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The Weekly Wrap, February 9, 2024

Productivity part 2 - industry mix matters

By Mark Parsons, ATB Economics 9 February 2024 7 min read

In this week’s ATB Economics Weekly Wrap…

  • New year, new jobs
  • Final tally on Alberta’s 2023 exports
  • Building to catch up
  • Shifting U.S. trade patterns
  • Interesting Fact: A New Event Centre in Calgary 
  • Topic of the Week: Alberta productivity part 2: A look under the industry hood

The January jobs report capped off the week and it was better than we expected. In our topic/chart of the week, we dig deep into industry data to find out why Alberta’s labour productivity level is higher.

A new year, another job increase

Alberta’s labour market has been on a decent run. It added jobs in 11 of the 12 months last year, and that trend continued into 2024. The January employment gain came in at 10,100, building off December’s modest 5,000 reading. Looking at the longer-term trends, Alberta’s year-over-year job growth has outpaced the national average for 22 straight months.

Alberta added 84,800 jobs between January 2023 and January 2024

Alberta added 84,800 jobs between January 2023 and January 2024

The question remains: can Alberta’s labour market churn out jobs at the rate people are coming to the province and entering the labour force? Afterall, Alberta leads all provinces in population growth, driven by record interprovincial migration.

The provincial unemployment rate sits at 6.2%—down from December, but up from 6.0% in January 2023 and from a low of 5.5% in September. But considering the massive labour force increase—98,000 y/y— employment has mostly kept up. For now, population growth shows few signs of abating, and we could see some higher unemployment rate readings in the coming months, before edging lower again. Our current view is that both employment and labour force growth will slow this year with the unemployment rate averaging just over 6%.

Canadian employment also surprised higher, but a closer look provides a more nuanced picture. All the job gains were part-time, and the unemployment rate only fell due to a lower rate of labour force participation. Wage growth is easing, but still uncomfortably high for the Bank of Canada. A falling employment rate points to some slack, which should temper wage gains going forward.

This mixed report will keep the Bank in a cautious and patient stance. We’re still in the June rate cut camp for now, but starting to lean closer to July. Either way, no immediate cut is on the horizon.

Exporting a quarter of Canada’s goods

We’re well into 2024, but the economic data from last year are still trickling in (and I’m still saying Happy New Year). This week we received the final tally on Alberta merchandise exports: $175 billion, second highest ever and a quarter of Canada’s merchandise exports, but shy of the 2022 record of $205 billion.

To be fair, 2022 was unique. A spike in energy and agri-food prices caused export values to soar. In July that year, Alberta merchandise exports exceeded even Ontario’s—that’s never happened before.

Alberta’s largest export markets last year? U.S. (89%), China (3%), Japan (1.6%), South Korea (0.5%) and Mexico (0.5%). This is the typical top five. China returned to number two after being temporarily supplanted by Japan in 2022 when shipments of propane surged.  The top export categories: energy (75%), food (7%), chemicals (6%) and forestry products (2.5%).

In 2024, we see export volumes picking up, mainly on rising oil production as the Trans Mountain Expansion comes on line. Trade is the main driver of Alberta’s economic growth next year in our forecast.

China now second largest export to U.S.

Speaking of trade, Mexico replaced China as the top exporter to the United States in 2023. China held the number one spot for two decades, with Canada in third spot. This is a sign of shifting trade patterns amid US-Chinese trade tensions and the trend towards nearshoring.

Home building still trying to catch the population

It was a slow start, but a much stronger finish to home building in Alberta last year. Home starts hit 42,600 (annualized) in the final quarter after beginning the year at 28,000 in Q1. Likewise with residential permits—up 29.5% over the same time frame. Interest rates and construction worker shortages are pulling, but demographic forces are pushing even harder. We see housing starts averaging about 40,000 this year—not bad, but still not enough.

