Carolyn Rogers: Time to break the glass - fixing Canada's
productivity problem
Remarks by Ms Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, to
Halifax Partnership, Nova Scotia, 26 March 2024.
* * *
Introduction
Good morning. Canada's economy was built by trade and immigration. Halifax is not
just a key port-it has also been the landing spot for countless new Canadians. So I'm
glad to be here, speaking to a group like the Halifax Partnership, which is dedicated to
helping Canadian businesses grow and thrive.
We've just passed the fourth anniversary of the start of the COVID-19 pandemic. It's
been four difficult years. Beyond its human toll, the pandemic upended economies
around the world and sparked the biggest global inflationary episode in decades. This
led central banks-including the Bank of Canada-to raise interest rates sharply so that
we could get inflation under control.
For the past two years or so, the Bank's Governing Council has focused on restoring
price stability. That's almost all we've talked about in our speeches. And we've heard
directly from Canadians who have struggled with inflation and who are feeling the
impacts of higher interest rates.
The good news is that monetary policy is working, and inflation has come a long way
down. We're not all the way back to target, and we know we need to finish the job. But
we have made a lot of progress. And so it's a good time to reflect on how the economy
has changed in Canada and around the world and to think about what those changes
mean for the future.
When we look ahead, we see a future where inflation may be more of a threat than it
has been over the past few decades. We know that many of the forces that helped
create a benign environment for inflation in the past, such as globalization, are going to
fade away, or even reverse. We know that changing demographics and the economic
impacts of climate change will tend to put upward pressure on prices. Persistent global
trade tensions also raise the risk of future inflation.
So, at the Bank of Canada, we're turning our thoughts-as well as our speeches-to this
future. And today I want to talk about a topic that is critical to our ability to navigate a
future that's more prone to inflation: productivity.
Productivity is a way to inoculate the economy against inflation. An economy with low
productivity can grow only so quickly before inflation sets in. But an economy with
strong productivity can have faster growth, more jobs and higher wages with less risk of
inflation. That's why I want to talk about Canada's long-standing, poor record on
productivity and show you just how big the problem is. You've seen those signs that
say, "In emergency, break glass." Well, it's time to break the glass.
Canada's labour productivity eked out a small gain at the end of last year, according to
Statistics Canada. But that came after six straight quarters where productivity fell. Of
course, the pandemic was a major disruptor for the economy. During the pandemic, the
resourcefulness and ingenuity of Canadian business leaders was put to full use.
Companies adjusted their business models and ways of working. Given how nimble
companies were, we thought productivity would improve coming out of the pandemic as
firms found their footing and workers trained back up. We've seen that happen in the
US economy, but it hasn't happened here. In fact, the level of productivity in Canada's
business sector is more or less unchanged from where it was seven years ago.
People have been sounding the alarm, but it can be hard to feel a sense of urgency
about an abstract concept like productivity. Most people, when they hear that we need
to improve productivity, think they're being told they have to work harder or work longer
hours to produce more, or maybe take less time off.
That's not the case. Labour productivity measures how much an economy produces per
hour of work. Increasing productivity means finding ways for people to create more
value during the time they're at work. This is a goal to aim for, not something to fear.
When a company increases productivity, that means more revenue, which allows the
company to pay higher wages to its workers without having to raise prices. Ultimately,
higher productivity helps the economy generate more wealth for everyone. The bottom
line is that the benefits from raising productivity are there no matter what your role is: for
workers, for businesses and, yes, for central bankers, too. I'll come back to this point
later.
First, I'm going to spend some time today spelling out the factors that determine
productivity. I'll review Canada's record for clues about how we can improve, and I'll talk
about what we can all do to raise Canada's productivity and make our economy more
resilient.
Ingredients of productivity, and Canada's record
Economists will tell you that three factors determine how productive an economy's
workforce is: capital intensity, labour composition and multifactor productivity. These
are the types of words that often lead non-economists to tune out. But they're important,
and once you get past the jargon, they're not that complicated. So, let's look at each
one.
Capital intensity is about equipping workers with better tools. If you run a snow-clearing
business, your workers will be able to clear more driveways if they have solid shovels
that don't break easily. Of course, give them a snow blower and they'll be able to clear
many more driveways than with just shovels. Invest in pickup trucks with plows, and
they can do even more.
The most natural way to think about capital intensity is in physical terms like machinery,
but of course some of the biggest advances in productivity have come through
improvements in computing power and the ability to use and move information. The
smartphone in your pocket has way more computing power than the spaceship that first
took humans to the moon. These advances continue to put more capability in the hands
of employees, giving them the ability to be more productive across a wide range of
industries, whether goods or services.
