Productivity and Wages

May 29, 2014
Jock Finlayson

An important long-term challenge facing British Columbia is to improve upon the province’s rather lackluster productivity record. In recent years, BC has trailed the national benchmark on overall business sector[1] productivity by around 10%, as depicted in the figure below. In 2012, BC ranked sixth in the country in business sector productivity. Moreover, the province has had very limited success in boosting economy-wide productivity since the 1980s.

That counts as an alarming trend, since higher productivity will be increasingly critical to raising real incomes and living standards in the future as the growth of the workforce slows due to population aging. In the end there are two main ways to expand the size of the “economic pie”: i) higher productivity, and/or ii) increases in “labour input” – i.e., more people working. Labour force growth is constrained by underlying demographic patterns, whereas in theory there is no limit to future productivity growth.

Ultimately, productivity conveys vital information about the efficiency with which scarce economic resources – capital, labour, and other inputs – are employed in the economy to produce goods and services. There are actually several different ways to measure productivity, of which the most widely used is “labour productivity” – defined as the value of output (real GDP) per hour worked, across the economy (or the business sector).

A key point that is often overlooked in public discussions of the economy is that labour productivity is related to the wages/benefits that workers earn, which means that workers and other citizens should care about it. It stands to reason that more productive businesses are able to pay their employees more than businesses which have lower levels of productivity, and the data generally confirm this. The same logic holds for the economy as a whole. In fact, it turns out that real worker compensation in Canada (the value of wages and benefits, adjusted for inflation) matches very closely the growth of labour productivity over the past few decades, as shown in the figure below. Improving productivity is the surest way to ensure that workers enjoy higher real incomes over time.

How might British Columbia establish conditions that lead to stronger productivity growth? This topic was briefly explored in the August 2013 edition of the Business Council’s Policy Perspectives newsletter. Many relevant and useful ideas were also canvassed in a series of papers published by the accounting and consulting firm of Deloitte over the course of 2011-2013.

In essence, the key requirement for building a more productive economy is a stepped-up pace of investment – in machinery and equipment, advanced process technologies, business research and innovation, core economic infrastructure, and the development of a highly skilled workforce. Deloitte’s work on productivity was framed in a wider Canadian context, but the messages that emerge from the firm’s studies also apply to British Columbia. The Business Council will be taking up these themes through our new Innovation and Productivity Task Force over the balance of 2014.

[1] This measure excludes the government-dominated industries of public administration, education and health care.

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