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Recent trend in manufacturing productivity

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In 2008, annual growth in manufacturing productivity slid into negative territory for the first time since 2001

The recent trend in Canadian manufacturing productivity has substantially lagged that of the United States. The last time Canada posted stronger growth in manufacturing productivity than the United States was in 2005.

In 2008, productivity in the Canadian manufacturing sector dropped 2.1% in 2008. It was the first annual decline since 2001. In comparison, American manufacturers enjoyed a 1.3% increase in productivity in 2008. And that was down substantially from the annual growth rate of 4.7% in each of the previous two years.

For 2008, when the economic contraction began, the annual gap in manufacturing productivity growth in favour of the United States remained quite large (+3.4 percentage points). That gap is due to a sharper decline in manufacturing output in Canada, since the decrease in hours worked in the sector was comparable in the two countries. In 2008, hours worked shrank by 3.9% in the United States and 3.7% in Canada.

The 2008 output decline affected both Canadian and American manufacturers, but the rate of decline was slower in the United States

The manufacturing sector in Canada suffered a substantial 5.7% drop in output in 2008, its third consecutive annual decrease. The 2008 contraction in Canadian manufacturers’ output was primarily attributable to the motor vehicle and auto parts industry (including plastic parts and bodies and trailers).

Meanwhile, manufacturing output in the United States fell 2.7% in 2008. The contraction, the first since 2001, took place in a context where American manufacturers faced difficulties associated with the economic recession that had affected their country since the beginning of the year.

The Canadian manufacturing sector has been in a period of slow productivity growth since 2000

Over the last nine years, manufacturing productivity growth has been, on average, much slower in Canada than in the United States. Between 2000 and 2008, manufacturing productivity increased an average of 0.5% a year in Canada, compared with 4.6% in the United States. The gap is mainly due to the very different trends in manufacturing output in the two countries during that period.

Chart 1 The gap in manufacturing productivity growth in favour of the United States persists
Description for Chart 1
Chart 1 The gap in manufacturing productivity growth in favour of the United States persists

The upswing in the value of the loonie that began in early 2003 continues to present a challenge for the Canadian manufacturing sector. Between 2003 and 2008, Canadian manufacturers had to cope with an average increase of 5.7% a year in the value of the Canadian dollar against its American counterpart. During that period, manufacturing output fell by an average of 1.1% a year in Canada, while it rose 2.4% in the United States. At the same time, hours worked shrank by an average of 2.0% in Canada and 1.3% south of the border.

Canadian manufacturers’ competitive capacity continues to erode as the dollar gains strength

Between 2003 and 2008, unit labour costs climbed an average of 2.2% a year (in Canadian dollars) for Canadian manufacturers, while they declined an average of 1.0% (in U.S. dollars) for their American competitors.

During that period, the difference in unit labour costs between the Canadian and American manufacturing sectors was mainly due to the slower average annual growth rate of labour productivity in Canada, since hourly compensation evolved at comparable rates in the two countries. Between 2003 and 2008, hourly compensation grew at an average annual rate of 3.2% in Canada, compared with 2.7% in the United States.

When the exchange rate is factored in, the unit labour cost advantage for American manufacturers was even greater during that period. In American dollars, Canadian manufacturers’ unit labour costs grew at an average annual rate of 8.0% in the 2003-2008 period. Most of that jump was due to the average annual appreciation of 5.7% in the Canadian dollar.

Manufacturing productivity accelerated in the third quarter

Despite the losses in the recent years, Canadian manufacturers have been able to boost labour productivity over the last two quarters. In the third quarter, a strong 1.6% gain in productivity was registered, following a 0.2% rise in the second quarter. It was the largest advance in nearly three years.

Manufacturing output and hours worked both fell sharply in the previous four quarters. That period was dominated by the global economic downturn, which affected output and employment in the Canadian manufacturing sector.

In the third quarter, hours worked in manufacturing shrank by 1.9%, which marks the thirteen consecutive quarter of decline, reflecting the continued downsizing in the sector. In particular, manufacturing industries have suffered substantial job losses since the third quarter of 2008.

In the meantime, manufacturing output decreased again, but at a much slower rate than in the previous four quarters, falling 0.3% in the third quarter. Manufacturing is highly dependent on exports and is particularly affected by weaker demand in the United States and by international competition, which intensified with the appreciation of the Canadian dollar.

Canadian manufacturers had to cope with a 6.3% rise in the exchange rate between the Canadian and American dollars in the third quarter. This was in addition to the 6.7% appreciation in the second quarter.

Canadian businesses invested in their productive capacity in the third quarter. Investment in machinery and equipment were up 5.9%, the first increase in six quarters. The growth in machinery and equipment investment is largely attributable to spending on motor vehicles and industrial machinery.

Nevertheless, Canadian manufacturers became less competitive because of the Canadian dollar’s substantial appreciation in the last two quarters. The manufacturing sector’s unit labour cost in American dollars jumped 5.0% in the third quarter and 5.8% in the second quarter, after shrinking for five quarters.

Source: U.S. data are from the Bureau of Labor Statistics, International Comparisons of Manufacturing Productivity and Unit Labor Cost Trends - 2008, published in NEWS, October 22, 2009.

Note: The term “productivity” herein refers to labour productivity. Labour productivity is a measure of real gross domestic product (GDP) per hour worked. Unit labour cost is defined as the cost of workers’ wages and benefits per unit of real GDP.