian dollar against its US counterpart after three quarters of strong gains, Canadian businesses saw their unit labour costs in US dollars edge downward for the first time in a year. The unit labour costs for Canadian businesses in US dollars have been trending upward since the second quarter of 2002. In spite of the 0.7% decline in the first quarter of 2008, unit labour costs in US dollars were over 90% higher compared with the first quarter of 2002.

Output slows, but job market remains buoyant

Although the volume of hours worked remained the same for Canadian businesses in the first quarter, their output declined and consequently their productivity fell. GDP of Canadian businesses fell 0.3% in the first quarter, after remaining flat in the fourth quarter of 2007. This contrasts with the first two quarters of 2007, when GDP grew at a steady pace.

A sharp slowdown in inventory buildup by businesses, as a result of the combined effect of higher consumer spending and lower imports, was a major contributor to the decline in Canada's GDP in the first quarter.

Employment in the Canadian business sector maintained its upward trend, climbing 0.5% in the first quarter, but the volume of hours worked remained unchanged due to a decline in hours worked per job. Over the previous nine quarters, the total volume of hours worked had risen at a fairly steady pace, averaging 0.5% growth per quarter.

Unit labour costs continue to advance

Hourly compensation in Canada increased in the first quarter while productivity decreased, leading to a 1.6% advance in the cost of labour per unit of output in the Canadian business sector. This increase was similar to the previous quarter and more than twice the average pace observed during the first three quarters of 2007.

However, Canadian businesses saw a slight improvement in their competitive position when the unit labour cost is adjusted for the exchange rate. In the first quarter, the Canadian dollar depreciated 2.2% against the US currency, which pushed Canada's unit labour costs in US dollars down 0.7%. This was the first quarterly decline of this indicator in a year. Unit labour costs for the US business sector increased 0.6% in the quarter.

Labour productivity increases in the United States

In the United States, labour productivity growth in the business sector rebounded to 0.6% in the first three months of 2008, after posting a 0.2% increase in the fourth quarter of 2007. This upturn was mostly attributable to the largest decline in the volume of hours worked since the second quarter of 2003, as GDP growth in the United States was low.

The slow growth in the GDP during the last two quarters in the United States is largely a result of continued sluggishness in consumer spending on durable goods and the persistence of the housing slump.

Hours worked in American businesses declined for a third consecutive quarter, dropping 0.4% in the first quarter.

Recent revisions in Canadian productivity estimates have little impact on the gap between Canada and the United States

Overall, the 2004 to 2007 revisions (which affected GDP and hours worked) decreased the annual rate of growth in Canada's labour productivity for 2005 and increased it for 2004, 2006 and 2007. The magnitude of the revisions ranged from a 0.5% decline in 2005 to a 0.5% gain in 2006.

In general, the revisions tended to cancel each other out. Consequently, the size of the revisions has had no impact on the average difference in productivity between Canada and the United States since 2000.

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 first quarter 2008 issue of Canadian Economic Accounts Quarterly Review, Vol. 7, no. 1 (13-010-XWE, free), which is now available from the Publications module of our website.

Second quarter 2008 data for labour productivity, hourly compensation and unit labour cost will be released on September 10.

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: 613-951-3618; maynard@statcan.gc.ca), Income and Expenditure Accounts Division.

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