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JDI Roundtable on Manufacturing Competitiveness in New Brunswick

Is culture or policy responsible for productivity?

Herb Emery

Central Canadians are starting to get a sense that the Canadian economy isn’t doing well. But they can’t seem to figure out that the long play of knee-capping the energy sector to cure the “Dutch disease” allegedly afflicting manufacturers hasn’t proven to be good strategy for promoting investment and growing GDP.

Even stranger, many “influencers” argue that Canadian attitudes are the problem, and not the lousy policy decisions we have been living with of late.

The trigger for the latest hand-wringing is data confirming the slow, if not negative, productivity growth in the Canadian economy. This is an issue because we already have a low level of labour productivity relative to United States. And, for what it is worth, New Brunswick and the other Maritime provinces have a lower level of labour productivity than the Canadian average.

Labour productivity is GDP produced per hour of work. Higher labour productivity occurs because of investment, which results in more capital per worker, or from “technical progress.” The latter is a nice term for producing more from the same number of workers with better machines, higher skilled/educated workers, better processes, etc.

To raise labour productivity, we need investment in machinery and equipment, and we need investment in education, training and research and development. Of all those items, we are only doing well in terms of dollars spent on university education. Other countries with higher productivity growth put more funds toward those other things. 

Low Canadian labour productivity relative to the U.S. has been a longstanding concern. And by longstanding, we are talking back to Confederation in 1867. But in more recent times, Canada pursued the 1985 Macdonald Commission which recommended free trade with the United States to stimulate productivity growth by exposing producers to competition, while giving them better access to a larger market.

The Canada-U.S. productivity gap has survived the free trade agreements that followed the Macdonald Commission. We’ve managed to export more from our resource-based industries and our auto sector, and we were employing many more Canadians that we had before. Employment increased, but productivity and wage growth remained sluggish.

We got the increase in GDP from higher exports, but we didn’t see the shift to higher productivity growth. Economists in the 1990s identified the low value of the Canadian dollar as the source of the problem. The low dollar kept smaller, less-efficient firms in operation and reduced the incentive for investment in machinery and equipment to improve the competitiveness of our exporters.

The solution proposed at the time? Canada should adopt the U.S. dollar or peg the value of our dollar to the U.S. currency, which would kill off all of those marginal producers and encourage growth of our internationally competitive producers.

We got to test that idea with the rise of the energy economy through the 2000s. Robust energy exports drove the Canadian dollar to par, and stronger, with the U.S. dollar. But did we applaud this positive, productivity-enhancing effects of a stronger currency? Nope.

Many Canadian manufacturers screamed in anguish as their profitability declined. Governments in Canada with a “jobs agenda” used subsidies, regulation and labour market protections to ride out the high dollar and allow us to merrily continue on with low productivity. This worked so well that with the Canadian dollar low once again, we now have “labour shortages” to go along with our low labour productivity.

In the 2000s, manufacturers and other exporters should have been doing what their U.S. counterparts did in response to rising competition. Canadian firms should have been investing in machinery and equipment to raise labour productivity. We should have seen more automation and larger, integrated producers who are part of global value chains. Yet we haven’t seen much in the way of net additions to the aggregate manufacturing capital stock in Canada for almost 20 years.

Kevin Carmichael, in a recent Financial Post commentary, put forward the argument that attitudes of the Canadian public, rather than government policy or economic conditions, explain our economic mediocrity. He has some great lines that play well with those who don’t understand the economy. “Complacency is to us what arrogance is to Americans. We embrace it every time we shut down early on Friday to get to the cottage.” “StatCan’s quarterly calculations of labour productivity can be counted on to remind us that the grit we think makes us special on the ice is missing from many of our non-hockey battles.”

The Carmichael hypothesis for the deep causes of our tanking national economy is a sociological explanation that dismisses the importance of economics and practical policy solutions for spurring investment and research and development. As Carmichael states his position: “Economists tend to dismiss Canada’s chronically weak productivity numbers as a psychological problem. For them, it’s a condition created by onerous tax policies, cumbersome regulation, and misaligned incentives. Policy matters, but let’s be honest: This is us.”

I am one of the economists that Carmichael argues does not see our economic performance as a sociological and psychological phenomenon. But, I am open minded. If commentators more enlightened than me can produce evidence that tax policy, cumbersome regulation and misaligned incentives have not discouraged investment and innovation in our economy, then I will join the masses of self-loathing Central Canadian elites who really wish they had the self-discipline to stay home from the cottage on weekends once in a while.

For the record, I do not own a cottage.

Herb Emery is a Brunswick News columnist and the Vaughan Chair in Regional Economics at the University of New Brunswick.

This article first appeared in Brunswick News publications – May 8, 2019

The JDI Roundtable on Manufacturing Competitiveness in New Brunswick is an independent research program made possible through the generosity of J.D. Irving, Ltd. The funding supports arms-length research conducted at UNB.