An Analysis of the Causes of Weak Labour Productivity Growth in Canada since 2000

Since 2000, business sector labour productivity growth in Canada has averaged 0.95 per cent, 0.60 percentage points below the long-term trend established over the 1973-2000 period (1.55 per cent). In the United States productivity growth has continued to be robust beyond 2000, averaging 2.60 per cent per year. This article argues that Canada’s weak productivity growth since 2000 is temporary, and mostly associated with over-hiring and the adjustment costs of moving from a labour surplus to a labour shortage economy. The concentration of weak productivity growth since 2000 in the goods sector, the sector which shouldered the brunt of the structural adjustment, gives additional credence to this explanation. Moreover, most of the increased Canada-US productivity growth gap since 2000 relates to developments south of the 49th parallel. Given that the state of the factors driving productivity growth has not deteriorated in Canada relative to the United States in recent years, it is unlikely that long-term productivity growth in Canada and the United States have decoupled. Indeed, the current widening opens more room for convergence. Future productivity growth in Canada is likely to revert to its 1973-2000 trend.