Economics, Resources and International Affairs Division
Productivity – the amount produced per hour of work – is one of the main drivers of economic growth, especially in an aging society such as Canada’s.
Yet Canada invests less in research and development (R&D) than a number of other similar countries do. This lack of investment may be a critical problem given that R&D can spark innovations that generally lead to higher productivity.
These facts may partly explain why the Centre for the Study of Living Standards found that Canada’s private sector productivity in 2014 was only 71% of that of the United States (U.S.); in 1984, the gap was only 5% (see Figure 1).
Figure 1 – Labour Productivity in Canada and the United States (=100), Private Sector, 1961–2014
Source: Figure prepared by the Library of Parliament using data from Centre for the Study of Living Standards, Aggregate Income and Productivity Trends, Canada vs. United States.
The U.S. had the highest productivity among G7 nations in 2014. Each hour of work in the U.S. produced an average of $63 in good in services, nearly 30% more than in Canada. Over the past 30 years, productivity in Canada has increased at an average annual rate of 1.1%, ranking Canada second-to-last among G7 countries.
Table 1 – Level and Average Annual Growth Rate of Productivity, 1984–2014
Source: Table prepared by the Library of Parliament using data from Organisation for Economic Co-operation and Development, Productivity, Level of GDP per capita and productivity, OCDE.Stat (database), consulted 22 October 2015.
Productivity and Growth in Living Standards
Per capita output is an approximation of living standards. Because Canada’s population is aging, it is increasingly difficult to raise the number of hours worked in order to maintain or improve living standards and pay rising costs in areas such as health care and pensions. Consequently, Canada will probably need to increase the amount it produces per hour of work—that is, to become more productive.
Figure 2, below, presents various factors that academic studies have identified as possibly affecting productivity.
Figure 2 – Diagram of Key Factors Affecting Productivity
Source: Figure prepared by the Library of Parliament based on various economic studies.
Analysis of the Canadian Situation
A number of studies have examined Canada’s poor productivity performance. An article by Don Drummond, “Confessions of a Serial Productivity Researcher,” shows that a large number of factors that support higher productivity are already present in Canada. For example, Canadians are among the best educated citizens in the world and the country’s macroeconomic factors are effectively managed. The author therefore calls for more research into the lack of business investment in R&D. A study by the professional services firm Deloitte, The Future of Productivity 2013: Close the Perception Gap, reveals that 36% of businesses have an erroneous impression: they think they are investing more than other firms, but they are not.
In 2014, gross domestic expenditures on R&D by Canadian businesses accounted for 0.82% of gross domestic product (GDP), less than in Japan, the United States, France and the United Kingdom. Figure 3, below, shows that this percentage has been declining in Canada since 2001, when it was 1.26% of GDP.
Figure 3 – Gross Domestic Expenditures on Research and Development by Businesses as a Percentage of Gross Domestic Product in Various Countries, 2000–2013
Source: Figure prepared by the Library of Parliament using data from Organisation for Economic Co-operation and Development, Science and Technology Indicators, Main Science and Technology Indicators, GERD as a percentage of GDP, OCDE.Stat (database), consulted 22 October 2015.
Federal Government Productivity Initiatives
The federal government funds a number of programs designed to increase productivity. It has also asked groups of experts to conduct studies to better understand the challenges surrounding this issue and potential solutions. Here are some examples.
The report of the Competition Policy Review Panel contains 65 recommendations for improving competitiveness and boosting productivity, in areas ranging from taxation to immigration to business growth.
The report of the expert panel on R&D (Jenkins report) recommends, among other things, better coordination of federal innovation funding, which should be managed by a single government department.
The federal government’s science, technology and innovation strategy, updated in 2014, has three pillars: people, knowledge and innovation.
The federal government has implemented a number of programs in this area, including the Build in Canada Innovation Program, which enables Canadian businesses to sell their products to the government at the pre-commercial stage. These businesses can then improve their products or services and more easily find potential buyers, as the federal government has already tested and bought them. According to Public Works and Government Services Canada’s Report on Plans and Priorities, this program has a budget of $29.8 million in 2015–2016, increasing to $39.8 million in 2017–2018.
The federal government also supports R&D by investing in projects of the Canada Foundation for Innovation, which was established in 1997, and in granting agencies that fund university research, among other work. In the 2015 federal budget, the Foundation received $100 million to fund digital research infrastructure, and starting in 2016–2017, an additional $46 million will go to the three granting councils and the Research Support Fund to improve collaboration between university researchers and businesses. According to the 2015–16 Main Estimates, the budget for the Social Sciences and Humanities Research Council is $717 million and includes $342 million to manage the Research Support Fund, the budget for the Natural Sciences and Engineering Research Council is $1.1 billion and the budget for the Canadian Institutes of Health Research is $1 billion.
Centre for the Study of Living Standards, International Productivity Monitor.
Council of Canadian Academies, Some Assembly Required: STEM Skills and Canada’s Economic Productivity, Ottawa, 2015.
Léonard, André. Productivity in Canada: Concepts and Issues, Publication No. 2014‑84‑E, Ottawa, Parliamentary Information and Research Service, Library of Parliament, 16 September 2014.