Canada’s productivity issues could require structural changes to address, according to a report, and the longer the issue persists the more likely it is to get embedded into financial assumptions going forward.
Beata Caranci, SVP and chief economist at TD Bank, released a report Thursday that said healthy productivity is essential to maintaining quality public services for a country with an aging population as well as public health and pension programs.
“For Canadian workers, they should be paying attention because living standards were lower in 2023 than in 2014, based on GDP (gross domestic product) per capita. And it’s no coincidence that falling real median wages coincides with falling productivity,” Caranci said.
The report also noted comments from Bank of Canada Senior Deputy Governor Carolyn Rogers in March that described Canada’s productivity issues as an emergency.
“The time is ripe for policymakers to get on this. But it could require a structural change in how we grow our economy,” the report said.
Caranci said the baseline forecast for the next three years assumes Canada’s productivity returns to one per cent growth, despite averaging negative 0.5 per cent over the previous three years.
“The longer weak productivity persists, the less we can explain away aspects as one-time effects or anomalies, and the more likely it gets embedded into financial assumptions,” the report said.
According to the report, productivity issues have been “broadly represented” in the goods sector of the economy since 2019.
When looking at Canada’s productivity issues, the report said a “lesser discussed challenge” is Canada’s emphasis on construction investment which consistently experiences weaker productivity when compared to other industries.
The report highlighted that although the issue is not a “uniquely Canadian problem,” the effects of construction-related productivity issues are amplified in Canada due to the “disproportionately large amount of resources dedicated to the sector.”
“There are many factors at play outside of the commonly cited barriers associated with over-regulation and complex permitting processes. One of those is the disproportionate share of very small firms, where one-quarter have fewer than 20 employees,” Caranci said.
Smaller firms are frequently slower to integrate new technologies compared to larger firms and often have thin margins that hinder risk-taking activity, the report noted.
“Policymakers would have to think through an incentive structure to reward growth towards becoming larger, which hasn’t been the typical focus in Canadian policy,” the report said.
Over the next five years, Canada’s economy is positioned to allocate more resources to the construction sector, according to Caranci, “which will amplify a weak productivity sector.”
