Solve Low Labour Productivity in Canada: Businesses Need Investments, Less Taxes, Less Homeownership Obsession

Economists at the Bank of Canada have been blaring the alarm about a problem in Canada’s economy that’s even more important than, but inextricably linked to, inflation.

This problem is the consistently stagnant and even declining rate of productivity in Canada. It is close to the bottom of the ranking of productivity among its G7 peers.

Productivity in Canadian business has remained more or less unchanged since 2017. In a world of constant frenetic growth, standing still means you’re getting left behind.

What is Productivity?

Let’s start at the beginning and define productivity.

Labour Productivity measures how much an economy produces per hour of work.

In simple terms, Productivity is Worker Output per Hour.

Increasing productivity means the worker produces more output, and therefore more value, during the hours that he is at work.

It’s imperative to note that increasing output does not mean you have to work harder or increase your working hours to produce more value. In fact, that’s often counterproductive.

Example of Increasing Productivity

To better explain productivity, let’s think of a grocery store.

Imagine that there are 5 employees working at the cash registers to serve customers checking out their items at the store.

Let’s assume that there are 50 customers at any given time. So each cashier can serve 10 customers.

Then, next week, the store invests in and installs 5 self-checkout machines. The same store with 5 cashiers can now potentially serve 100 customers at any time.

And with equipment financing terms, the store doesn’t need to increase its prices to serve more customers.

In this scenario, when you calculate productivity, the same 5 workers are now serving 100 customers during the exact same number of hours in a day. Hence, the worker labour productivity has increased.

When a business increases its productivity, it produces more revenue. This enables the business to pay higher wages to its workers without having to raise prices.

As such, over the long-term, higher productivity helps the business and the overall economy by increasing the economic pie. Productivity generates more wealth for everyone.

Why Does Productivity Matter Relative to Inflation?

Productivity is a way to protect the people and economy from inflation.

An economy with strong productivity produces faster growth, more jobs and higher wages, which negate the effects of rising living costs associated with higher inflation rates.

An economy with low productivity produces less growth, fewer jobs and lower wages, and therefore people suffer more from rising living costs associated with higher inflation rates.

Productivity from Statistics Canada

Statistics Canada compiles data from the Canadian economy to measure labour productivity each quarter.

Productivity is determined by 3 factors:

  • Capital intensity
  • Labour composition
  • Multifactor productivity

Capital Intensity

This simply means investing in better tools or technology for the workers.

In our grocery store example, the store invested in self-checkout machines to increase the output of the workers.

In a sales business, the company could provide the sales reps with the latest customer relationship management software, which enables them to target, reach, and manage more client relationships than they could have done with a pen and pad.

Labour Composition

This measures the level of skill of people in the workforce and how much training they receive.

If workers are highly educated and well-trained, they produce more value and higher output.

Canada consistently ranks at the top of the list with an extremely high percentage of college-educated people in the workforce.

According to a 2022 OECD report, Canada was the most educated country in the world. It ranked first in the world with over 57 percent of Canadian adults having attained at least an undergraduate college or university degree.

So the labour composition is very good.

Multifactor Productivity

This measures how efficiently capital and labour are being used.

This could refer to intangibles such as the competitive environment that a business operates in, economies of scale, management systems, and implementation of new technologies.

Businesses Need to Invest in Technology

When we look at these 3 factors in productivity, we see that the main problem that Canada has is it doesn’t invest enough in technology compared to its peers. This investment would enable its highly-educated workforce to produce more output.

There are numerous reasons for this including capital flight from Canada to the United States where this capital can potentially get a better return on investment.

Government Tax Policy

A recent Canada federal government budget released in April 2024 proposed to increase capital gains tax on individuals and corporations that earn over $250,000 in investment income. This reduces potential investment returns and doesn’t help the productivity situation at all.

It pushes more capital away from Canada to seek better returns elsewhere. Or Canadian businesses and investors just sit on the sidelines and choose not to invest their funds.

So we see here how government policy can hurt productivity.

Obsession with Home Ownership

As in many developed countries, owning a home is considered the ultimate goal in Canada for most people.

While there’s nothing inherently wrong with buying and owning a home as an investment for the future, it can also hurt the growth of an economy.

There is limited capital in any economy. There are different sectors and businesses competing for this limited capital.

The more capital that large financial institutions – that provide the majority of funding to businesses and individuals in any economy – allocate to home ownership in the form of mortgages, the less capital is available to businesses for business investments.

An investment of $100,000 in a house down payment doesn’t hire any workers or produce any products or services. Money sits in the home and produces little to no output beyond some maintenance work performed on the home occasionally over the years.

An investment of $100,000 in a business operation can grow the business, which can hire more people and produce more output.

As such, the more productive business economy is competing for limited capital with the less productive housing economy, and losing.

And government policy continues to focus more and more tax dollars towards the housing economy in each new annual budget including the aforementioned April 2024 budget.

Let’s Invest in Canadian Business

Nonetheless, at BizFunding.ca, we are doing our part to continue to connect businesses with capital to help grow businesses and our overall economy in Canada.

If you need investors or lenders to get capital and grow your business, Contact Us today.

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