The Bank of Canada is almost comically inclined not to be dramatic, as far as government institutions go. So when one of the bank’s highest-ranking officials starts talking about an economic emergency, it’s worth taking that seriously. Earlier this year, during a speech in Halifax, Senior Deputy Governor Carolyn Rogers didn’t mince words: Canada’s economy is struggling, and it’s time for leaders to stop being complacent about the status quo.
“You’ve seen those signs that say, ‘In emergency, break glass.’ Well, it’s time to break the glass,” Rogers said. The economic evil keeping her up at night isn’t a recession or inflation, but rather Canada’s lacklustre productivity and the way it’s holding back our prosperity.
“Productivity is a way to inoculate the economy against inflation. An economy with low productivity can grow only so quickly before inflation sets in,” she said. “But an economy with strong productivity can have faster growth, more jobs, and higher wages with less risk of inflation.”
Rogers isn’t the only person concerned about Canada’s anemic productivity. Ontario Liberal leader Bonnie Crombie has criticized the Progressive Conservatives for their economic management. Federally, Canada’s economic performance is part of the regular drumbeat of attacks on the Liberal government and Prime Minister Justin Trudeau.
Bank of Canada deputy governor gives a speech on productivity, March 26, 2024
A recent paper published in the Canadian Journal of Economics, however, says that we might want to leave the glass intact and that Canada’s productivity “emergency” isn’t all it appears. The problem, write Oliver Loertscher and Pau Pujolas of McMaster University, starts with the way we measure productivity at the highest level: total factor productivity, or TFP.
“TFP is basically a measure of our ignorance,” says Pujolas. “It’s our inability to understand why the economy is growing beyond capital and labour.” Economic output can expand by increasing inputs — capital and labour — or it can expand due to increased efficiency in how those inputs are used. TFP is an attempt to measure that efficiency, but it’s not a visible, tangible thing, making it a tricky thing to measure.
The paper looks at how Canada’s TFP is measured, and in some sense distorted, by the rapid growth of the oilsands in Alberta since the 2000s. The expansion of that sector has been massively lucrative for energy firms, workers, and governments but, crucially, required massive infusions of financial and physical capital. Because TFP is a mathematical relationship between economic outputs (oil) and inputs (capital), the expansion of the oilsands had the statistical effect of lowering Canada’s apparent productivity even as it grew GDP overall.
Pujolas and Loertscher recalculated Canada’s TFP by stripping out the contributions of the oilsands and found that Canada’s productivity growth over the past generation has been nearly identical to that of the United States.
“For the last 20 years in Canada, TFP hasn’t been growing,” Pujolas says. “Many people have been concerned, people write so many op-eds, but when it comes to productivity growth, if you don’t take the oil sector into account, Canada and the U.S. have done the exact same.”
Pujolas is quick to add that he’s not criticizing the oilsands per se — that would be, he says, a much wider conversation — but simply illuminating an artifact of statistics used for national accounting. He’s also not saying there’s no productivity gap between the U.S. and Canada: there is, and it has persisted for decades. But much of the rhetoric around a productivity “emergency” has relied on an analysis of Canada’s supposed performance relative to the U.S. in the past 20 years that’s been distorted by the oilsands.
Brian Lewis, former chief economist for the Ontario government and current senior fellow at the Munk Centre for Global Affairs and Public Policy, says that the concept of a productivity “crisis” can be a tempting one for people who want to urge policy changes but that it simply doesn’t describe the problems Canada faces.
“Canada’s weak productivity growth is because of of the strength we have in natural resources — especially oil, but other natural resources as well. Those have been growing in output for a generation because global prices have been high,” Lewis says. “It doesn’t mean our standard of living is falling.”
Lewis, whose responsibilities in the Ontario Public Service included publishing the estimates of Ontario’s GDP, knows the value of solid economic statistics. But he’s cautious about drawing conclusions from the data that don’t pass the test of common sense.
“Alberta’s the most prosperous province, by far. They’ve also got the weakest productivity growth,” Lewis says. “I think we’re being sold a fake bill of goods by a lot of economists who should know better.”
If economists disagree on the diagnosis of the problem, there’s substantial agreement on a prescription for the Canadian economy in coming years. Rogers, in her speech, called on governments in Canada to adopt more aggressive pro-competition policies, something Pujolas and Lewis both agree with.
Provincial governments have limited leverage when it comes to national competition policy, but there’s one priority Ontario could focus on, Pujolas says: supporting the post-secondary education sector to ensure we can continue to grow the productivity we have.
“It’s remarkable how good we are at attracting talent, remarkable how well they do, and remarkable how many of them end up going south of the border,” Pujolas says. “If we had the resources to compete, we could be at the top of the world.
Donate