“Productivity isn't everything, but, in the long run, it is almost everything.”

—Paul Krugman, Nobel Prize-winning economist

Economists are obsessed with productivity. I’m one of them.

But I know from first-hand experience, in presentations and casual conversations with friends, that the topic doesn’t always land.

I see two reasons for this. First, improving labour productivity—the amount of economic output per hour worked—doesn’t sound appealing. It can be seen as working harder, doing more with less, or even job losses. The second problem is that you may not feel the impacts of sluggish productivity right away. It’s a slow burn that, over time, chips away at living standards (hence Krugman’s comment about the long run). This makes it less likely to be a kitchen table discussion at home (trust me, I’ve tried).

It does matter to living standards in the long run (there’s that term again). Our latest industry-level scatter plot below shows a link between labour productivity and wages.

And for those already tired of working harder, the good news is that it involves working smarter, not harder.

So after a year or so distracted by geopolitics, it’s time to bring productivity back into the conversation.

It was just two years ago in early 2024 when Senior Deputy Governor of the Bank of Canada, Carolyn Rogers, called Canada’s dismal productivity performance an “emergency.” Since making those comments, quarterly business sector productivity in Canada picked up in late 2024, but has subsequently stalled.

Today, we look at recent annual data by province, released just two weeks ago.*

Everywhere you look - Productivity growth is weak

Canadian labour productivity has grown only 0.5% per year over the last decade. That won’t cut it, given that we need to close the productivity gap with the U.S. and other G7 countries. Last year, productivity rose 0.7%—a slight acceleration from 2024’s pace of 0.5%.

No matter where you look across the country, there’s no stand-out growth performer. Saskatchewan leads over the last decade, but at only 0.8% per year, while Manitoba and New Brunswick rank at the bottom at 0.2%.  Alberta is slightly above the average, at 0.6% per year, lifted by last year’s jump.

What to do? One obvious thing is to boost business investment, which remains below 2014 peak levels. Other culprits frequently cited include lack of scaling of start-up companies, low business R&D and commercialization, regulatory bottlenecks, lack of competition, taxes and internal trade barriers.

More productive overall - Energy producers lead

Alberta continues to have the highest level of labour productivity at $76.20 per hour worked (measured in 2017 dollars), about 25% higher than the national average. Saskatchewan and Newfoundland and Labrador round out the top three.

What do these provinces have in common? They are all more capital-intensive, energy-producing economies. The oil and gas extraction industry, for example, had a labour productivity level last year of $438/hour (in 2017$) in Canada vs. an all-industry average of $61/hour.

Productive diversification

In a summer 2024 paper, I asked the question: "What does productive diversification look like for Alberta?" That is, expanding non-resource sectors while still maintaining the highest productivity level.

I found that most of Alberta’s productivity advantage stemmed from having a higher share of workers in more productive industries (primarily in the energy sector) as opposed to being more productive in general (though Alberta’s advantage is fairly broad-based across industries).

Here’s the trade-off. Diversifying into new industries creates new opportunities for workers and the economy, and it also makes the economy less susceptible to energy cycles. But, as more people shift into lower-productivity industries, it tends to weigh on average productivity levels.

What to do? Alberta can lead on productivity, and still diversify, by building off its resource strengths. In our June outlook, we discussed momentum in emerging sectors like aviation, food manufacturing, tech and data centres. At the same time, oil and gas production has continued to rise, and could see much larger gains if new pipelines come online.

There is always a concern about labour shortages if things really take off in the oil patch, but right now there is slack in the labour market with unemployment elevated at 6.6%.

There is scope to do both, but however we get there, increasing productivity will be key to Canada’s and Alberta’s economic future.

So next time you’re at the kitchen table, bring up productivity in conversation and let me know how it goes.

*We look at total productivity levels, including the business and public sectors, as that is the only breakdown provided in the updated provincial data. There are challenges with measuring public sector productivity due to lack of observed market value for the output.

Answer to the previous trivia question: In 1986, The Economist magazine created an index for measuring purchasing power in different countries. It’s called the Big Mac Index because it uses the McDonald’s staple to show how prices differ from place to place.

Today’s trivia question: What is the Baumol effect (a.k.a. Baumol's cost disease)?