Canada's well-educated workforce lacks much-needed physical capital to
improve productivity

OTTAWA , Jan. 26 /CNW Telbec/ - Canada has a well-educated workforce that has not been given the required physical capital-machinery and equipment, infrastructure and buildings-to maximize output. This helps to explain the country's sluggish productivity growth over the past 25 years, the Conference Board argues in a new report released today.

"Canada's slow productivity growth over the last 25 years cannot be attributed to its labour force," said Alan Arcand , Principal Research Associate. "Labour quality has improved steadily since 1961. However, capital intensity, which grew rapidly in the 1960s and 1970s, slowed between 1983 and the mid-2000s. Essentially, we have under-invested in physical capital.

"It's therefore no surprise that Canada's productivity growth also began to slow around the same time and pales in comparison to other developed countries."

The Conference Board has argued for more than a decade that Canada's poor productivity performance has been hurting its ability to compete globally. For that reason, the Conference Board created the Centre on Productivity as part of its CanCompete research program. The Centre on Productivity's first report, Sluggish Productivity Growth in Canada: Could the Urbanization Process Be a Factor? (published in December 2008 ) identified physical and human capital as the two most important factors affecting productivity growth. This new publication, Canada's Lagging Productivity: The Case of a Well-Educated Workforce Lacking the Much-Needed Physical Capital, analyzes the evolution of Canada's human and physical capital from 1961 to 2008 and compares the relationship between the two.

The report shows that this overall result is fairly widespread among the country's industries and provinces. At the provincial level, seven provinces saw productivity growth slow since 1983.

Canada has a very high proportion of college and university-educated workers in the labour force compared with other developed countries. The Conference Board's recently published How Canada Performs-Education and Skills report card, gives Canada a second place ranking and an 'A' grade in educational outcomes. How Canada Performs does, however, point to the fact that Canada is posting a very low rate of graduation at the doctorate level.

While the study released today does not claim that Canada's education level is optimal, it points to a strong need for further investment in physical capital to maximize the already existing potential of our country's labour force.

International empirical evidence shows that a more educated labour force should spur investment in physical capital, enhancing its productivity potential. The study shows that Canada's capital-to-labour ratio is weaker than it should be, given our high levels of education. Canada's labour productivity grew by an average of 2.8 per cent annually from 1962 to 1983, but slowed to an average of 1.3 per cent yearly between 1984 and 2008.

The national pattern is repeated at the provincial level, where all ten provinces experienced slower capital-labour ratio growth during the 1984-2008 period compared to the 1962-1983 period. Just three provinces - Newfoundland and Labrador, Prince Edward Island , and Ontario - had stronger rates of productivity growth over the past 25 years compared to the earlier period. This same trend is also fairly widespread among the country's industries, with both goods-producing and services-producing industries posting a slower capital-labor ratio expansion since the mid 1980s.

Five potential reasons are highlighted to help explain the much slower growth in the capital-labour ratio:

    
    -   The introduction of the capital tax by the federal government in 1985
        (eliminated only in 2006), along with capital taxes by provincial
        governments (six provinces still tax capital, although Ontario plans
        to eliminate its tax this year);
    -   Fluctuations in the exchange rate;
    -   An underperforming Canadian venture capital market;
    -   Insufficient public infrastructure investment; and
    -   Burdensome government regulations.
    

"Most of the issues hindering productivity growth can be tackled by Canadian governments and businesses expediently. Tax reform alone would go a long way toward securing a better economic future for Canada ," said Arcand.

The CanCompete project is a three-year Conference Board program of research and dialogue is designed to help leading decision makers advance Canada on a path of national competitiveness.

For further information: Brent Dowdall, Media Relations, Tel.: [phone] ext. 448, E-mail: [email protected]