Thursday, September 11, 2014

Increase in Labor Productivity in Canada

Labor productivity, i.e., output per hour worked, has considerably improved in Canada.  During the second quarter of 2014, it was 50 % higher than in 1981. This improvement means goods and services are more and more produced efficiently. Compared to thirty-three years ago, nowadays, a worker produces 50 % more output within an hour or it is taking now a worker about forty minutes to do a one-hour job.  

Labor Productivity Index in the Business Sector, Canada, 1981:Q1-2014:Q2, Source: Statistics Canada
Figure 1: Labor Productivity Index in the Business Sector, Canada, 1981:Q1-2014:Q2, Source: Statistics Canada

Labor productivity stagnated from the mid-1980s to the early 1990s and in the late 2000s. It soared between these two time periods. Some economic factors likely to influence the evolution of labor productivity are: education, the available physical capital per worker, and advances in technological knowledge.   

The number of workers, female or male, with a postsecondary diploma or a university degree has considerably increased in Canada [here]. Between 1990 and 2013, the proportion of the labor force with a university degree almost doubled, reaching 26.8 % in 2013. There is now almost an equal proportion in the labor force of men and women with a university degree whereas in 1990, women with a university degree represented only 5.8 % of the labor force.  The proportion in the labor force of people with at least a postsecondary diploma was 61.9 % in 2013 versus 39.7 % in 1990.

The share of machinery and equipment in the gross domestic product (GDP) has doubled over the sample period, reaching 4.6 % over the second quarter of 2014. 

Percentage Share of Machinery & Equipment and Business Gross Fixed Capital Formation in GDP, Canada, 1981:Q1-2014:Q2, Source: Statistics Canada
Figure 2: Percentage Share of Machinery & Equipment and Business Gross Fixed Capital Formation in GDP, Canada, 1981:Q1-2014:Q2, Source: Statistics Canada

Besides, machinery and equipment are becoming an important component of business gross fixed capital formation. In 1981, they represented about 16 % of private investment. In 2014, this share has gone up to one-quarter. Increase in this share suggests firms are adopting new or the latest production technology. The fall in the price of machinery and equipment since the late 1990s has made this possible.

The cross-correlation coefficients between the labor productivity and the share of machinery and equipment in GDP are very high –above .8. This means firms’ adoption of new technologies boosts current and future labor productivity.

While workers’ productivity has significantly increased, that is not unfortunately the case for the compensation of employees or wealth redistribution in Canada [here].