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Finlayson: BC must up its productivity game (Troy Media)

A fundamental long-term challenge facing British Columbia is to improve upon the province’s lackluster productivity record.   B.C. trails the national benchmark on overall business sector[1] productivity by around 10%.  In 2012, BC ranked sixth among the ten provinces in the level of productivity.  Moreover, the province has had very limited success in boosting productivity since the 1980s.  This is a worrisome trend, since higher productivity will be essential to raising real incomes and living standards as the growth of the workforce slows due to the effects of an aging population.  In the end there are really only two ways to expand the “economic pie”: i) higher productivity, and/or ii) greater “labour input” – i.e., more people working.  The size of the workforce is limited by underlying demographic patterns, whereas in theory there is no limit to future productivity growth.

Productivity gives us crucial information about the efficiency with which scarce economic resources – capital, labour, technology, land and other inputs – are employed in the economy to produce goods and services.  There are several different ways to measure productivity, of which the most widely used is “labour productivity” – defined as the value of output (real gross domestic product) per hour worked across the economy. 

An important point that is often overlooked in public discussions of the economy is that productivity strongly affects the real wages/benefits that workers earn, and thus the incomes available to families (since employment accounts for two-thirds of all household income).  At a micro level, it stands to reason that more productive businesses are able to pay their employees more than less productive ones.  The same logic holds for the economy as a whole.  In fact, it turns out that real worker compensation in Canada (wages and benefits adjusted for inflation) matches quite closely the growth of labour productivity over the past 50 years, as shown in the accompanying figure. The positive link between productivity and wages is also consistent with the fact that the provinces which lead the pack in business sector productivity – notably Alberta and Saskatchewan – have higher average weekly earnings than middling performers like B.C. and Quebec.  Improving productivity is the surest way to ensure that workers and families enjoy higher real incomes over time. 

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What can be done to deliver faster productivity growth at an economy-wide level?  This topic was explored in a series of accessible and timely papers published by the accounting and consulting firm of Deloitte over the course of 2011-2014.  It has also been a focus of extensive work by Canadian economists and think tank researchers.  Ultimately, building a more productive economy depends on a stepped-up pace of investment – in machinery and equipment, in advanced process technologies, in research and innovation, in transportation and other core economic infrastructure, in strengthening the export capacity of Canadian firms, and in developing a highly skilled workforce. 

Public policy has a vital role to play in this whole domain.  For government, achieving higher productivity calls for taxation policies that encourage business investment and innovation, a commitment to efficient and predictable regulatory processes, the presence well-functioning public education and training institutions, and open trade and investment policies that enable access to outside markets and foster competition at home.  Deloitte’s analysis was framed in a wider Canadian context, but the messages that emerge from the firm’s work equally apply to British Columbia and other provinces looking to up their productivity game.

By Jock Finlayson, Executive Vice President and Chief Policy Officer, Business Council of British Columbia

Originally published online by Troy Media 

[1] This measure excludes the government-dominated industries of public administration, education and health care.