Labour productivity, hourly compensation and unit labour cost

Second quarter 2006

Note to readers

Labour productivity in the Canadian business sector, measured on a quarterly basis, fell by 0.4% between April and June. This is the first time in two years that it has slipped into negative territory. On a year-over-year basis, productivity growth has declined from 2.1% in the first quarter of 2006 to 1.4% in the second quarter of 2006.

The second-quarter decline in productivity was the direct result of a slowdown in economic activity combined with a more pronounced increase in hours worked. The goods producing industries which experienced a decline of 1.0% in labour productivity were primarily responsible for the overall decline.

First quarterly downturn in productivity in two years

However, labour costs per unit of output, a key measure of inflationary pressure on wages, continued to increase at a slow pace in the second quarter (+0.3%). Since the beginning of 2006, the increase in unit labour costs in Canadian businesses has remained modest.

Labour productivity is a measure of real gross domestic product (GDP) per hour worked. Growth in productivity over time serves to improve the population’s standard of living and business competitiveness. Generally speaking, businesses enjoy productivity gains when the growth rate of GDP surpasses the rise in hours of work devoted to production.

From April to June 2006, growth in hours worked accelerated, whereas that of production slowed down, resulting in a drop in productivity. This stands in contrast with the previous seven quarters, when the growth of activity outpaced that of hours worked during every quarter, leading to quarterly productivity gains during the period.

In the United States, business productivity rose by only 0.4% between April and June, after posting 1.1% growth (revised) in the first quarter of 2006. Since the second quarter of 2005, business productivity in the U.S. has been up and down.

U.S. productivity makes moderate gains

For 2005 as a whole, the average annual rate of growth in productivity for both Canadian and U.S. businesses was identical, a 2.3% increase.

Canada’s annual performance in 2005 was the best since 2000. In the United States, the rate was the lowest on record since 1997, but it matched the average annual gain of 2.3% between 1995 and 2001.

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Decrease in productivity can largely be attributed to the goods sector

The drop in productivity for businesses as a whole in the second quarter of 2006 can largely be attributed to goods-producing businesses. On a quarterly basis, productivity in that sector decreased by 1.0%, while remaining stagnant for service-producing businesses (0.1%).

The stagnation in productivity among service-producing businesses in the second quarter occurred despite the performance of the wholesale trade (+1.7%) and the retail trade (+1.1%), the latter two industries having posted strong productivity growth since the beginning of 2006. However, accommodation and restaurant services and the information and cultural industries posted significant decreases.

The virtual lack of productivity growth among service-producing businesses happened in the context of strong output growth combined with similar increase in hours worked. This differs from goods‑producing businesses, which have shown slow economic growth since the beginning of 2006, with a 0.2% increase in the first quarter and a 0.3% decrease in the second quarter. However, the number of hours worked rose during the same period, their growth rate moving from 0.4% in the first quarter to 0.7% in the second quarter.

The drop in productivity among goods-producing businesses was largely a reflection of the substantial decreases noted in the mining industry and in manufacturing. These downward trends were partly offset by productivity increases in the construction industry and in utilities.

In the goods sector, there was a drop in production in the mining and oil and gas extraction sector which suffered a number of production stoppages due to unforeseen repairs. In addition, economic activities in the construction sector slowed down dramatically from the first quarter when unseasonably warm weather favoured this industry. Construction grew only 0.4% in the second quarter, a much slower pace than in the previous quarter (+2.4%). Despite a net slowdown in production, the construction industry experienced a productivity increase for a fourth straight quarter, rising 0.6% between April and June 2006.

Also, manufacturing output has declined for two quarters in a row while its labour input has not yet adjusted to this decline. As a result, productivity in this sector dropped 1.5%, after showing almost no growth during the first quarter. In 2004 and 2005, quarterly growth in productivity in this sector was at least 1.0% during six of the eight quarters that comprise those two years.

In the second quarter of 2006, the productivity decline in the manufacturing sector took place in the context of a 0.6% drop in production, combined with a 0.9% increase in hours worked. Prior to this increase, growth in hours worked in manufacturing had been nil in the first quarter of 2006 after having declined for seven consecutive quarters.

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Despite the decrease in productivity, growth in unit labour cost remains moderate

Unit labour cost is obtained by calculating the ratio of hourly compensation to labour productivity.

In the second quarter of 2006, labour costs per unit of GDP did not change for goods‑producing businesses, while they rose by 0.3% in service-producing businesses. The slow growth in labour costs in the second quarter was largely the result of the drop in hourly wages in goods-producing industries (-1.0%) and the slow rate of increase in service-producing industries (+0.4%).

In service-producing businesses, the main decreases were observed in professional services (-1.4%), transport and warehousing (-1.2%) and the wholesale trade (-0.4%). Conversely accommodation and restaurant services (+2.5%), information and cultural industries (+1.7%), administrative and support, waste management and remediation services (1.3%) and other services (+1.3%) posted the largest increases in unit labour cost among service-producing industries.

As for goods-producing businesses, agriculture, fishing and forestry (-2.9) and utilities (‑1.5%) saw their unit labour costs decline, whereas such costs were up in the mining and oil and gas extraction sector (+3.6%) and in construction (+1.5%). Since the beginning of 2006, the mining and oil and gas extraction sector, among others, has suffered a number of production stoppages due to unforeseen repairs. This resulted in an increase in labour costs and a downturn in productivity.

