: Ontario’s Long-Term Report on the Economy
Chapter 5: Productivity in Ontario: Challenges and Opportunities

INTRODUCTION

Productivity growth is a key driver of an economy’s prosperity and living standards.1 Labour productivity growth for Ontario’s business sector, including key subsectors, has slowed significantly over the past decade. In addition, Ontario’s productivity gap with the United States, its key trading partner, has continued to widen.

As the growth of Ontario’s labour force slows due to the aging of the population, stronger productivity growth will be increasingly important to ensure future prosperity. A key challenge will be the shaping of government policies to support private-sector opportunities that will raise productivity growth in the future.

Productivity is not the sole determinant of economic well-being. Terms of trade also affect economic well-being.2 As well, how each citizen shares in economic output depends on the distribution of income and on tax and transfer policies. In addition, the measurement of gross domestic product (GDP) or “output” is imperfect and excludes both negatives (e.g., pollution) and positives (e.g., the free or unpriced enjoyment of parks and natural spaces). Nonetheless, productivity is important and failure to keep up with others will affect Ontario’s ability to compete and maintain its standard of living.

Section 1 of this chapter reviews Ontario’s historical productivity trends. Section 2 describes Ontario’s productivity growth relative to other comparable jurisdictions. In Section 3, potential causes of Ontario’s lagging productivity growth are explored. Section 4 focuses on current policy initiatives and possible areas of policy focus that would help raise productivity growth in the future. Finally, Section 5 identifies opportunities for the business sector to strengthen productivity over the long term.

1. Ontario’s Historical Productivity Trends

An analysis of productivity trends must take a long-term view since annual rates of productivity growth tend to be influenced by business cycles. Decomposing real GDP growth into two parts — growth in hours worked and growth in labour productivity (i.e., output per hour worked) — allows a comparison of the relative contribution of each. Over the 1984–2011 period, this reveals a number of important insights (Chart 5.1):3

  • In general, since 1984, growth in hours worked has been the more important contributor to real GDP growth.
    • During the 1980s, hours worked tracked real GDP closely, which was reflected by weaker labour productivity growth over this period.
    • During the early 1990s, labour productivity increased steadily while hours worked declined, a reflection of job losses during the 1991–93 recessions.
    • Over the second half of the 1990s, labour productivity and hours worked both grew strongly, with the result that real GDP posted very strong rates of growth.
    • Over the past decade, while hours worked have increased steadily, labour productivity has plateaued.

2. Ontario’s Productivity Growth Compared to Other Jurisdictions

Productivity growth in Canada and Ontario lagged that in other G7 countries over the 1984–2011 period (Chart 5.2). During this period, Japan, Germany and the G7 countries experienced higher productivity growth relative to the United States, while Ontario and Canada lost considerable ground in productivity compared to their U.S. neighbour.

In the past decade, Ontario and Canada’s productivity has plateaued, contributing to widening productivity gaps with the other advanced economies. Although such international comparisons are fraught with challenges because of measurement problems, they nonetheless convey an important message that productivity in Ontario and Canada has not kept pace with that in major advanced economies over the last three decades.

The Ontario and Canadian economies are highly integrated with that of the United States, which makes the United States a key benchmark for various cross-country comparisons. Ontario and Canada have faced a widening productivity gap and declining productivity growth relative to the United States (Chart 5.3).

  • Between 1985 and 2000, business-sector productivity growth averaged 1.3 per cent annually in both Ontario and Canada compared to growth of 2.1 per cent in the United States.
  • Since 2001, the productivity gap has widened further, as business-sector productivity growth slowed to 0.4 per cent annually in Ontario and 0.8 per cent in Canada, while U.S. productivity growth picked up to 2.4 per cent annually.

The Task Force on Competitiveness, Productivity and Economic Progress4 noted that, in 2012, Ontario’s lagging productivity accounted for the greatest share of Ontario’s prosperity gap (as measured by GDP per capita relative to the median of 16 North American peers).5 If Ontario’s productivity had not lagged, higher notional output in Ontario could have been used for increased personal consumption, higher private or public investment, or additional public services.

3. Potential Causes of Ontario’s Lagging Productivity Growth

This section examines Ontario’s productivity growth at the industry level and discusses the role of labour, capital, innovation and other factors on Ontario’s productivity growth.

