Canada's ongoing affordability crisis is fundamentally a productivity problem that can be resolved through strategic economic improvements, according to senior officials at the Bank of Canada.
The Productivity-Affordability Connection
During a recent address at the Association des économistes québécois and CFA Québec in Quebec City, Bank of Canada external deputy governor Nicolas Vincent delivered a clear message: "If we want to make things affordable, we need to raise our income. And the way we grow our income is by increasing productivity."
Vincent emphasized that income growth driven by productivity gains comes with minimal inflationary pressures, making it an ideal solution to Canada's cost-of-living challenges. In a higher productivity environment, businesses can maintain stable prices while increasing wages, ultimately boosting purchasing power for Canadians.
Canada's Troubling Productivity Trends
The deputy governor highlighted concerning data showing Canada's productivity performance has significantly deteriorated over recent decades. Since 2000, Canada has consistently lagged behind the United States and other G7 countries in productivity growth.
The numbers reveal a stark decline: Canada's annual labour productivity growth dropped from three percent between 1962 and 1979 to just over one percent between 2000 and 2019, and further declined to under 0.5 percent between 2020 and 2023.
Vincent stressed that even modest improvements could yield substantial benefits. "If our productivity growth since 2000 had been similar to that of other G7 countries, our GDP in Canada today would be about nine percent higher, which translates to almost $7,000 per person," he explained.
Understanding Productivity Gains
Addressing common misconceptions, Vincent clarified that higher productivity doesn't mean working harder or longer hours. "Instead, it means producing more with what we have. It means producing better," he stated.
Using a practical example, Vincent illustrated how productivity improvements benefit both workers and businesses. Imagine a company that takes 100 hours to produce 100 units while paying workers $40 per hour. The unit labour cost would be four dollars per unit.
"Now, let's say a new technology or process lets the company produce 125 units in 100 hours instead of 100," Vincent said. "Thanks to this gain in productivity, the company would be able to pay its workers up to $50 an hour without increasing its unit labour cost."
Growing Concern at Central Bank
This isn't the first time the Bank of Canada has raised alarms about productivity. Earlier in 2024, senior deputy governor Carolyn Rogers described Canada's productivity issue as an "emergency" requiring immediate attention.
Last month, Rogers again addressed productivity challenges, focusing on fostering more competition among industries, including the financial sector, as a potential solution.
The recent trade disruptions with Canada's largest trade partner have only reinforced the urgency for a more productive economy. Vincent likened a productive economy to having a strong immune system against increasing global shocks, emphasizing that Canada must build economic resilience through productivity improvements.
As Canadians continue grappling with rising costs, the central bank's message is clear: solving the productivity puzzle is essential to restoring affordability and economic prosperity across the nation.