Labour composition in an economy measures the skill level of people in the labour force
and how much training they receive. The more skills people have and the more training
they receive, the more value they can generate on the job.
Finally, there's multifactor productivity , which measures how efficiently capital and
labour are being used. This can refer to intangibles such as how much competition a
company faces, economies of scale, management practices and many others. It can
also refer to how well companies are taking advantage of technologies such as
machine learning and generative artificial intelligence.
Those are the ingredients of productivity. Now, when people measure productivity in an
economy, they are looking either at its level-how much value an economy is producing
for every hour worked-or at the growth rate of that productivity. Canada has been
struggling on both measures for a while.
Back in 1984, the Canadian economy was producing 88% of the value generated by the
US economy per hour. That's not great. But by 2022, Canadian productivity had fallen
to just 71% of that of the United States. Over this same period of time, Canada also fell
behind our G7 peers, with only Italy seeing a larger decline in productivity relative to the
United States.
Improving productivity in Canada needs to be a priority for everyone, and there are two
basic strategies for doing it. One is to have the economy focus more on the industries
that add greater value than less-productive activities. The other strategy is to keep
doing the jobs we're doing but do them more efficiently. Ideally, Canada would use both
strategies, leading to an economy with strong productivity growth and a large
concentration of high-value industries.
Unfortunately, Canada's recent record isn't very good on either front. That may seem
strange. After all, Canada is known for some high-value industries, such as energy and
aerospace. But while the level of productivity here is high, the growth rates aren't
necessarily strong. At the same time, some industries in Canada have shown pretty
1
good productivity growth over the past couple of decades. But these include sectors
such as retail and wholesale trade, which tend not to generate the same amount of
output per worker as sectors like energy or aerospace.
I want to be clear here. Improving productivity doesn't mean shutting down whole
sections of the economy and telling workers they have to go learn new sets of skills. It
means paying attention to where the future high-value industries are coming from. We
need to ensure that the right incentives are in place to allow companies in these
industries to grow and thrive. And they need the right supports, such as access to
markets and financing.
I expect this resonates with you here in the room. History shows that advances in
productivity often come from the start-ups, the new companies led by entrepreneurs
with groundbreaking ideas. Organizations such as the Halifax Partnership and other
incubators are encouraging the companies that can lead us to the next great
breakthrough in productivity. And you can see examples across the region, particularly
in the clean tech, ocean tech and agritech sectors.
How to improve
I want to turn now to what we can do to improve Canada's productivity. Many studies
have looked at this issue over the years, and there's still no consensus about the
causes of Canada's poor performance and where policy-makers should put their
energies first. But we can't afford to wait for complete certainty. There is much we can
all be doing to boost productivity. In fact, if I took the time to drill down into every
potential priority, this breakfast speech would become a lunch speech, too. So I'm going
to focus on three key areas.
The first is labour composition, or the skills workers bring to the job. For existing
workers, improvement here means having access to training and reskilling
programswhether it's learning how to use new workplace technologies or gaining skills that can
create opportunities to switch to a whole new job. For new entrants to the workforce,
we're counting on colleges, universities and apprenticeship programs to prepare
students for current and future jobs.
It's also important to acknowledge that Canada's workforce is expanding at a
recordsetting pace, with immigration driving this increase. In January, the working-age
population grew by over 125,000 people. That's the fastest single month of workforce
growth on record. In the future, Canada's productivity-and our standard of living-will
depend importantly on how well we leverage and develop the skills of these new
workers. Too often, new Canadians are working in jobs that don't take advantage of the
skills they already possess. And too often these people wind up stuck in low-wage,
lowproductivity jobs. Doing better at matching jobs and workers is crucial to the future of
Canada's economy.
The second key area relates to multifactor productivity. We know that small and
medium-sized companies tend to lack the economies of scale that allow larger firms to
become more productive. And Canada has proportionally more of these smaller firms
than many other economies do. Removing disincentives to growth is always a good
idea.
But if I had to pick the biggest concern in this area, I'd say it's competition. Simply put,
businesses become more productive when they're exposed to competition. Competition
drives companies to become more productive by innovating and by finding ways to be
more efficient. In doing so, competition can make the whole economy more productive.
Canada's economy features many sectors where companies face limited levels of
competition, whether from firms in other provinces, foreign rivals or new entrants. Of
course, every country has certain sectors that it champions, and there can be valid
reasons to protect local businesses. However, too much protection can lead to
problems. It can also help to explain Canada's weak record in business investment.
