Labour productivity, hourly compensation and unit labour cost

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First quarter 2008

Labour productivity note to readers

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.

Chart F.1
Productivity in Canadian businesses declines for a second straight quarter

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 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, twelve of the fifteen 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 U.S. counterpart after three quarters of strong gains, Canadian businesses saw their unit labour costs in U.S. dollars edge downward for the first time in a year. The unit labour costs for Canadian businesses in U.S. 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 U.S. dollars were over 90% compare to 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 last year. 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 as a result of 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.

Chart F.2
Hours worked remains almost unchanged in Canada, while it continues to decline in the U.S.

Unit labour costs continue to advance

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

Chart F.3
Canadian unit labour costs (ULC) in US dollars declines sharply

However, Canadian businesses saw a slight improvement in competitive position when the unit labour cost is adjusted for the exchange rate. In the first quarter, the Canadian dollar depreciated by 2.2% against the U.S. currency, which pushed Canada’s unit labour costs in U.S. dollars down 0.7%. This was the first quarterly decline in a year of this indicator. Unit labour costs for the U.S. 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 U.S.’s GDP in the last two quarters is largely due to continued sluggishness in consumer spending on durable goods and the persistence of the housing slump.

Chart F.4
U.S. productivity rebounds slightly

Hours worked in American businesses declined for the third quarter in a row, 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 2004-2007 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.

Table F.0
Comparison of annual labour productivity growth in the business sector before and after revision

Empty cell	Canada		United States
	Before revision	After revision
	annual % change
1981-2007	1.4	1.4	2.1
1981-2000	1.6	1.6	1.9
2000-2007	1.0	1.0	2.6
2004	0.0	0.2	2.9
2005	2.5	2.0	2.0
2006	1.1	1.6	1.0
2007	0.5	0.6	1.9
Source: U.S. data are from the Bureau of Labor Statistics, Productivity and Costs - First quarter 2008, published in NEWS, June 4.

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.

Industry analysis

Manufacturing productivity fell once again

Labour productivity in Canadian businesses edged down for a second consecutive quarter, falling 0.3% in the first quarter. Manufacturing, construction as well as transportation and warehousing accounted for virtually all the decrease.

Chart F.5
Main industries’ contribution to percent change in labour productivity in the business sector, first quarter 2008

As in the previous quarter, the productivity decline in Canadian businesses in the first quarter 2008 was mainly due to goods producing industries. On a quarterly basis, productivity in the goods sector fell by 1.3%, while it increased by 0.4% for service producing businesses.

In the first quarter of 2008, manufacturing productivity fell 1.6%, almost twice the decline observed in the previous quarter. The combined effects of a labour conflict at a U.S. auto parts plant, lower U.S. demand, and a shift in consumer preference towards more fuel-efficient models, contributed to the decrease in motor vehicle production in the quarter. Real GDP in manufacturing decreased for the third consecutive quarter, falling by 3.0% in the first quarter 2008. In a similar fashion, hours worked in manufacturing decreased by 1.4% in the first quarter, the largest drop since the fourth quarter 2006.

Chart F.6
Productivity in manufacturing sector slips once more

Modest increases in construction activity (real GDP up 0.3%) combined with a continued strong upward trend in the number of hours worked, induced productivity to decrease in this industry for the fourth consecutive quarter.

After declining in the previous quarter, productivity rebounds in services

Productivity in the services-producing industries improved in the first quarter, helped by a continued expansion in economic activity in this sector.

After declining by 0.1% in the fourth quarter of 2007, labour productivity increased by 0.4% in the first quarter 2008. Within the services sector, wholesale and retail trade continue to contribute the most. However, these increases occurred in a very different context for these two industries. While it came largely on the strength of positive GDP growth for retail trade, it was due to an important decline in the volume of hours worked for wholesale. Wholesalers were also affected by the slowdown in imports and exports of automotive products.

In contrast, transportation and warehousing as well as administration and support services registered important productivity declines in the first three months of 2008. The efficiency of transportation was particularly affected by the exceptional amount of snowfall this winter.

Most industries registered a decline of hours worked per job

In the context of inclement weather, hours worked per job declined in almost all industries of the business sector in the first quarter. Wholesale trade, accommodation and food services, communication and cultural services and construction industries were particularly affected.

However, the number of jobs continued to increase at a steady pace during the first quarter of 2008 (+0.5%). The number of jobs increased in most industries. The only industries to register job decreases were manufacturing, wholesale trade, public utilities and arts, leisure and culture. Construction, administrative and remediation services as well as transportation and warehousing registered employment increases higher than one percent for the quarter.

Unit labour cost continues to increase more in the goods producing industries

Unit labour cost in the business sector (an indicator of inflationary pressure) jumped 1.6% for the second consecutive quarter. Most of this increase comes from the goods sector which saw its unit labour cost climb an additional 2.5% after recording a 3.0% increase in the previous quarter. All industries of the goods sector registered important increases in their cost per unit of output, except agriculture, forestry, fishing and trapping,

Unit labour cost in manufacturing climbed 3.0% in the first quarter, compared with 2.6% in the previous quarter, the highest increase registered since 2002. This was due to strong growth in hourly compensation.

Mirroring the trend observed for the total economy, inflationary pressure from wages increased in mining, oil and gas extraction, even after the six year high registered during the fourth quarter of 2007. During the first quarter of 2008, unit labour cost registered an additional increase of 3.9%.

In transportation and warehousing, an industry that was particularly hit by the harsh winter and the increases in fuel prices, the unit labour cost increased by 2.4% during the first quarter of 2008. This was the largest quarter over quarter increase since 2002.

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.