Canada’s productivity problem isn’t that big if we exclude oil
Pau S. Pujolas and Oliver Loertscher
Special to The Globe and Mail
Published August 12, 2024
For Subscribers
Pau S. Pujolas is an economics professor at McMaster University, where Oliver Loertscher is a doctoral student. The following draws from their research published in the Canadian Journal of Economics.
We are witnessing a surge in interest regarding Canadian productivity ([url]https://thehub.ca/2024/07/11/trevor-tombe-canadas-resource-sector-is-its-productivity-powerhouse/[/url]). This is great news, and the conversation should continue.
But there’s one issue we haven’t talked about much: since 2001, Canadian productivity has grown at the same rate as in the U.S. once the oil sector is excluded from the calculations of productivity. Including the oil sector shows no growth in Canadian productivity.
Why is this the case?
First, we must appreciate that people use the term “productivity” to mean different things.
A common preference is to use labour productivity, which is output divided by hours worked, ignoring capital. By this definition, oil is the most productive industry. The oil sector uses far less labour to produce the same output as others.
But this definition can be misleading. For instance, comparing the productivity of Jacques Villeneuve and Donovan Bailey in travelling 100 metres would unfairly favour Mr. Villeneuve due to his Formula One car. Similarly, comparing labour productivity between the oil sector and the rest of the economy is flawed because this definition would be artificially inflating its labour productivity.
“Productivity” should refer to total-factor productivity (TFP), which measures output relative to the inputs used (labour and capital). TFP is consistent with national accounts, vastly used in modern macroeconomic theory, and provides a useful benchmark: In healthy economies it grows at 2 per cent per year.
This increase in total-factor productivity has happened with other sectors in Canada’s economy, but not with oil.
Since the late 1990s, the proportion of Canadian capital invested in the oil sector has increased to more than 30 per cent, up from 15 per cent, coinciding with an oil price boom and the commercialization of oil sands technology.
However, the oil sands are less productive than traditional oil sources. As a result, we have more capital to produce increasingly less oil (the share of oil in Canada’s economy has not moved at nearly the same pace), and this reduces productivity.
In terms of absolute levels, Canadian productivity has consistently been lower than that of the U.S. This indicates that there is a need to consider measures to close the productivity gap. Effective strategies include fostering more competition and providing the necessary means for knowledge creation and transfer to flourish.
But given that the two countries’ growth rate for productivity is similar if oil is excluded, this indicates that there is no immediate need for drastic action.
Some people have described the oil sector as a boon for the Canadian economy. In a way, that’s true. But that has nothing to do with productivity.
The oil sector, like any extractive industry, is akin to selling family heirlooms. Having cash on hand (income) is better than keeping old silver in a drawer, but it doesn’t mean you’re more productive.
Pau S. Pujolas and Oliver Loertscher
Special to The Globe and Mail
Published August 12, 2024
For Subscribers
Pau S. Pujolas is an economics professor at McMaster University, where Oliver Loertscher is a doctoral student. The following draws from their research published in the Canadian Journal of Economics.
We are witnessing a surge in interest regarding Canadian productivity ([url]https://thehub.ca/2024/07/11/trevor-tombe-canadas-resource-sector-is-its-productivity-powerhouse/[/url]). This is great news, and the conversation should continue.
But there’s one issue we haven’t talked about much: since 2001, Canadian productivity has grown at the same rate as in the U.S. once the oil sector is excluded from the calculations of productivity. Including the oil sector shows no growth in Canadian productivity.
Why is this the case?
First, we must appreciate that people use the term “productivity” to mean different things.
A common preference is to use labour productivity, which is output divided by hours worked, ignoring capital. By this definition, oil is the most productive industry. The oil sector uses far less labour to produce the same output as others.
But this definition can be misleading. For instance, comparing the productivity of Jacques Villeneuve and Donovan Bailey in travelling 100 metres would unfairly favour Mr. Villeneuve due to his Formula One car. Similarly, comparing labour productivity between the oil sector and the rest of the economy is flawed because this definition would be artificially inflating its labour productivity.
“Productivity” should refer to total-factor productivity (TFP), which measures output relative to the inputs used (labour and capital). TFP is consistent with national accounts, vastly used in modern macroeconomic theory, and provides a useful benchmark: In healthy economies it grows at 2 per cent per year.
This increase in total-factor productivity has happened with other sectors in Canada’s economy, but not with oil.
Since the late 1990s, the proportion of Canadian capital invested in the oil sector has increased to more than 30 per cent, up from 15 per cent, coinciding with an oil price boom and the commercialization of oil sands technology.
However, the oil sands are less productive than traditional oil sources. As a result, we have more capital to produce increasingly less oil (the share of oil in Canada’s economy has not moved at nearly the same pace), and this reduces productivity.
In terms of absolute levels, Canadian productivity has consistently been lower than that of the U.S. This indicates that there is a need to consider measures to close the productivity gap. Effective strategies include fostering more competition and providing the necessary means for knowledge creation and transfer to flourish.
But given that the two countries’ growth rate for productivity is similar if oil is excluded, this indicates that there is no immediate need for drastic action.
Some people have described the oil sector as a boon for the Canadian economy. In a way, that’s true. But that has nothing to do with productivity.
The oil sector, like any extractive industry, is akin to selling family heirlooms. Having cash on hand (income) is better than keeping old silver in a drawer, but it doesn’t mean you’re more productive.
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