This brings me to the third area for improving productivity.
The need for investment
When you compare Canada's recent productivity record with that of other countries,
what really sticks out is how much we lag on investment in machinery, equipment and,
importantly, intellectual property. The global economy continues to change rapidly, and
in many sectors, it's not machinery and equipment that are key-it's investment in
intellectual property. Increasingly, companies need to own or have the rights to patents
that will allow them to compete by adopting productivity-boosting processes.
Weak investment has been a problem in Canada for a long time. You can go back 50
years and find a persistent gap between the level of capital spending per worker by
Canadian firms and the level spent by their US counterparts. However, the situation has
become worse over roughly the past decade. While US spending continues to increase,
Canadian investment levels are lower than they were a decade ago.
Economists and policy-makers across the country have worked hard to understand the
root causes of why Canadian businesses seem reluctant to invest. At the Bank, we are
constantly talking to companies, asking them about their challenges and opportunities.
Our Business Outlook Survey consistently shows that companies say they plan to
increase their spending on machinery and equipment. But we haven't seen it in the
data, at least not yet.
Adding to the puzzle is the fact that Canada has many advantages that should lead to
higher investment and productivity. We have a well-educated labour force. We have a
strong research culture at our universities that is driving advances in technology. And
we have trade agreements that give us better access to global markets than any
country in the world.
To understand the lack of investment, it might be helpful to look at the incentives that
companies see. If firms have high profits, high margins and limited competition, they
may not feel as much pressure to invest. Statistics Canada published a report last
month that draws a link between decreasing competition within Canada and declining
investment levels.2
Another challenge for companies may be a lack of policy certainty. In some cases,
incentives or regulatory approaches can change from year to year. We have also heard
from companies that are naturally wary of a regulatory approval process that can be
both lengthy and unpredictable.
And, of course, the past few years have been a challenging time for making investment
decisions. The pandemic caused tremendous levels of instability and uncertainty. A
backdrop of global trade tensions is certainly not helping matters. More recently, we've
heard from firms that say the current interest rate environment is making financing more
difficult. However, investment levels were also weak in the years before the pandemic,
when rates were much lower than today.
More generally, in times of upheaval it's natural for companies, especially established
ones, to want to be cautious and build reserves. I understand that. We see the risks out
there. Yet these same forces and risks are also present in other countries. And
companies in those countries-our global competitors-continue to invest, widening the
gap with Canada, making it increasingly urgent that we turn the situation around.
The Bank of Canada has a role here. It's our job to deliver the economic stability that
should encourage investment. You can be sure we will continue to do all we can to
keep inflation low, stable and predictable, supporting the investment climate along the
way. This is our contribution to helping bring about an economy that's not only more
productive but also more resilient.
Conclusion
It's time for me to wrap up. I hope I've been clear about the pressing need for Canada
to increase productivity. I'm saying that it's an emergency-it's time to break the glass.
I've used some pretty grim statistics to support my point. But the urgency comes not
only from the fate that awaits us if we don't act. It also comes from the payoff if we do.
So let me conclude on a more uplifting note.
Higher productivity should be everyone's goal because it's how we build a better
economy for everyone. When a business gives workers better tools and better training,
those workers can produce more. That, in turn, means more revenue for the business,
which allows it to absorb rising costs, including higher wages, without having to raise
prices.
For our part, central bankers look at the economy as a whole, not at individual
companies. And when the entire economy becomes more productive, that means the
country can have more growth before we see upward pressure on inflation. We can
have more jobs. We can have higher wages.
We've all just been through a wrenching period in the global economy. We've been
reminded how corrosive inflation is and how difficult but necessary the remedy can be.
Increasing productivity is a way to protect our economy from future bouts of inflation
without having to rely so much on the cure of higher interest rates.
At the Bank of Canada, we will keep working to provide the stability that's most
conducive to risk taking and investment. With governments providing the right policy
background, and with the business community doing its part to invest, together we will
all be able to help Canada's economy to grow-and Canadians to prosper-in the years
ahead, no matter what surprises may come.
Thank you.
I would like to thank Eric Santor for his help in preparing this speech.
1
See C. Haun and T. Sargent, "Decomposing Canada's Post-2000 Productivity
Performance and Pandemic-Era Productivity Slowdown," Centre for the Study of Living
Standards, International Productivity Monitor 45 (2023): 5-27.
2
See W. Gu, "Investment Slowdown in Canada after the Mid-2000s: The Role of
Competition and Intangibles," Statistics Canada Analytical Studies Branch Research
Paper No. 474 (February 2024).