There are numerous reasons why Canada’s productivity growth is weak, but the quality of Canada’s labour force is not one of them. Canada has a well-educated workforce that has not been given the required physical capital — machinery and equipment, technology, and infrastructure — to maximize output for the hours worked.

There is no quick fix to boost productivity. But productivity growth is the key ingredient to improving our economic well-being. It will be even more essential as the demographic tsunami of an aging population approaches. Without improved productivity growth, Canada’s underlying economic potential will begin to fade when labour becomes scarcer after 2015.

Yet Canada has suffered from chronically slow productivity growth for nearly three decades. Between 1985 and 2010, labour productivity growth in Canada fell to less than half the growth of the 1962 to 1984 period.

Economic theory suggests that a more educated labour force should lead to more investment in physical capital, for two reasons. First, labour becomes more expensive, which leads firms to substitute machinery and equipment for workers. Second, educated and skilled workers increase the return on investment in physical capital, encouraging firms and organizations to invest in productivity-enhancing technology, equipment and infrastructure.

On one side of this equation — labour quality — Canada can boast one of the top workforces in the world. Compared with many other developed countries, Canada has a very high proportion of college-and university-educated workers in the labour force. Only Finland surpassed Canada in the Conference Board’s How Canada Performs analysis in Education and Skills — our best showing across six socio-economic categories. And Canadian business leaders ranked this country’s quality of education among the top 10 in the world in the 2011-12 Global Competitiveness Report produced by the World Economic Forum.



True, Canada could benefit from a higher proportion of PhD graduates and graduates in disciplines that are likely to spur innovation — science, math, computer science and engineering. However, Canadians’ educational attainment should attract physical capital, not serve as a constraint.

Since Canada’s labour quality has improved steadily over the years, one would expect investment in physical capital to follow suit. But in the mid-1980s, growth in Canada’s ratio between physical capital and labour slowed dramatically. Around the same time, productivity growth also fell sharply. Canada’s labour productivity grew by an average of 2.8% annually from 1962 to 1984, but slowed to an average of 1.2% yearly between 1984 and 2010.

The Conference Board has examined five reasons why capital intensity has levelled off over the past 25 years, even though the labour force has improved:

- The weak Canadian dollar in the 1990s and early 2000s, which made productivity enhancing machinery and equipment (M&E) produced in the U.S. relatively more expensive than domestic labour.

- The introduction of the capital tax in 1985 at the federal level.

- Tariff and non-tariff barriers between Canada and other countries, and, more depressingly, continuing barriers to the free movement of goods and services between provinces.

- Under-investment in Canada’s public infrastructure, especially in transportation networks such as railways and roads.