Published on October 17, 2007
Slide1: Productivity Challenges Facing Canadian Organizations Presentation to: Council for Performance Excellence by Brenda Lafleur Director, The Canada Project June 3, 2004 Why worry about productivity?: Why worry about productivity? Because lower Canadian productivity is the main cause of our lower standard of living compared to the United States Because improving productivity is the only sustainable way to reduce the Canada–U.S. income gap Slide3: Real GDP Per Capita (1997 $ U.S.) Sources: Statistics Canada; U.S. Bureau of Economic Analysis. Slide4: Real GDP Per Capita (1997 $ U.S.) Source: OECD. 1 Switzerland 27,562 1 Switzerland 27,727 1 United States 33,123 2 United States 26,928 2 United States 26,630 2 Ireland 30,910 3 Germany 25,407 3 Japan 23,548 3 Norway 30,127 4 Canada 23,467 4 Iceland 22,903 4 Switzerland 28,684 5 Iceland 23,068 5 Denmark 22,761 5 Canada 28,344 6 Denmark 22,386 6 Norway 22,411 6 Denmark 28,017 7 Japan 21,818 7 Canada 22,396 7 Iceland 27,214 8 Sweden 21,667 8 Austria 21,982 8 Netherlands 26,409 9 Norway 21,372 9 Germany 21,905 9 Australia 26,382 10 Austria 20,846 10 Belgium 21,680 10 Austria 26,370 1989 1991 2002 Slide5: Real Income Per Capita, 2002 (1997 $ U.S.) Source: The Conference Board of Canada. What is Productivity?: What is Productivity? Labour productivity is the value of output per unit of labour. Productivity reflects: Organizational efficiency Capital intensity Skills of workers Mix of products Canadian content Slide7: “Over long periods of time, productivity is the single most important determinant of a nation’s living standard or its level of real income.” Richard Harris Slide8: Real GDP Per Capita by Province, 2002 (1997 $) Source: Statistics Canada. Alberta Ontario Quebec British Saskatch- Manitoba Newfound- New Nova Prince Columbia ewan land Brunswick Scotia Edward Island Canadian average Slide9: Real GDP Per Capita, 2001 (1997 $ U.S.) Sources: Statistics Canada; U.S. Bureau of Economic Analysis. Slide10: Literature Review One lesson emerges from the literature: No one factor single-handedly explains the productivity gap between Canada and the United States. Slide11: Productivity Drivers Source: The Conference Board of Canada. Slide12: Productivity Drivers Source: The Conference Board of Canada. Physical Capital ― Machinery and Equipment: Physical Capital ― Machinery and Equipment Countries and firms with high rates of investment in M&E have higher productivity growth. The U.S. M&E investment rate has been higher than Canada’s since the 1980s and widened dramatically in the 1990s when U.S. firms invested heavily in ICT. Differences in capital intensity accounted for 30 per cent of the manufacturing productivity gap between 1994 and 2000. Why? The price of labour relative to capital increased by 1.7 per cent per year between 1994 and 2000 in Canada, and by 4.6 per cent in the U.S. Slide14: Productivity Drivers Source: The Conference Board of Canada. Human Capital: Human Capital Education brings private and public returns. Higher education levels are associated with higher earnings (a measure of marginal productivity) Evidence that quality of human capital is associated with an economy’s ability to undertake innovation. Good and bad news for Canada. Slide16: Proportion of the Population Aged 25–64 Attaining a Post-secondary Education, 2001 (per cent) Source: OECD. Slide17: Productivity Drivers Source: The Conference Board of Canada. Innovation: Innovation Clear link between the level of innovation in a country and economic success. Countries and businesses that show more evidence of innovation are richer and grow faster. R&D is often used as a proxy for innovation. R&D performance in Canada is poor. Slide19: R&D as a Percentage of GDP (per cent) Source: OECD, Main Science and Technology Indicators, 2003. Determinants of Innovation: Determinants of Innovation Networks, alliances, and collaboration are particularly important for innovation. Canadian manufacturing firms that are world-first in their innovative activities have the most extensive networks. A strong skills base is required for innovation. The greater the knowledge intensity of the firms, the greater the likelihood of innovation. Intellectual property rights, such as patents and trademarks, support innovation. If firms are unable to protect their innovation outputs, there will be less payoff and therefore less incentive to undertake innovation activities. This is a particular problem for small firms, which often do not have the resources to protect their intellectual property and therefore under-invest in innovation. Large firms innovate more than small firms. Large firms are more likely to have a dedicated R&D unit to generate new ideas and help to absorb ideas from outside the firm. Competitive pressures motivate firms to innovate. Less competitive industries show a lower propensity to innovate than competitive industries. Slide21: Productivity Drivers Source: The Conference Board of Canada. Industrial Structure: Industrial Structure Are differences in Canada’s industrial structure partly to blame for its lagging productivity growth? In particular, does Canada’s disadvantage stem from its reliance on early-stage natural resource industries? Does the U.S. advantage come from its higher value-added industries? Slide23: Dollar Value of Labour Productivity Sources: Statistics Canada; U.S. Bureau of Economic Analysis. Slide24: Productivity Drivers Source: The Conference Board of Canada. Composition of Output: Composition of Output What Canada produces is important. Discussions on the income and productivity gap often focus on how efficiently industry supplies good and services to the market, while ignoring the value of the goods and services produced. Standard of living depends on both. Slide26: Productivity Drivers Source: The Conference Board of Canada. Size of Firm: Size of Firm SMEs are less productive than larger firms, and because they account for a greater share of manufacturing output and employment in Canada than in the U.S., it