Canada's chronic productivity problem is casting a pall over the economic recovery.
The latest measure by Statistics Canada on Tuesday showed minuscule labour productivity growth in the third quarter, fuelling worries Canada is losing its trade competitiveness with the United States. The pressure is building for companies to do more with less by investing in new processes to boost productivity.
The trend is of particular concern now that the Canadian dollar is near parity with its U.S. counterpart, already pushing up the cost of Canadian exports. Over the long term, Canada's already fat trade deficit could widen and impede economic growth.
For years, policy makers have warned about lacklustre productivity, a measure of economic output per hour worked. Canada's persistent underperformance does not bode well for the recovery, and economists are urging Canadians to pay attention.
"Canadian living standards will lag those of the United States," said Sal Guatieri, a senior economist with BMO Nesbitt Burns Inc. "Our income growth will be slower than in the U.S. In a relative sense, we will become poorer than Americans over a longer period."
The problem is that companies are relying too heavily on labour, but failing to invest in new business processes and innovation to meet future demand. For living standards to improve, businesses need to produce more with fewer resources, Mr. Guatieri said.
According to Statistics Canada, the labour productivity of Canadian businesses increased by a measly 0.1 per cent in the third quarter, after declining by 0.6 per cent in the second quarter.
That slim improvement was sparked by "modest growth" in real gross domestic product combined with no change in hours worked, the federal agency said. Service industries were fingered as the weak spot even as goods-producing industries mustered improved output.
Productivity increased 1 per cent for manufacturers, marking that sector's sixth straight quarterly improvement. That shows Canadian manufacturers are "catching up on the productivity race" with their American counterparts, Mr. Guatieri said.
While manufacturers can often boost productivity in the short term by adopting innovative processes or investing in new equipment, those gains are more difficult to achieve in the service sector.
"When we invest in our business, we don't buy a plant or make a fixed investment, we hire people," said Philip Deck, executive chair of Waterloo, Ont.-based software firm MKS Inc.
Consequently, for a year or two after a major hire productivity is actually lower, he said, because of the increased employment costs. Down the road, however, the productivity improvements can be pronounced as the new workers come up to speed.
MKS has boosted its staff by 20 per cent this year.
David Yager, chief executive officer of HSE Integrated Ltd., a Calgary company that sells health and safety services to industry, mainly in the oil patch, said it's tough for labour-intensive service firms to boost productivity.
"On the labour side, in terms of pure output per hour of work, there's not much we can do on productivity," he said.
But there is a role for governments in helping to boost productivity for all companies in the resource sector, Mr. Yager added, and that's by helping to cut the regulatory paperwork burden that companies face.
He acknowledged that the energy industry must remain under tight regulatory control, but said governments could do more to help curtail the escalating costs of meeting those rules.
While the third-quarter reading by Statistics Canada was better than the 0.1 per cent decline originally forecast for the period, economists were not impressed.
Toronto-Dominion Bank economist Shahrzad Mobasher Fard characterized it as "dismal," but she is forecasting labour productivity improve to an average rate of 1 per cent in 2010 and 2011.
"The improvement is likely to be driven by recent business efforts to ramp up spending on machinery and equipment in light of a low interest rate environment, the implementation of the harmonized sales tax in B.C. and Ontario, and added financial incentives from the federal government's current capital cost allowance program," Ms. Mobasher Fard said.
In the United States, business productivity rose 0.6 per cent in the third quarter. That increase came on the heels of a 0.5 per cent decline in the previous quarter.
Rita Trichur