Canadian companies are falling further behind their U.S. counterparts in the race to become more productive and that has some economists worried about Canada's standard of living.
Weak labour productivity is by far the biggest culprit behind a $4,779 (U.S.) per capita income disparity between Americans and Canadians, according to a Conference Board of Canada report released last fall.
But the good news is that Canadian companies are adopting efficiency boosting techniques and help is available for entrepreneurs who want to make their operations more productive.
Last year, Canada's productivity grew by just 0.1 per cent as the economy was affected by the strengthening dollar, SARS and other economic shocks. U.S. productivity, by contrast, galloped ahead 4.5 per cent, spurred by low interest rates, fiscal stimulus and weaker U.S. dollar.
Canadian labour productivity has now fallen to less than three-quarters that of the U.S. after three years of sluggish performance, according to a recent study by the Centre for the Study of Living Standards.
The solution isn't to make Canadians work harder than Americans. It's to make Canadian companies larger, leaner and more innovative, economists say.
Small and medium-sized business, in particular, know they have to boost their productivity to compete against tough international competition, said André Bourdeau, BDC Acting President and Chief Executive Officer and Executive Vice President, Financial Services and BDC Consulting Group of the Business Development Bank of Canada (BDC).
But Bourdeau noted these companies must balance profitability with spending on productivity enhancing technology, equipment and worker training.
"Entrepreneurs know the world is going to become more and more competitive," Bourdeau said. "It's a constant struggle. That's why BDC promotes investment, innovation and productivity."
Laurentian Bank Chief Economist Carlos Leitao said the rapid rise of the Canadian dollar has exposed Canada's weak productivity.
"We do have an underlying problem," Leitao said. "When the Canadian dollar was relatively weak, Canadian firms in general didn't pay a whole lot of attention to productivity and efficiency. Now we have to face the issue, because it's not only a question of a stronger Canadian dollar, but we also have to face the emergence of China and India as competitors."
Labour productivity is defined as the level of output per unit of labour and is the single most important determinant of a nation's living standard, according to Simon Fraser University economist Richard Harris.
There are complex structural factors underlying Canada's weaker productivity performance relative to the U.S. They include lower investments in technology and equipment, lower research and development spending and a larger share of small and old-economy companies that aren't as productive as large and technology-intensive services firms.
But there is cause for hope. Economist Andrew Sharpe notes that the Canadian economy showed good productivity growth in the late 1990s and Ottawa has instituted pro-productivity policies. He attributes the poor performance so far this decade to an economic slowdown and shocks like the rise of the dollar.
Sharpe, executive director of Ottawa's Centre for the Study of Living Standards, predicted Canadian productivity growth will catch up to U.S. levels as the economy recovers and technological advances spill over from south of the border.
"Canada, indeed, the world, will eventually benefit from technological advances south of the 49th parallel that are fueling productivity gains in that country," Sharpe wrote in a recent report.
Part of the answer lies in embracing change in factories and offices. Bourdeau of the BDC noted that many small and medium-sized companies are wringing waste out of their operations through the use of lean manufacturing techniques that don't require big investments.
BDC offers both consulting services and financing to small and medium-sized businesses working to enhance the productivity of their operations. "There are solutions available to entrepreneurs who are struggling with this issue," Bourdeau said.
For more information, call 1 877 BDC-BANX (232-2269).
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