Labour productivity, hourly compensation and unit labour cost

First quarter 2005

Note to readers

Labour productivity in the Canadian business sector rose a slight 0.2% during the first three months of 2005 compared with the previous quarter, continuing its anaemic performance of the past two years.

Productivity growth came down again

In the United States, productivity increased 0.6%, three times the rate of growth in Canada. This gap stems entirely from a more rapid economic growth in the US.

Canada’s marginal first-quarter gain in productivity followed a slight rebound of 0.5% in the fourth quarter last year and a gain of only 0.1% in the previous quarter. This anaemic productivity performance in Canada occurred in the context of a strong Canadian dollar.

Productivity rises when gross domestic product (GDP) increases at a faster pace than the number of hours worked. Ultimately, rising productivity enables Canadians to increase and maintain their standard of living.

Real GDP in the Canadian business sector rose 0.5% in the first three months of the year, the same rate of growth as in the previous quarter. This was due to the strength of domestic demand, which was partially offset by the rapid increase in imports and by a slowdown in the accumulation of inventories.

Taking advantage of the strong dollar, Canadian businesses continued to invest in machinery and equipment, increasing their purchases by 3.8% in the first quarter of 2005, which explain in part the 2.5% surge in imports.

South of the border, productivity among US businesses continued to rise more rapidly than that of their Canadian competitors, although the growth rate was significantly slower.

U.S. productivity growth slowed

Productivity in the American business sector increased 0.6% in the first quarter, three times the rate of growth in Canada. However, the American rate slipped from 1.0% in the fourth quarter of 2004.

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Comparable growth in productivity in the service and goods sectors

In the first quarter of 2005, productivity in the service industries was up 0.3%, an increase similar to the 0.4% rise recorded by the goods sector.

In the previous quarter, the growth in productivity in both sectors was also comparable, at 0.6% for the services sector and 0.5% for the goods sector.

However, the similar productivity gains in the two sectors stems from different sources during the first three months of 2005: while production and hours worked in the services industries rose in the first quarter, the two measures drop in the goods sector.

In the goods sector, the productivity gains posted in the first quarter were driven largely by a 2.0% recovery in productivity in the construction industry, after six straight quarterly decreases.

The manufacturing sector, one of the important components in the goods sector, saw its productivity increased by 0.9% during the first quarter, slightly less than the average 1.5% pace of the previous three quarters. This performance may be the result of manufacturers’ efforts to reduce their labour force as a result of the low rate of growth in their production.

After a 0.2% decline during the last quarter of 2004, manufacturing activities edge up by 0.2% in the first quarter. Only 12 of the 21 major groups, representing 53% of the value added in the manufacturing sector, saw an increase in their activity in the first quarter. The more impressive performance was reported by machinery, computer and electronic products and fabricated metal products. During the same period, the number of hours worked in this sector declined by 0.7%, recording a decline for a third consecutive quarter.

The growth in productivity in the services sector posted in the first quarter was primarily attributable to the gains of 1.8% in transportation and storage sector and of 1.6% in retail trade.

Activities in retail trade showed a strong 2.0% increase in GDP in the first quarter following the end of strike by employees of the Société des alcools du Québec as well as the increasing popularity of gift certificates. In the meantime, the number of hours worked rose slightly by 0.3% after declining by the same rate in the previous quarter.

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Businesses tighten control of their unit labour cost

Following a 0.5% quarterly increase in hourly compensation and a 0.2% rise in productivity, business’ unit labour costs rose by 0.3% in the first quarter of 2005. This was down from the 0.8% increase posted in the fourth quarter of 2004.

Unit labour costs are an indicator that can be used to measure relative changes between hourly compensation and productivity.

The cost of labour per unit produced in the services sector was 0.2% lower in the first quarter, a first drop since the first quarter of 2002. In the goods sector, unit labour costs rose by 0.8 % in the first quarter following a 1.2% increase in the fourth quarter.

Some of the industries that posted the highest rates of growth in the unit labour costs during the first quarter of 2005 were professional, scientific and technical services, construction and agriculture, forestry, fishing and hunting. At the other end of the spectrum, the most pronounced decreases in terms of labour costs were reported in retail and wholesale trades.

