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A Canadian magic trick: wages that rise even if productivity doesn’t

An Econowatch special report on productivity (part three)


 

If you spend any time reading about the Canadian economy, you have inevitably come across the Great Canadian Productivity Puzzle. Canada’s productivity is much lower than that of other countries, and we don’t really know why. Neither do we seem to be able to fix the problem. Policymakers have used every trick in the book to try to boost productivity, but the results have disappointed. Productivity growth matters because it drives up our purchasing power: if it lags, so will our standard of living. And yet—here’s where things get interesting—Canadians are far better off than one would tell looking at our dismal productivity performance over the past 20 years. How did we do it? In this six-part special report, Maclean’s in-house economist Stephen Gordon investigates the mystery. (With a contribution from Econowatch editor Erica Alini.)

Click here to see what’s coming up next and view past posts.

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The trick

In part one of this series, I made the point that income growth is driven by productivity. In part two, I noted that Canadian productivity growth has stagnated since at least 2002. You’d think Canadian incomes would also have stagnated, but they haven’t. There’s another piece that has to be added to the productivity-income puzzle.

First, though, a quick recap.

 

 

From part one: wages track productivity.

From part two, Canadian labour productivity growth has been lagging that in the U.S.

But look how the real purchasing power of wages have evolved in the two countries.

Even though workers’ productivity has grown more slowly in Canada, our inflation-adjusted earnings have grown faster than in the U.S. How is that possible if wages track productivity? The answer is international trade.

It all goes back to commodity prices

If the price of a country’s exports rises relative to the price of the goods and services it imports, then purchasing power will improve, even if productivity levels stay the same. This shows up in the national accounts as a divergence between GDP, which is a measure of production, and Gross Domestic Income, which tracks aggregate income. (For a more detailed explanation of the distinction, see here. It involves beer and pizza.)

The reason why GDI started trending above GDP is the same reason wages have been growing faster than productivity: the surge of commodity prices, and of oil prices in particular, since 2002.

Another way of saying this is to look at producer and consumer prices. Rising commodity prices and international trade also put a wedge between producers’ prices (what firms receive when they sell the goods and services they produce—this is the price firms use to calculate the real wage that tracks productivity) and consumer prices (what consumers pay to buy stuff—the lower they are, the greater workers’ purchasing power).  The reason why workers in Canada fared slightly better than in the U.S. is that producer prices here grew more rapidly than consumer prices, while the opposite was going on south of the border. Canadians’ buying power increased because the prices of the things we were selling grew faster than the prices of the things we were buying.

Yes, high oil prices are a good thing

Many commentators go on to conclude that the higher incomes generated by high commodity prices have given Canadians a temporary reprieve from the problem of low productivity growth. Jeffrey Simpson’s take on this is typical of this line of thought:

“Canadians are so damn lucky. We just dig and pump and cut and ship, and we never seem to run out. We just hope commodities prices remain high.

All those resources can be a fool’s game. Pumping and digging and cutting can keep the country comfortable, but they do little to address the country’s biggest challenge – a sagging competitive position. All those natural resources soak up capital; they usually don’t require much innovation or processing…

The old model of exploiting natural resources and shipping most of them (and everything else) to the United States will certainly keep Canada comfortable. But increasingly it won’t make Canada more productive at a time when the population is aging and immigration isn’t working. Without better productivity, forget real income growth. Without it, a comfortable stagnation.”

And here is Dan Gardner making a similar point along with a quote from Don Drummond:

“In June, when the Organization for Economic Cooperation and Development (OECD) released its latest report on Canada, it hit on a theme that is depressingly familiar to economists: Canada’s productivity growth is awful. And getting worse. ‘Canada’s overall productivity has actually fallen since 2002,’ the report noted, ‘while it has grown by about 30 per cent over the past 20 years in the United States.’ On a chart, the lines tracing Canadian and American productivity are essentially equal in the late 1980s but slowly diverge in the 1990s and then, in the last decade, an enormous gap opens.

If we don’t close that gap, our prosperity will slip away when the commodity boom goes. And the commodity boom will go. They all do.

So how do we improve productivity? ‘Twenty years ago we created a laundry list of the things we needed to change in the policy front and productivity would blossom,’ says Don Drummond, one of the country’s leading economists.

‘And you know, we changed most of them but productivity didn’t blossom.’ ”

I think these narratives have things backwards. In the next post, I will argue that the standard metric of productivity growth hasn’t slowed because of any particular failure of Canadian firms or Canadian policy—although there’s always room for improvement. Instead, the problem is how we measure productivity.

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INDEX:

  • Part three: A Canadian magic trick: wages that rise even if productivity doesn’t

 

A Canadian magic trick: wages that rise even if productivity doesn’t

  1. Strikes….or the threat thereof.

  2. So far, so good. But, the contentious part, IMO, will come in part 4.

    Because, as you rightly have pointed out, looking at recent history, oil is the driver. But, here’s where we may diverge: Opportunity cost.

