Money Fact Sheet #17

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PRODUCTIVITY IS A MEASURE of how efficiently an economy transforms its labour, capital, and raw materials into goods and services.

One common measure of an economy's productivity is labour productivity, or the output per worker. This is not merely a measure of how hard people work but how "smart" they work. It is a measure of the extent to which Canadian businesses and industries take advantage of better education, training, management, equipment, and technology to increase the amount of production per worker.

Productivity and the standard of living

Labour productivity plays the dominant role in how fast the incomes of workers improve. Productivity growth allows real wages to increase by lowering prices, thus leading to real improvements to our standard of living.

Increased productivity, which means reduced real costs to producers, is often confused with two other related but very different concepts: competitiveness, which means lower production costs than the competition, and profitability, which means low production cost relative to the selling price.

Economists do not fully understand the driving forces behind productivity growth. Many of the things that increase productivity are factors over which we have very little influence or control. The invention of the transistor and the growth of the Internet are examples.

Through the post-war years and until the early 1970s, productivity growth in Canada, like that in other major industrial countries, was exceptionally strong. In the past two decades, however, productivity growth has been weaker. As a result, growth in per capita real income has also slowed remarkably during this period. The reasons for the decline are still not clear. Many explanations have been advanced, but none of these have been completely satisfactory.

Past experience has shown that, when periods of dramatic technological change occur, it takes a fairly long time for productivity to increase. There have been many changes in the Canadian economy over the past 10 years—large investments have been made in equipment and business processes driven by new information technology as well as changes that governments have made, such as deregulation and free-trade agreements. The productivity dividends that should result from these changes have not yet been fully realized.

The best contribution that the Bank of Canada can make to increasing Canadian productivity is to provide a stable monetary policy. A high and unstable inflation rate is detrimental to productivity growth because it makes it more difficult to make sound investment decisions. It also encourages investment in inflation protection rather than investment in productivity improvement. Low and stable inflation reduces uncertainty and encourages the investment necessary for Canadian businesses to become more productive and competitive, so the economy can keep growing.

January 2000

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