Renewable gains

A new report by the Canadian Renewable Energy Association (CREA) shows that installed capacity for wind, solar and battery storage rose by 2.3 GW, or 11.2%, to 21.9 GW across Canada last year. The vast majority of that growth was in Alberta, where the province added 1.7 GW. Alberta now has a total of 5.8 GW of renewable energy generation (4.4 GW wind, 1.4 GW solar).

Interesting Fact: Calgary’s Event Center and Culture and Entertainment District is expected to break ground in 2024, with planning and engineering work underway. In addition to the Event Center, the project will include a community rink, parkade, event plazas, and infrastructure and transportation improvements. The total cost with infrastructure improvements is expected to exceed $1.2 billion.

Topic of the Week: Productivity - Part 2
Productivity Levels in Alberta: A look under the industry hood

In part 1 of our productivity series, we looked at broad trends in Canada and Alberta’s labour productivity performance.

In part 2, we take a deep dive into the industry data to find out why Alberta’s productivity is higher than the national average—27% higher in 2022 for the business sector.* In particular, our goal is to find out if this gap is related to industry mix (more workers concentrated in productive industries), or general (more productive across industries).

Not surprisingly, industry mix plays an important role. To illustrate, the following figure plots Alberta’s share of national hours worked against national productivity levels by industry.

The oil and gas industry stands out. It recorded output per hour of $387 (in $2017) in 2022—more than six times the national business sector average. Workers in that industry are heavily concentrated in Alberta.

Similarly, there is greater concentration of hours worked in other high-productivity areas linked to oil and gas extraction like petroleum manufacturing, pipeline transportation and natural gas distribution.

The oil and gas extraction sector recorded real output per hour of $387 in 2022—more than six times the national business sector average

The oil and gas extraction sector recorded real output per hour of $387 in 2022—more than six times the national business sector average

But industry mix does not explain all the differences, at least directly. As shown in the figure below, Alberta productivity tends to be higher than the national average across a range of sectors.

Labour productivity is higher in Alberta

Labour productivity is higher in Alberta

To get a little more precise, we use a quantitative method to find out how much of the Alberta-Canada productivity gap is due to industry mix vs. general differences across industries.**

Using broad industry definitions, the results suggest that just over 40% is based on industry mix between 2018 and 2022, and the remainder is due to higher productivity across industries. However, if you use more detailed industry data, the results change to approximately 80% industry mix vs. 20% general.

Why the difference? There is a high degree of heterogeneity within the broader industry categories. Take manufacturing, for example. Within that sector, Alberta has a higher concentration of activity in higher labour productivity industries like petrochemicals and refining, which gets picked up using the more detailed industry definitions.

Why is labour productivity higher in Alberta even after accounting for industry mix? One potential reason is that resource industries may increase the demand for labour and hence wages, encouraging companies to devote more spending on capital. Indeed, as shown below, the vast majority of industries have higher capital investment to worker ratios than the national average.

Most industries in Alberta have a higher capital investment to worker ratio than the national average

Most industries in Alberta have a higher capital investment to worker ratio than the national average

Bottom Line: Industry composition matters a lot when it comes to productivity. In Alberta’s case, high productivity levels are a function of its unique industry structure with more workers in the energy and related sectors. But it’s also due to higher general rates of productivity.

That concludes our two-part series on productivity. Stay tuned for an upcoming paper that pulls all this together, including a closer look at recent trends.

*Inconveniently, all the productivity data were revised today, including chaining prices to 2017 vs 2012 previously! Griping aside, the story doesn’t really change. The Alberta-Canada productivity gap is still wide, but not as much as before. This update includes the new data. Last week’s feature has the old data. We’ll put all this together in a single report with the new data.

**We employ the methodology from Baldwin, Maynard, Sabourin and Zietsma (2001) for decomposing level effects into industry mix and general, or ‘real’, differences. Using broad industry definitions, there are 19 industries in total. At the more detailed industry level, there are 95 industries.

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