follows that Canadian manufacturing overall is less productive. (estimated to account for ¼ of the manufacturing productivity gap) Canadian SMEs are less productive than U.S. SMEs. (estimated to account for ¾ of the manufacturing productivity gap) Slide28: Productivity Drivers Source: The Conference Board of Canada. Degree of Foreign Ownership: Degree of Foreign Ownership Evidence suggests that Canadian-controlled manufacturing firms may be less productive than foreign-controlled firms, even controlling for such factors as size, unionization, and R&D intensity. Between 1985 and 1988, Canadian controlled firms were 25 per cent less productive than those under foreign control. Between 1989 and 1995 the gap was 16 per cent. Why? Some evidence points to management practices and technological know-how of foreign firms. Slide30: Productivity Drivers Source: The Conference Board of Canada. Degree of Competition: Degree of Competition Increased competition drives productivity. Competition spurs organizations to continuously seek new ways to better meet the demands of customers. Some factors: Labour market rigidities Equalization Slide32: Productivity Drivers Source: The Conference Board of Canada. Openness to Trade and Investment: Openness to Trade and Investment Available evidence overwhelmingly supports the link between productivity and openness to trade and investment. A 2002 study on the impact of the FTA on productivity concludes that over the 1989–1995 period, the FTA raised productivity by 3.2 per cent per year in industries most affected by tariff cuts and by 0.6 per cent in overall manufacturing. Between 1990 and 2002, the OECD reports that the implementation of the FTA and then NAFTA accounted for the entire rise in the exports-to-GDP ratio. Openness to Trade and Investment: Openness to Trade and Investment Has Canada fully embraced openness? The answer is both yes and no. The OECD concludes that Canada has very low barriers to entrepreneurship, and a “relatively liberal environment in which to do business,” but that it is one of the “most restrictive in the OECD when it comes to regulatory barriers to trade and investment.” Slide35: Productivity Drivers Source: The Conference Board of Canada. Location of Firms: Location of Firms Idea of clustering. Focuses on the importance of the cross-industry transfer of ideas. Some evidence shows that one-industry clusters (such as Silicon Valley) are less stable than more diversified clusters. Slide37: Productivity Drivers Source: The Conference Board of Canada. Urbanization: Urbanization Appears to be a link between a country’s or region’s degree of urbanization and its productivity. Study of Ontario shows it has lower degree of urbanization than comparative jurisdictions in the United States. May explain some of the lower productivity. Slide39: Productivity Drivers Source: The Conference Board of Canada. Class of Worker: Class of Worker Some evidence that differences in labour productivity between Canada and the United States can be attributed to the relatively poor productivity performance of self-employed in Canada. Why? U.S. has a higher proportion in full-time; in goods-producing; and higher-paid occupations. Slide41: How Can We Close the Gap? Long-term forecast used. 5 components: Labour force participation rate: Canada already has an advantage and this will continue. Demographic structure: Canada already has an advantage and this will continue. Slide42: How Can We Close the Gap? Workweek: U.S. has an advantage—they work longer hours. Both countries will see average weekly hours, but U.S. will still be higher. Even if Canada matched the U.S. hours, the income gap in 2015 would narrow by only 10 per cent. Slide43: How Can We Close the Gap? Unemployment: U.S. has lower unemployment over the forecast. If Canada matched the lower U.S. unemployment rate, the income gap would narrow by 19 per cent in 2015. Slide44: How Can We Close the Gap? Productivity: The largest proportion of the income gap over the forecast period is due to lower Canadian productivity. Canada: 1.5 per cent per year U.S.: 1.7 per cent per year Slide45: How Can We Close the Gap? Canada’s productivity would have to grow by 2.8 per cent per year compared to the U.S. rate of 1.7 per cent per year to eliminate the gap by 2015. Slide46: Canadian Real GDP Per Capita as a Proportion of U.S. Real GDP Per Capita (per cent) Source: OECD. Slide47: The Key Implication The key to eliminating the Canada–U.S. income gap is sustained higher productivity growth. Because productivity is multi-faceted, there is no silver bullet. But the fundamentals of good policy are well understood. Unique factors at play in each industry. Slide48: Current or Planned Canada Project Research Source: The Conference Board of Canada. The Automobile Industry is a Case Study of Economic Integration: The Automobile Industry is a Case Study of Economic Integration A fully integrated North American industry, with excess capacity and increasing competition from Asia. Different economic activities take place in Canada and the United States within the same sector. 1/3 of income gap in auto sector is due to differences in the occupational mix in the two countries. Slide50: Efficiency in Auto Assembly, 2002 (vehicles per labour hour) Source: The Harbour Report North America 2003. Slide51: Real GDP Per Employee in the Auto Sector, 2001 (1997 $ U.S.) Sources: Statistics Canada; U.S. Bureau of Economic Analysis. Slide52: Auto Sector (proportion of total employment and total income in higher-income occupations) Sources: Statistics Canada; U.S. Bureau of Labor Statistics. Slide53: Auto Sector (proportion of total employment and total income in lower-income occupations) Sources: Statistics Canada; U.S. Bureau of Labor Statistics. Slide54: Implication of Case Study While policies that promote innovation, skills development, and openness to trade and investment are necessary condition, they are sometimes not sufficient. There are unique factors in each industry that must also be identified and addressed.