Productivity growth by industry

Despite a slowdown in economic activity since 2000, productivity growth of Canadian businesses grew 1.5% annually during the 2000 to 2003 period. Although less rapid than the 2.8% advance during the 1997 to 2000 period, this performance is comparable with the 1.6% average posted during the last business cycle from 1988 to 2000.

From 2000 to 2003, a period that was characterized by an economic slowdown, several industries such as manufacturing, agriculture and mining extraction and oil and gas experienced a productivity slowdown compared with their performance during 1997 to 2000, a period marked by rapid economic growth. In contrast, service industries such as wholesale, retail, transportation, information and financial services and real estate have generated the bulk of the business sector productivity gains during the 2000 to 2003 period.

Productivity has generated economic growth of Canadian industries

Productivity is a notion that is more meaningful when measured over the long run. Changes from one year to another often reflect the effect of unexpected random macroeconomic shocks, such as the burst of the technological bubble and the dollar rally, rather than only the efficient use of resources.

Over the entire 1997 to 2003 period, information, professional services, wholesale and retail, all of which are services, have posted the most rapid economic growth of the business sector. Other important sectors, such as manufacturing, mining and transportation, have experienced relatively more moderate economic growth.

Economic growth is driven by increased hours at work and labour productivity gains. It is important to quantify which of these two factors has contributed the most to economic growth.

During this period, industries that have experienced the most rapid economic growth are also those with the highest productivity gains. These industries are in the services sector and account for a large part of the Canadian business sector. This result holds true not only for the 1997 to 2000 period of rapid economic growth but also during the economic slowdown environment that took place between 2000 and 2003. Not only have these industries in the services sector generated the bulk of economic and labour productivity growth, their economic performance was least affected by the change in the economic climate from 1997 to 2003.

Labour productivity gains result from several factors: the increase in capital available for every hour worked (capital intensity), the increase in skilled workers (change in labour composition, reflecting a larger share of workers with more education and more experience) and a number of other factors captured by multifactor productivity, the overall efficiency with which resources are employed.

In general, changes in labour composition make a positive, albeit small, contribution to labour productivity growth. The 1997 to 2003 period are no exception. During this time, labour composition made a 0.2 percentage point contribution to the 2.1% annual growth of the business sector labour productivity. Capital intensity made only a 0.4 percentage point contribution, a reflection of the collapse of investment in machinery and equipment and the relatively rapid growth in hours at work. Multifactor productivity has added 1.5 percentage points, accounting for the bulk of labour productivity growth. Multifactor productivity was the main source of labour productivity not only during the rapid economic growth period of 1997 to 2000 but also during the economic slowdown period of 2000 to 2003.

In general, the industries that posted the largest labour productivity gains were also those with the most rapid multifactor productivity growth rates, indicating that major improvements in overall efficiency have taken place in recent years.

The increase in the dollar associated with a slowdown in manufacturing activity in 2003

Despite the economic slowdown in 2003, services industries were still reporting rapid productivity gains. In contrast, manufacturing showed no labour productivity gain during the same year, a sharp contrast from the 3.9% increase posted in 2002.

The lack of labour productivity gain in 2003 for Canadian manufacturers, combined with the higher Canadian dollar, has led to a large increase in unit labour costs measured in US dollars (+13.4%). As a result, Canadian exports have fallen by 2.2% as the competitiveness of Canadian manufacturers deteriorates compared with their American counterparts.

The 10.8% increase of the Canadian dollar over the US dollar between 2002 and 2003 also helped to lower import prices of machinery and equipment for manufacturing. This contributed to the 6.7% increase of investment in machinery and equipment, compared with two consecutive declines in 2001 and 2002.

Growth of real GDP per capita in an economic slowdown

Productivity is a key economic indicator because it constitutes an important source of change in the growth of real GDP per capita in the long run. During the 1997 to 2003 period, Canada's real GDP per capita advanced at 2.7% annually. Labour productivity contributed for more than two-thirds and the remainder was due to the increase in the number of hours worked per person.

The growth in real GDP per capita during the 2000 to 2003 period occurred during a slowdown in Canadian economic growth. Real GDP increased at a modest 2.4%, a sharp deceleration from the rapid 5.0% annual average economic growth observed during the 1997 to 2000 period.

Despite the difficult economic environment of the 2000 to 2003 period, real GDP per person increased 1.4% annually, a performance comparable with that of the last business cycle from 1988 to 2000. Despite the changes in the economic climate between the 1997 to 2000 and 2000 to 2003 periods, productivity growth remained the main source of real GDP growth per person.