Productivity
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