    When the economic reward is so significant of getting a project approved, built, producing, and generating cash flow, corners are cut in order to meet schedule. Works ok, unless the economic incentive decreases, or roadblocks are thrown in the way. This does not lead to focusing on productivity, in the traditional way.

    So, for example, when designing a pipeline route and sizing for throughput, you simply pick the straightest line, limit the amount of consultation, hire the pr people and full steam ahead. This approach, up to now, has worked just fine. If times change, the public responds negatively, and this approach is no longer suitable, then disaster looms…

    Working hard is not the same as working smart. As in most projects, there are three choices/factors: cost, schedule and quality. You can have two, but not all three. There are trade-offs, and in this recent economic period, schedule has largely dominated (though rising costs are tempering it lately).

    The other thing about resource development is that each project, to a large extent, is unique. And enough regulatory/technical checks and balances that improving productivity, significantly, over time is a challenge (notwithstanding technical breakthroughs in drilling, fracking etc.)

    • I like how you refer to yourself in the third person in the blog. This is a rather bizarre research promotion strategy.

  3. It’s true resource jobs pay better for unskilled and low-skilled labor. But this is because most people don’t want to get shipped off to the middle of nowhere to work in an open-pit mine. These kind of jobs turn Canadians into migrant workers, separating breadwinners from their families for long periods of time.

    What’s worse is that Harper has allowed companies to hire temporary foreign workers at a 15% discount to drive down labor costs for resource corporations.

    Canada has too great a population to live off of resources. The entire oil sands development has created only 75,000 jobs. And this is after 500,000 good-paying value-added jobs have been lost due to the soaring oil-sands dollar.

    Canadians want good job and business opportunities across the country close to our homes. We are much more than hewers of wood and drawers of bitumen.

  4. The working poor and lower middle class have the greatest impact on productivity. In the past 25 years, a small number of wealthy people have gotten wealthier, while most Canadians have stayed the same or seen their income decrease. Sure, GDP has gone up — but the beneficiaries of this increase are very small, elite group, of which Steven Gordon is a member. Most people are worse off, despite the increasing GDP. This is a very important concept. Paying people who are already wealthy is not the road to increased productivity. If you want the average working joe to be more productive, try giving him a raise.

    • Yeah, that Steven Gordon is bad news.

      • This is not a joke. Try and come up with something that helps us all – not just your class.

        • Ain’t no-one here but us wage-slaves.

          • Sure, but some of “us” are hired guns for the 1%.

    • Yes, over the past 25 to 30 years, the average person has not been sharing in the benefits of GDP and productivity growth. This is unlike the post-war Keynesian era when we employed centrist economics to create an economic tide that raised all boats. But GDP growth has actually been declining, along with living standards for the average person. The 2000s was the worst decade for economic growth since the Great Depression.

      No doubt, there are many economists out there peddling political agendas. This series is nothing more than an apologist piece for the tar sands. Most economists would say rising wages not being supported by productivity gains are unsustainable. It would be sheer foolishness to turn Canada into a resource-based economy (read: banana republic) in the 21st century.

      • What we really need is for the US to nuke China and a few other asian countries, take out the industrial production capacity of much of the world. Brazil as well. The lack of competition would bring us back to the wonderful days when much of Europe and the asian powerhouse were in ruins.

        • Not sure what kind of point you’re trying to make with this disgusting nonsense. But the fact is Germany has one of the most competitive economies on the planet. They have achieved this with centrist mixed-market economics. It takes money to make money. Private companies are not going to invest in social and physical infrastructure. That takes “gubment.”

          The reason developing nations have only a fraction of the productivity that developed nations have is because of social and physical infrastructure. So instead of embarking on a self-defeating race to the bottom, we need to follow the success stories. Free-market ideology is unstable, unsustainable and unfair. It just doesn’t get the results.

      • And make sure all those women working stay home to darn our socks and cook us dinner for when we come home. Just think that alone would probably double the number of jobs available for men. It would be just like it was in that post war Keynesian paradise.

        • It is completely ignorant to suggest that a greater proportion of single-income families is what created the enormous wealth of the post-war era. But thanks to 30 years of flaky free-market ideology, people are working a lot more for a lot less pay and benefits. And this “age of greed” came crashing down in a second global economic meltdown. (The first one that produced the Great Depression led Keynes to create the mixed-market system in the first place.)

          Hopefully the people will learn something from this. God knows people with right-wing political agendas are incapable of learning anything.

  5. Timothy Taylor writes on “Labor’s Falling Share, Everywhere” at http://conversableeconomist.blogspot.ca/2013/06/labors-falling-share-everywhere.html:

    “One of the results of the declining labor share of the economy is that as productivity growth increases the size of economies, the amount going to labor is not keeping up.”

    also:

    “It’s important to remember that the falling share of labor income is different from a rising level of wage inequality. The share of income going to labor as a whole is falling, and also a greater share of labor income is going to those at the highest levels of income. Both trends mean that those with lower- and middle-incomes are having a tougher time.”

    I hope you plan to address these points comprehensively.

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