Pay and Productivity in Canada: Growing Together, Only Slower than Ever

Pay and labour productivity growth in Canada are broadly aligned over the long run since 1961 and during the 2008-19 business cycle. The slowdown in Canada’s productivity growth rate since 2000, the general stability of the labour share, and the lack of further gains in labour’s terms of trade after 2008 largely explain the slowdown in workers’ real pay growth over the 2008-19 business cycle. Canadians should be concerned about the country’s persistently low productivity growth because it leads to low real pay growth. Canada’s policymaking institutions should prioritize understanding and accelerating productivity. This article examines the long-run relationship between growth in labour productivity, defined as real output per hour worked across the total economy (“productivity”), and growth in average workers’ pay, defined as real hourly total labour compensation (“pay”). 2 When both concepts are carefully measured, productivity and pay in Canada have broadly kept pace with each other in aggregate over the long run and across business cycles. The economy-wide link between growth in productivity and pay appears foundational and intact.3 The main contribution of this article is to present new evidence for Canada building on Sharpe et al. (2008a). In comparision with that study, and also Dufour and Russell (2015), Uguccioni et al. (2016) and the Canadian results in Harrison (2009) and Sharpe and Uguccioni (2017), this article uses: total economy average labour compensation (including supplemental labour income and the labour income of the selfemployed) as the sole, comprehensive measure of nominal pay. To construct real pay, 1 Vice President of Policy at the Business Council of British Columbia. The author thanks Andrew Sharpe, Jock Finlayson, Ken Peacock and four anonymous referees for helpful comments, and Wulong Gu from Statistics Canada for providing historical data. Email: david.williams@bcbc.com. 2 Hereafter, “productivity” and “pay” refer to levels, and growth refers to their change over time. An acceleration (deceleration) in levels is an increase (decrease or slowdown) in growth rates. 3 The analysis does not consider changes in the distribution of pay across income groups, firms, regions, industries, skills, or socioeconomic characteristics. It is noteworthy that although income inequality did increase in Canada during the 1980s and 1990s, the Gini coefficients for market incomes and disposable incomes peaked in 1998 and 2004 respectively (Statistics Canada, 2021). In other words, Canada appears unlike the United States (Mishel and Gee, 2012) in that household income inequality has been declining for about two decades. INTERNATIONAL PRODUCTIVITY MONITOR 3 the study uses the household consumption expenditure deflator (HCE) in addition to the GDP deflator (PGDP) and the consumer price index (CPI). The study also excludes depreciation and output-based taxes from the measure of total economy output in labour productivity. Sharpe et al. (2008a) consider the five Canadian business cycles over 1961-2007 but the main analysis is focused on 1980-2005 which predates most of the boom in Canada’s external terms of trade from 2002-08. This article examines a longer time period of 19612019 and includes six business cycles, including the 2008-19 cycle. Sharpe et al. (2008a) concluded that hourly median real earnings of full-time workers deflated by the consumer price index (CPI) had lagged productivity by 1.26 per cent per annum during 1980-2005. They attributed about half of the gap to the incompleteness of the wage measure and an increasing gap between median and average earnings. By focusing solely on average total labour compensation (and comparing it to productivity which is also an average), this article does not consider those factors. Of the remaining gap, Sharpe et al. (2008a) attribute almost twothirds to a decline in labour’s terms of trade and the rest to a decline in the labour share (the ratio of nominal labour compensation to nominal output). The longer time period and measurement choices in this article provide new evidence about these relationships for Canada. The structure of the article is as follows. The first main section surveys the literature. Section 2 sets out the neoclassical theory of the firm on the relationship between pay and productivity. Section 3 addresses measurement issues. Section 4 provides the results using annual Canadian data. Section 5 discusses the findings. Section 6 discusses the policy implications. Section 7 concludes. The Appendix provides data sources and descriptions.