Labour productivity, hourly compensation and unit labour cost

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Third quarter 2008

Labour productivity note to readers

The labour productivity of Canadian businesses remained unchanged in the third quarter, extending the weakness that began in the second quarter of 2007.

Chart F.1 No productivity gains for Canadian businesses in the third quarter

In the third quarter, the gross domestic product of Canadian businesses and the hours worked related to this production increased in tandem, at a rate of 0.2%. The increase in the number of hours worked in Canadian businesses was similar to that of the first two quarters of the year. In the first three quarters of 2008, hours worked grew at less than half the pace recorded in the first three quarters of 2007.

Productivity gains down sharply in the United States

Despite the economic slowdown, U.S. productivity grew 0.4% in the third quarter, after rising 0.9% in the second quarter. This productivity gain occurred in a context of decreased output and hours worked.

Chart F.2 U.S. productivity growth slows

The output of U.S. businesses contracted 0.4% in the third quarter. This is the largest decline since the 0.8% drop registered in the third quarter of 2001. It is also the second quarterly decrease in a year. The third quarter drop in U.S. GDP is mainly the result of the first decrease in consumer spending since 1991.

Meanwhile, hours worked in the United States continued to decline, falling 0.8% in the third quarter. Not since the first quarter of 2002 has there been such a steep drop.

Chart F.3 Hours worked continues to increase in Canada, while it continues its decline in the U.S.

Canadian business competitiveness gains ground in the third quarter

The growth rate of labour costs per unit of production, a barometer of long term inflationary pressure, decelerated to 0.6% for Canadian businesses in the third quarter, roughly half the rate registered in the previous quarter (+1.1%). This is the weakest growth rate since the third quarter of 2007.

With no change in productivity in the third quarter, the growth of unit labour costs was almost entirely due to the growth of hourly compensation, which decelerated to 0.6%.

Chart F.4 Canadian unit labour costs (ULC) in U.S. dollars declines sharply

The value of the Canadian dollar declined 3.1% in relation to its U.S. counterpart in the third quarter, helping Canadian unit labour costs measured in U.S. dollars fall substantially in the third quarter.

For their part, American businesses saw their unit labour costs rise 0.6% in the third quarter, after falling 0.6% in the second quarter.

Analysis by industry

Productivity continues to increase in manufacturing

Labour productivity in the goods producing industries grew by 0.3% in the third quarter, after five consecutive quarterly declines. Increased productivity in manufacturing and in mining, oil and gas extraction industries more than offset decreased productivity in construction. Against a backdrop of declining employment, the manufacturing sector saw a second consecutive increase in its productivity.

In the third quarter of 2008, productivity in manufacturing rose 1.0%, about the same pace as the second quarter. Manufacturing output edged up in the third quarter, after four consecutive decreases. During this time, hours worked continued to decline, falling 0.8% in relation to the second quarter.

Chart F.5 Manufacturing productivity increases again

In construction, productivity declined for a sixth straight quarter despite a 0.5% increase in output.

Productivity remains flat in the services sector

In the context of a slowdown in economic activity in this sector, productivity in services-producing businesses remained flat in the third quarter, after edging up 0.1% in the second quarter.

In the services sector, retail trade as well as administrative and remediation services registered the most important increases in the third quarter.

On the other hand, finance, insurance and real estate services as well as accommodation and food services registered major productivity declines in the third quarter of 2008.

Unit labour cost declines in goods sector

The growth of unit labour costs in the business sector (a long term indicator of inflationary pressures) slowed to 0.6% in the third quarter. Most of the growth is attributable to the services sector, where unit labour cost rise 0.8%, the same rate as in the second quarter. This rise in labour costs is mainly attributable to retail trade as well as accommodation and food services.

Chart F.6 Main industries’ contribution to percent change in unit labour cost (ULC) in the business sector, third quarter 2008

As well, the unit labour cost in the goods sector declined for the first time since the second quarter of 2007. It fell 0.2% compared to a 1.2% rise in the second quarter. This drop is mainly attributable to a decrease in unit labour cost in manufacturing reflecting its productivity gains, combined with a slight decline in hourly compensation.

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.