The slowdown in growth of Ontario’s aggregate business sector productivity can be attributed to both weaker productivity growth within individual industries and a shift in economic activity from high-productivity industries to low-productivity industries. As shown in the chart below, Ontario has experienced a decline in productivity growth in a number of its important high-productivity sectors, notably manufacturing, utilities and mining.6

The share of Ontario’s high-productivity manufacturing sector in the overall economy has declined over the past decade (Chart 5.5). In particular, within manufacturing, the relative size of the very high-productivity transportation equipment and chemical industries saw marked declines (Chart 5.6). In transportation equipment manufacturing, global structural forces were likely more important drivers of this decline than any firm- or plant-specific factors.7

Many experts have attributed the relative decline in the manufacturing sector to an overvalued Canadian dollar and increased global competition in key markets such as the United States. However, other factors have also been identified, including low investment in machinery and equipment (M&E) and, in particular, information and communications technology (ICT); weak spending on research and development (R&D); slow adoption of new innovations by business; and regulatory barriers, particularly between provinces.

Labour’s Role in Productivity Growth

Labour quality, influenced by education and training, plays a key role in driving both productivity growth and an economy’s standard of living. Ontario has made significant investments in the knowledge and skills of its people, from full-day kindergarten to postsecondary education. These investments have already shown positive results. Ontario’s high school graduation rate increased from 68 per cent in 2003–04 to 83 per cent in 2011–12. Seventy-one per cent of children in Grades 3 and 6 are meeting the provincial standards in literacy and numeracy, an increase from 54 per cent in 2002–03. With a postsecondary education attainment rate of 66 per cent in 2013, Ontario continues to benefit from one of the most highly educated workforces in the world.

At the same time, Ontario faces a number of labour market challenges.

Several segments of the population continue to struggle to successfully integrate into the labour market, including youth, recent immigrants, Aboriginal people and people with disabilities.

Some employers and industry groups are also concerned that a skills mismatch exists, where the qualifications of job seekers do not meet employers’ needs. This suggests there is a need for collaboration among governments, employers and educational institutions to ensure that workers have the skills required for high-productivity jobs.

It is equally important to address the issue of insufficient workplace training by employers. Studies show that organizations in Canada spend less than those in the United States and those in Ontario spend less than those in most other provinces.8

Cost Competitiveness

Ontario’s cost competitiveness has been eroded in recent years, with unit labour costs9 rising significantly (Chart 5.8). The labour cost of producing a unit of output in Ontario increased by 69 per cent over the last 13 years, while comparable costs in the United States increased by only 28 per cent.10 The key factors responsible for the sharp increase in Ontario’s unit labour costs have been Ontario’s weak labour productivity growth and the significant appreciation of the Canadian dollar.11

Business Investment and Productivity Growth

Weak capital investment in machinery and equipment (M&E), especially in information and communications technology (ICT), has likely contributed to Ontario’s lagging productivity growth.

Machinery and equipment investment matters critically for labour productivity growth, not only because it increases the amount of capital per worker, but also because it brings new technology to the workplace. Rapid adoption of new technologies spurs innovation, efficiency gains and increased competitiveness, which lead to higher output.

Ontario’s M&E investment relative to the size of the economy has remained consistently below that of the United States since 1981, and has declined considerably since 1998 (Chart 5.9).

Investment in ICT has also underperformed in Canada (Chart 5.10). The ICT investment gap (measured as nominal ICT investment per worker) in Canada relative to the United States is most pronounced in software. In particular, the difference in software investment per worker between Canada and the United States accounted for 85 per cent of the overall difference in total ICT investment per worker in 2012.

In terms of nominal ICT capital stock per worker, Canada’s gap is also significant relative to the United States — around 55 per cent (Chart 5.11). While Canada’s ICT capital-stock gap for computers has generally improved relative to the United States, the gap is more pronounced in communications and software.

Innovation and Other Factors

In addition to labour and capital investment, a number of other factors play important roles in supporting labour productivity growth.12 One of the most critical factors is innovation.

Innovation is what firms do to create economic value through new or improved products, processes, marketing methods or organizational advances.

Historically, Canadian industry’s high reliance on the United States may have led to a degree of complacency (“low-innovation equilibrium”) marked by acceptable profit margins, strong job growth, a weak Canadian dollar and an upstream position in global supply chains.13 This complacency may have reduced firms’ adoption of innovation as a business strategy, which has contributed to weak productivity growth.

