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Labour productivity, hourly compensation and unit labour cost
2004 and fourth quarter 2004
In 2004, Canadian businesses recorded their worst performance in labour productivity growth in eight years as both economic activity, hit by the rising Canadian dollar, and the number of hours worked increased in tandem for a second year in a row.
Productivity growth in Canadian businesses was a flat 0.0% last year. During the fourth quarter alone, productivity rose a marginal 0.2% from the third quarter. The gain was due almost entirely to growth in gross domestic product (GDP) as the number of hours worked edged up barely 0.1%.
Productivity is measured as the ratio of output for every hour worked. For example, it improves when GDP increases more rapidly than the number of hours worked. Productivity growth is a key factor determining the living standard of Canadians.
Productivity growth remained weak
Labour productivity has been virtually flat for two consecutive years. Last year’s growth was the smallest since 1996, while the increase in 2003 was only 0.2%. Canadian businesses had to cope with a 7.1% gain in the value of the loonie relative to the US greenback last year on the heels of a 10.8% gain the year before.
Business unit labour costs rise
Unit labour costs, an indicator that measures how hourly compensation changed relative to labour productivity, jumped 1.0% in the fourth quarter, following a modest 0.3% rise in the third quarter. The last increase of comparable size took place in the first quarter of 2001.
The 1.0% rise stemmed from a 1.2% jump in hourly compensation in the business sector, as productivity grew a mere 0.2% in the fourth quarter.
Unit labour costs in the business sector were unchanged in the second quarter, since productivity advanced at the same pace as hourly compensation.
While unit labour costs edged up 0.1% in the service sector in the fourth quarter, they surged ahead 1.8% in the goods sector after two consecutive quarterly declines.
At the industry level, the largest decrease was in accommodation and food services (-2.6%) and the largest gain was in manufacturing (+3.0%).
Fourth quarter 2004: Output growth in US surpasses Canada’s
Productivity grew faster among American businesses during the last three months of 2004 than it did among their Canadian counterparts because economic output in the United States increased at a faster rate. At the same time, the number of hours worked rose at the same rate in both countries, about 0.1%.
Productivity growth in the U.S. rebounds
In the United States, productivity increased 1.0% in the fourth quarter compared with the previous three months. This was an improvement over gains of 0.8% in the second quarter and 0.6% in the third.
During the past six quarters, the number of hours worked in the United States rose at an average of 0.3% per quarter. In Canada, however, the 0.1% increase in the fourth quarter halted a series of stronger increases than in the United States that started in mid-way through 2003.
The different productivity performance between the two nations was in growth of real GDP. Growth in output among American businesses surpassed that of Canadian businesses for the second consecutive quarter.
In Canada, GDP growth in the business sector slowed to 0.3%, less than half what it was in the third quarter (+0.7%). The slowdown was due to a decline in exports of goods and services, which were down for a second consecutive quarter.
On the American side, GDP growth slowed slightly from 1.1% to 1.0% between the third and the fourth quarter. US output has grown at rates higher or equal to 1.0% since the second quarter of 2003.
The slight deceleration south of the border was due partly to a slowdown in exports and in consumer expenditures (mainly from a slowdown in car purchases) and the acceleration of imports.
Annual 2004: Canadian firms had to adapt to soaring loonie
In 2004, productivity gains in Canada and the United States went in opposite directions: output grew more rapidly in the United States while hours worked continue to grow faster in Canada.
Productivity in the United States in 2004 benefited from higher output and a smaller increase in hours worked than in Canada. In Canada, real GDP and hours worked grew at a similar pace, leaving Canadian productivity virtually unchanged.
In Canada, where all the growth in employment was ascribed to full time jobs, hours worked advanced at 2,8%. Canada’s job market performance compares favourably to that of the United States which experienced a 1.1% increase in hours worked. This is the first time in four years that the US labour market posted a positive growth in hours worked.
Stronger increase in hours worked in Canada
In addition, during the past two years, Canadian businesses were forced to adapt to a major realignment of world currencies, including the Canadian dollar. The 10.8% rise in the value of the loonie relative to the US greenback in 2003 was followed by a further 7.1% gain last year.
Meanwhile, the American dollar lost ground not only against the Canadian dollar, but also against most “strong” European and Asian currencies. Consequently, American businesses experienced higher economic growth than Canada. They also registered their first increase in the number of hours worked in three years.
GDP growth higher in American businesses
In short, real GDP among Canadian businesses rose 2.9% last year, while the number of hours worked went up 2.8%. But in the United States, real GDP was up 5.1%, while the number of hours worked rose only 1.1%.
No productivity gains for Canada in 2004
The result was flat growth in labour productivity in Canada, and a 4.0% gain south of the border.
Productivity continues to grow faster in services than in the goods sector
In 2004, productivity remained low in the goods sector and slowed in the service sector.
After slipping 0.3% in 2003, productivity in the goods sector rose 0.3% in 2004. Average annual productivity growth in services fell to 0.7% in 2004 from 1.3% in 2003.
Since 2000, productivity has slowed gradually from year to year in the service sector and fluctuated up and down in the goods sector. Nevertheless, the service sector has invariably outpaced the goods sector in average annual productivity growth during the period.
The gap in productivity growth between the two sectors in 2004 was mainly due to differential increases in hours worked, since their output growth was identical (+3.4%).
In 2004, hours worked grew at a faster pace in both goods and services. The growth rate jumped from 2.1% in 2003 to 3.1% in 2004 in the goods sector and from 1.3% to 2.7% in the service sector.
In 2004, the productivity gains in the goods sector were sustained primarily by a healthy recovery in manufacturing productivity, up 3.5% after stalling in 2003.
This strong performance in the productivity of manufacturers in 2004 coincided with a sharp upswing in manufacturing output (+3.9%) that was mainly due to transportation equipment, chemicals and machinery. On the other hand, the sector was dragged down by the textile, leather products and clothing industries, where reductions in tariff barriers and heavy competition from Asian producers continued to chip away at output.
In services, the productivity slowdown in 2004 was due to all industries except finance, insurance, real estate and leasing, which enjoyed a strong rebound in productivity. Its productivity rose 2.9% in 2004 after shrinking 1.5% in 2003.
The finance, insurance, real estate and leasing group had a very good year, with growth of 3.8%, as the banking, insurance and real estate brokerage industries all posted substantial increases.
Unit labour costs in US dollars grew slowly
The United States continued to have an advantage over Canada in unit labour costs in 2004, especially when the exchange rate was taken into account.
The labour cost of producing one unit of output in the Canadian business sector rose 1.1% in 2004, nearly the same pace as in 2003. In contrast, unit labour costs in the American business sector edged up only 0.5% following two consecutive annual decreases.
When the exchange rate is taken into account, American businesses were in an even more advantageous position.
After reaching a record high, Canadian unit labour costs decelerate
The lack of labour productivity gains in the Canadian business sector in 2004, combined with the higher Canadian dollar, resulted in an 8.8% increase in unit labour costs in Canada measured in US dollars. In contrast, unit labour costs in the United States rose just 0.5%.
In 2003, unit labour costs in Canada, measured in US dollars, surged 13.6% to a record high, as the loonie rose 10.8% against the US dollar.
Despite this deterioration in unit labour cost, Canada’s exports rebounded 4.9% in 2004, following a 2.4% decline in 2003.
Canadian businesses also took advantage of the dollar’s strength to invest in machinery and equipment, on which they spent 9.4% more in 2004 than they did the year before. This was reflected in their sharply higher imports, which rose 8.2%.
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