Labour productivity, hourly compensation and unit labour cost

First quarter 2007

Labour productivity note to readers

The year 2007 opened on a solid note for productivity in the Canadian business sector. Between January and March, quarterly labour productivity growth climbed to 0.7%, more than three times the pace in the previous quarter (+0.2%).

Canadian businesses managed to triple their production rate relative to the previous quarter, while hours worked increased at a more moderate pace. This surge in productivity in the first quarter of 2007 is the largest gain since the 1.0% recorded in the third quarter of 2005.

Chart F.1 Productivity growth in Canada’s business sector accelerates

Both the services-producing and the goods-producing industries made positive contributions to the overall productivity performance in the first quarter. Gains were observed in wholesale and retail trade, manufacturing, construction, agriculture, forestry, fishing and hunting as well as finance and insurance services.

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Significant gains in productivity in the goods sector

In the first quarter of 2007, gains in productivity in the business sector are largely due to the goods-producing industries. Productivity picked up in the goods-producing sector with a growth of 1.4% in the first quarter following almost no change in the fourth quarter of 2006.

Growth in manufacturing and in agriculture, forestry, fishing and hunting industries contributed positively to the increase in the goods sector in the first quarter. Productivity in the mining, oil and gas extraction industry was down again in the first quarter of 2007.

In the services sector, productivity grew by 0.3% in the first quarter. Productivity increases were recorded in wholesale trade (+2.3%) and retail trade (+1.6 %) and finance and insurance (+0.6 %) industries but were partially offset by declines in accommodation and food services industries. However, in the fourth quarter, both wholesale trade and retail trade had recorded drops while accommodation and food services had reported growth.

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Substantial improvement in the unit labour cost in the services sector

After increasing by 1.3% for two consecutive quarters, growth in business unit labour cost slowed to 0.7% in the first quarter 2007. This improvement can be mainly attributed to the services sector.

In spite of a significant improvement in labour productivity, the unit labour cost in the goods sector rose by 0.9% in the first quarter of 2007, the same pace as the previous quarter. Almost all goods producing industries saw their unit labour cost increased.

In the services sector, the unit labour cost improved significantly in the first quarter with a growth of 0.6%, half of the increase registered in the previous quarter. Net improvements were observed in wholesale and retail trade, finance and insurance sector as well as in professional, scientific and technical services.

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Best performance in productivity in Canada in more than a year

Productivity increased at a faster pace in Canadian businesses than in American businesses in the first three months of 2007 in the context of a much stronger output growth in Canada.

Chart F.2 Canadian productivity outpaces by far that of the U.S. in the first quarter

For American businesses, quarterly productivity growth remains lacklustre. With a slowing of economic activity, productivity increased only 0.1% in the January-March period, a lower pace than in the fourth quarter of 2006. For the first time in over a year, the United States experienced a significantly weaker GDP growth than Canada.

Chart F.3 U.S. productivity slows in business sector

In Canada, real GDP businesses grew 0.9% in the first quarter of 2007, three times what it was in the previous quarter (+0.3%). It was the highest quarterly growth in a year.

Consumer spending on goods and services, which edged up to 1.0% from 0.9% the previous quarter, continued to drive the economy. The accumulation of business inventories due to increased output also made a positive contribution to Canada’s quarterly GDP growth.

Chart F.4 GDP growth in business sector accelerates in Canada, while it slows dramatically in the U.S.

American business sector GDP rose only 0.1% in the first quarter, substantially lower than the 0.7% increase observed in the last three months of 2006. In fact, it was the smallest gain since the last quarter of 2002 (+0.1%), just before the Iraq war began.

Hours worked in Canadian companies grew 0.3% in the first quarter, up slightly from +0.1% in the previous quarter. A large portion of the increase in hours worked between January and March was in part-time work.

Chart F.5 Hours worked increases slightly in Canada, while they decline in the U.S.

There was a sharp contrast between the United States and Canada in hours worked over the last two quarters. Specifically, hours worked in American businesses edged down in the first quarter, after climbing 0.3% in the fourth quarter of 2006. Hours worked has been slowing gradually since the third quarter of 2006.

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Unit labour costs slows in both countries

Unit labour costs slowed significantly in both Canada and the U.S in the first quarter of 2007. Nevertheless, unit labour costs rose slightly faster in Canada than in the United States in the first quarter, when measured in their respective national currencies.

Labour costs per unit of output in Canadian businesses reached 0.7% in the first quarter, compared with 1.3% in the previous quarter. This substantial improvement is attributable to higher productivity and slower growth in hourly compensation, which slowed from 1.7% in the last quarter of 2006 to 1.4% in the first quarter of 2007. For American businesses, unit labour costs were up only 0.5% in the first quarter. This is a sharp deceleration from the 2.2% increase recorded in the previous three months.

Chart F.6 Canadian unit labour costs in U.S. dollars declines sharply

However, Canadian businesses had a more favourable competitive position when the unit cost of labour was adjusted for the exchange rate. In the first quarter, the Canadian dollar depreciated by 2.8% against the U.S. dollar. The depreciation resulted in a 2.0% decline in Canadian unit labour costs, expressed in American dollars. This is the second consecutive quarterly decline in this indicator.

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Recent revisions to Canadian productivity estimates have little impact on the Canada/U.S. gap

Overall, the 2003-2006 revisions lowered the annual rate of growth in Canadian labour productivity in 2004 and 2006, and increased it in 2003 and 2005. The magnitude of these revisions ranged from -0.3% to 0.4%. For example, for 2006, productivity growth in Canadian businesses was revised downward from 1.2% to 1.0%. The 2005 productivity growth in Canada was revised upward from 2.1% to 2.5%.

Overall these revisions tend to cancel each other out. As a result, they had no impact on the average gap in productivity between Canada and the United States during the post-2000 period. However, for the first time since 2000 with these revisions, productivity growth is higher in Canada in 2005 than in the U.S.

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Statistical tables

• Table F.1 Business sector - Labour productivity and related variables for Canada and the United States, quarterly
• Table F.2 Business sector - Some related variables for labour markets
• Table F.3 Indexes of labour productivity by industry
• Table F.4 Indexes of unit labour cost by industry

Information on methods and data quality available in the Integrated Meta Data Base: 5042.