There’s rot in the economy and it’s costing you better pay and investment returns

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Canada’s biggest economic problem has a name that sounds like an accusation you’re not pulling your weight.

Productivity is about the amount of economic output per hour worked. We rank 18th among industrialized countries on productivity, well behind the United States. Climbing the ranking would mean more pay for workers, higher profits for business and potentially better investment returns.

Economists talk a lot about productivity right now, and the Bank of Canada singled it out a few months ago in an address by a senior deputy governor that included the word “emergency.” Weak productivity explains a lot about why people feel so discouraged about their financial prospects.

Politicians prefer to address our economic challenges in a micro sort of way – a policy on housing, on dental care or grocery costs. Improving productivity helps affordability across the board, but it’s an abstract concept that seems tone deaf in these emotional times. In reality, productivity is the one economic problem that rules them all.

First, let’s be clear that increasing productivity is not code for an assault on workers.

“It’s not about automating people out of their jobs, or strictly boosting business profits,” said Nathan Janzen, assistant chief economist at Royal Bank of Canada. “It’s really fundamentally about raising wages and living standards over time. You can’t have sustained wage growth without productivity growth.”

Mr. Janzen said Canada’s productivity problem is a result of a lack of business spending on new technology, factories and equipment. To achieve more economic output per hour worked, you need these types of investments.

Canadian businesses are sitting on piles of cash, Mr. Janzen noted. His take on why this money is not flowing into productivity-improving projects includes barriers to trade between provinces and the fact that it can be difficult to meet regulatory requirements and gain approvals from various levels of government.

“If you have your business thinking about making a significant investment, you want to be able to project how much it’s going to cost and how long it’s going to take,” he said. “And that’s more difficult to do in Canada than other parts of the world.”

It sounds naïve to imagine that freeing up business to do more business will make us all wealthier. But there are reams of data to show how low productivity is costing workers. For example, a recent RBC Economics report on productivity said wages for Canadian workers are roughly 8 per cent below those for U.S. workers.

The same report says the productivity gap can be seen in the relative performance of the Canadian and U.S. stock markets. A $1,000 investment in the main Canadian stock index in 2000 would be worth $4,400 today, compared to around $6,000 for the S&P 500.

The underlying trend here is that our productivity has been slipping. According to RBC, Canada has fallen from the sixth most productive economy in the Organization for Economic Co-operation and Development in 1970 to 18th in 2022.

The rising cost of living is the economic condition that weighs heaviest on the personal finances of the country. But we feel inflation more acutely because weak productivity has for years depressed wage growth and left us with declining purchasing power.

Current wage growth is running ahead of inflation, which is a complication for the Bank of Canada as it assesses how it will follow up on the interest rate cut it made in June. Inflation itself has declined, but workers are mindful of their lost purchasing power and looking for wage hikes that they feel will offer some compensation.

There’s too much catastrophizing these days about money, the economy, the country and so on. Not everything is broken.

But there’s no question that our standard of living is declining in a way that rewrites the script for a middle-class life. Decisions about home ownership and starting a family are dominated more than ever by economics in some cities and are no longer near-automatic life events.

Improving productivity is the best way to stop this trend. A question to ask in elections to come is which parties and politicians get this.


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