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Net slowdown in activity in both countries, but Canadian labour market was more dynamic

Productivity in Canada and in the United States followed opposite trends during the second quarter of 2006, owing to the very different situations in the two countries in terms of economic performance and the labour market.

Both experienced a net slowdown in GDP growth between April and June, while their labour markets evolved in opposite directions. While hours increased at about the same pace than in the first quarter in the United States, hours worked by Canadian workers accelerated in the second quarter.

The lesser increase in hours worked south of the border resulted in a positive, albeit modest, rate of productivity growth in the United States during the period from April to June (+0.4%). During the same period, productivity in Canadian businesses declined by 0.4%.

Productivity growth slows dramatically in Canada and the U.S.

Even though GDP growth was decidedly slower in both countries in the second quarter, it increased more rapidly for American businesses than it did for their Canadian competitors. Between April and June 2006, GDP in the United States rose at a rate twice that of Canada.

Following robust growth of 0.8% during the first three months of 2006, the growth in Canadian GDP fell by half in the second quarter to 0.4%. This was the slowest gain in the past three years. A smaller increase in consumer spending and business investment accounted for most of this deceleration. The slowdown in the housing market also played a role.

GDP growth in both countries was cut in half in the second quarter

In the United States, GDP grew by only 0.8% in the second quarter, significantly slower than the 1.6% growth recorded during the first three months of 2006.

This slower rate of growth in American GDP reflected a pronounced deceleration in consumer spending, particularly in purchases of durable goods. The drop in investment in hardware and software, as well as in federal public spending, also contributed to the slowdown.

In Canada, the modest growth in activity was accompanied by a more dynamic labour market.

Hours worked devoted to production in Canadian businesses increased in the second quarter at a rate twice that of the previous quarter, from 0.3% in the first quarter to 0.8% in the second quarter. Almost all the rise in employment between April and June was in full-time work.

Growth in hours worked accelerates in Canada, but remains moderate in the U.S.

Meanwhile, hours worked continued to increase among U.S. businesses, although at a slightly slower pace (+0.4%) than in the first quarter (+0.5%).

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Unit labour costs: Competitive position slipping for Canadian businesses

Unit labour cost, a major indicator of trends in production costs and inflation, rose more rapidly in the United States than in Canada during the second quarter when measured in the respective national currencies. (Unit labour costs represent the cost of wages and benefits of workers per unit of economic output.)

Without taking the exchange rate into account, the labour cost per unit of output for Canadian businesses rose 0.3% in the second quarter, an increase similar to the 0.4% rise recorded in the first quarter.

For U.S. businesses, unit labour costs increased 1.2% in the second quarter of 2006, a net deceleration compared to 2.1% in the prior three months. In the first quarter, hourly compensation in the United States grew much faster than labour productivity.

However, the competitive position becomes advantageous for U.S. businesses when unit labour costs are adjusted for the exchange rate.

Canadian unit labour costs in US $ increases again

In the second quarter, the strength of the Canadian dollar in relation to the American greenback resulted in a 3.1% increase in Canada’s unit labour cost expressed in U.S. dollars. This was nearly three times the 1.2% increase posted in the United States. In the first quarter, this indicator of competitiveness had advanced at the same pace in both countries.

In the second quarter, the Canadian dollar appreciated by 2.8% in relation to its U.S. cousin. This was the fourth consecutive quarterly rise.

However, Canadian businesses took advantage of the latest rise in the loonie by investing in efficiency-saving machinery and equipment. Their purchases in this area were up 2.1% in the second quarter.

Over the past four quarters, businesses made substantial investments in machinery and equipment, with average quarterly increases of 2.5%.

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U.S. revisions: Productivity gap between the two countries disappears for the year 2005

The United States recently made revisions to its labour productivity estimates. The data released today incorporates these revisions to the U.S. data affecting both GDP and hours worked.

The American GDP data were revised to the first quarter of 2003. The data on hours worked were also revised to reflect the inclusion of the information on jobs from the legal questionnaire of organizations from the 2002 economic census.

No corresponding revision to hours worked was done in Canada. The most recent revision for the last four years of GDP in Canada can be obtained in the June 8, 2006 edition of The Daily.

On the whole, the revisions made to the U.S. data have served to bring down the rate of growth in labour productivity in the United States for each of the past three years (2003-2005). For this period, the scale of the downward revisions ranged between 0.3% and 0.4%.

For 2005, productivity growth in the United States dropped from 2.6% before revision to 2.3% after revision, a rate identical to that observed in Canada during the same year. With these revised data, the productivity gap in favour of the United States disappeared in 2005.

Nonetheless, the previous estimates remained virtually unchanged over the medium term after the revisions. Between 2000 and 2005, productivity gains in the United States averaged 3.2% (instead of the +3.3% first estimated), a rate that was three times the 1.0% increase recorded in Canada.

During the period from 2000 to 2005, Canada (+2.5%) and the United States (+2.6%) posted average rates of growth similar to that of the GDP. However, the number of hours worked was up an average of 1.4% in Canada, while declining 0.6% in the United States during the same period.

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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: 5042.