In this week’s EconMinute, we’re talking about labour productivity.
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Productivity has been in the headlines as the culprit behind Canada’s meagre wage growth over the last decade.
The idea is pretty straight forward. Economic theory predicts workers are paid according to the value of the work they produce. When workers are able to produce more—say, through the help of new technologies or better training—their labour becomes more valuable and their wages grow.
Productivity growth is therefore an important signal for real and sustained improvements in our living standards. Wage growth in the absence of productivity growth, on the other hand, tends to simply drive up prices, eating away at any real gains in income.
As such, the fact that labour productivity growth has slowed over the last decade to around half of its previous rate is a major concern for Canadians. Furthermore, the slowdown is especially notable in Alberta since 2014.
In this indicator, we dig below the topline numbers to take a look at labour productivity across provinces and industries to see what else the data reveal.
So what do we see?
- First, labour productivity growth has slowed nationally across both goods-producing and services industries over the last decade.
- In Alberta, this has been the case with services but not goods. Productivity in goods-producing industries has actually accelerated, rising by an average of ~1.4% per year since 2014.
- This increase is largely driven by the energy sector which—due to pressures to cut costs to remain competitive—has become more efficient and technologicaly savvy.
- However, this is enough to drive Alberta’s productivity growth economy-wide. While important for the industry and those employed by it, energy is shrinking as a share of the economy in terms of employment and GDP.
- Meanwhile, not only are services industries less productive than goods industries in general but also Alberta’s productivity advantage in services—previously as high as 25%—is quickly eroding. It is now just 10% higher than the national average.
- As a result of falling services sector productivity, Alberta has not seen any overall productivity growth since 2014.
Nevertheless, a significant gap exists: overall labour productivity is still more than 30% higher in Alberta than the national average and the province remains a clear outlier among the five largest provinces. But keeping it higher will require a renewed focus on the things we know drive productivity and wage growth: namely, innovation and capital investment.