Because of its productivity performance in the first quarter, the manufacturing sector posted a 0.3% decrease in its unit labour costs, compared to a 0.7% increase in the previous quarter.

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Canadian businesses continue to lag their US counterparts

Canadian businesses continued to lag behind their American counterparts in terms of the growth in their productivity. During the first three months of 2005, quarterly productivity in both countries was slower.

Canada–U.S. productivity gap persisted

The first-quarter gap between the two nations stems entirely from the difference in performance of economic activity, while the number of hours worked increased 0.3% on both sides of the border.

Growth in economic output in Canada’s business sector has increased at a slower pace than in the US business sector for three consecutive quarters. In the first quarter, business sector GDP south of the border rose 0.9%, nearly double the rate of growth in Canada.

Higher output growth of U.S. businesses

Business sector output in Canada started to slow late in 2004 after posting quarterly increases of about 1.0% for about a year. South of the border, however, output in the American business sector prior to the first quarter this year had expanded by 1.0% or more for seven consecutive quarters.

Growth in economic activity in Canada in the first quarter of 2005 is largely attributable to healthy domestic demand, which was strongly supported by household spending. Strong domestic demand helped to offset the dampening effect of the foreign trade balance on GDP growth. After two quarters of decline, exports rose 1.5%, compared with a 2.5% increase in imports.

In the United States, consumers were primarily responsible for the first-quarter growth in the output. Business investments in inventories, exports, residential investment and computer hardware and software were also factors.

Hours worked increased at a similar pace in both countries

The small rate of increase in hours worked posted in Canada during the last two quarters follows in the wake of a series of strong increases that started in the third quarter of 2003. In comparison, the growth in hours worked in the United States has kept essentially the same pace for the last seven quarters. On average, the number of hours worked increased during this period by 0.3% per quarter.

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Competitive capacity among businesses crumbles with strong loonie

On a year-over-year basis and without the effect of the exchange rate, the labour cost to produce a unit of GDP for Canadian businesses increased 0.9% in the first quarter, somewhat less than during the fourth quarter of 2004.

In comparison, American businesses saw their unit labour costs increasing for a third consecutive quarter. On a year-over-year basis, their unit labour cost advanced by 4.1% in the first quarter of 2005, compared with 3.0% in the fourth quarter of 2004.

When the exchange rate is taken into account, the position turns in favour of American businesses.

Canadian unit labour costs in US $ slowed slightly

In Canada’s business sector, the lack of productivity gains during the first three months of 2005, combined with the strong Canadian dollar, resulted in an 8.5% rise in unit labour costs measured in US dollars. This compared to the 4.1% growth in the United States.

Despite this decline in competitiveness from a cost standpoint, Canada’s exports nonetheless rebounded 4.4% in the first quarter of 2005, after falling 3.0% in the previous quarter.

Canadian businesses also took advantage of the strength of the dollar to invest in machinery and equipment. On an annual basis, their purchases in this area climbed 11.2% in 2004, in line with the strong 10.7% increase in imports.

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With the recent revisions in both countries, the productivity gap continues to favour the United States

Today’s data release incorporates the revised Canada data for both GDP and hours worked. For its part, the Bureau of Labor Statistics has revised its historical data on hours worked, while their revisions to GDP data should be released in September.

Quarterly measures of productivity in the Canadian business sector are also made available from 1981 onward, which will make it possible to evaluate the changes in productivity between the two countries during the past three cycles. Prior to this release, the data were available only back to 1987.

In general, the revisions have resulted in almost no change from previous estimates.

On a long-term basis, revised data show that the average annual rate of growth in Canada’s productivity between 1981 and 2004 was 1.4% per year, less than the 2.2% posted in the United States during the same period.

This gap in productivity growth was due mainly to the period between 2000 and 2004. During this time, productivity in the United States grew at an annual average rate of 3.8%, more than four times the rate of growth of only 0.9% in Canada.

This gap in productivity growth was due mainly to the period between 2000 and 2004. During this time, productivity in the United States grew at an annual average rate of 3.8%, more than four times the rate of growth of only 0.9% in Canada.

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Statistical tables

• Business sector: Labour productivity and related variables for Canada and the United States
• Business sector: Some related variables for labour markets
• Labour productivity by industry
• Unit labour cost by industry

Information on methods and data quality available in the Integrated Meta Data Base: 1402.