CANADIAN PRODUCTIVITY

National Post - May 31, 2002
http://www.nationalpost.com/home/story.html?f=/stories/20020531/404464.html
Canadians earn 68.4 % of U.S. peers Due to productivity gap
Alan Toulin

OTTAWA - A new study shows Canadians' incomes continue to fall further behind those of Americans. The research by the Centre for the Study of Living Standards found personal after-tax disposable income in Canada fell to 68.4% of the U.S. level last year, down from 69% in 2000 and 78.4% 10 years ago.

Lower per capita incomes, which effectively mean lower living standards, reflect Canada's lagging productivity, says the study by Andrew Sharpe, head of the Ottawa-based think-tank. Mr. Sharpe, an economist, said the widening income gap is likely to grow because of the fundamentally different rates of productivity growth in the two countries.

Business leaders such as Charles Baillie, Toronto Dominion Bank chief executive officer, have called for concerted national action to close the income gap by improving productivity. Allan Rock, the Industry Minister, is developing a 10-year innovation program to match and surpass U.S. income levels. In Montreal yesterday, Gordon Thiessen, the former Bank of Canada governor, said lower taxes, innovation and investment in education must become national priorities if Canada is to close the gap. "There's no perfect model and we won't catch up easily," Mr. Thiessen told the Montreal Economic Institute during a conference.

Serge Coulombe, a University of Ottawa economics professor, told the conference that tightening the gap will mean Canadians must work longer hours. "They'll [Canadians] do that if they have the incentive and stop thinking they're well off at $50,000 a year," he said. "We'd better do something fast because the Mexicans are moving right into our U.S. markets, including autos, and other countries are working on productivity." However, Mr. Sharpe said it might be too late for Canada to catch up to the United States in productivity. He explained that if U.S. productivity keeps growing by 2.5% a year, as the evidence suggests it will, then Canada "will face a very difficult challenge just to prevent the gap from widening further, let alone to narrow it."

The report said the growing income gap "is primarily due" to the growing productivity gap between Canada and the United States. The latter gap broadened last year, with the value of goods and services produced per worker here falling below 80% of what an American worker produces. In 1989, a Canadian worker produced 86.8% of that of his U.S. counterpart, but by 2000, the level had fallen to 80.5%. Productivity measures how the economy uses capital, labour and other inputs to produce goods and services. "Productivity gains fuel real income gains, so slower productivity growth in Canada relative to the U.S. translates into slower income growth. Without arresting the widening of the productivity gap, there is little chance of stemming the growth in the income gap," Mr. Sharpe said.

Gross domestic product per worker based on exchange rate adjustments was US$40,613 in 1989, or 86.8% of the US$46,779 in the United States. By 2000, Canada's output per worker at US$60,163 had fallen to 80.5% of the U.S. level of US$75,573. The U.S. economy pulled further ahead during last year's economic downturn. "Canada's aggregate productivity performance in 2001 was respectable, given the economic downturn, but it certainly showed no sign of the acceleration the U.S. economy experienced after 1995," the study says. "Without such an acceleration, and with the likely continuation of the current U.S. productivity trend, the Canada-U.S. productivity and income gaps will continue to widen, a development with important implications for the Canadian economy and society." The study appears in the latest edition of the centre's International Productivity Monitor.

atoulin@nationalpost.com