Ontario’s economy should have a strong capacity for innovation. As noted above, the province has a well-educated workforce, with 66 per cent of the population having a postsecondary education. Ontario is also home to a research-intensive academic system that includes 22 universities, 24 colleges and 24 academic hospitals. As well, more than 530,000 scientists and engineers were employed in Ontario in 2013, representing 40 per cent of the Canadian total. Ontario offers a competitive business tax environment, with marginal effective tax rates below the U.S. and Organisation for Economic Co-operation and Development (OECD) averages, as well as generous research and development (R&D) tax credits. The government also offers a well-developed suite of commercialization programs to translate ideas into goods and services for the global marketplace.

Despite this capacity, Ontario’s record in business innovation has been weak. This is evident when looking at business expenditures in R&D, which is one measure of innovative activity in the private sector. Business R&D spending as a percentage of GDP in Ontario has continuously lagged the United States over the last decade (Chart 5.12), despite generous tax incentives and funding support. The gap in business R&D activity has widened since 2005, largely due to a decline in R&D performed by Ontario’s manufacturing sector. Ontario’s declining business R&D expenditures over the past decade were particularly concentrated in communications equipment manufacturing.14

The quality of management plays an important role in business innovation. The Task Force on Competitiveness, Productivity and Economic Progress found that Ontario managers tend to have fewer university degrees than their American counterparts.15 A comprehensive research study using a sample of more than 10,000 firms in 20 countries found that management quality is an important contributor to firms’ overall performance and their productivity.16

An important area of strength within Ontario’s private sector has been its collaboration with academic institutions, which is a key measure of cooperation and a potential source of technological transfer. Ontario has one of the highest rates of higher-education R&D funded by business among G7 jurisdictions. In addition, based on U.S. Patent and Trademark Office data, Ontario’s patenting intensity exceeds that of all Canadian provinces and G7 countries, except for Japan and the United States. Even so, there is little evidence that these activities have resulted in a proportionate increase in the introduction of innovative goods and services by Ontario businesses.

Entrepreneurial startups often exploit technological or commercial opportunities that have been overlooked by more established companies, which have a positive impact on long-term productivity growth. The availability of venture capital financing is often linked to entrepreneurial firm growth. Ontario has a robust venture capital market. Among G7 countries, Ontario trails only the United States in venture capital investments as a proportion of GDP. To better encourage the growth of entrepreneurial firms, Ontario’s innovation system may need further strengthening of the linkages among business, academia and government.

Investment in intangible assets is increasing in many developed countries and regions, including Ontario. Intangible assets that provide future benefits but do not have physical embodiment, such as computer software, R&D, managerial skills and organizational structure, marketing and branding, contribute significantly to productivity and economic growth. In addition, investments in intangible capital are essential for developing a comparative advantage in international trade, penetrating high-value segments of global value chains and effectively reallocating resources to innovative firms.

In Ontario, investment in intangible assets is a valuable component of business-sector output. It is estimated that, in 2008, investment in intangibles in Ontario accounted for 10.4 per cent of total output,17 which exceeded that of Germany (7.2 per cent), France (7.9 per cent), Italy (5.0 per cent) and Spain (5.5 per cent),18 but was lower than estimates in the United Kingdom (10.5 per cent), the United States (11.5 per cent)19 and Canada (13.2 per cent).20

Another important factor that may help explain Ontario’s lower productivity growth is a relatively high concentration of small and medium-sized firms. Larger firms are generally more productive than smaller firms. Recent studies by Statistics Canada21 have found that the United States has a greater share of larger firms than Canada. The productivity gap between smaller and larger firms is attributed to factors such as economies of scale, capital costs and differences in managerial efficiency. In addition, in 2008, small and medium-sized firms22 accounted for around 70 per cent of hours worked in Canada (56 per cent in the United States). However, Canadian small and medium-sized firms’ productivity was 47 per cent that of large firms while it was 67 per cent in the United States in the same year.

Barriers to entry and competition in key Canadian industries such as transportation, telecommunications, financial services and professional services have been attributed by observers to slower productivity growth in Canada. At the same time, a number of countries have taken steps to remove barriers to competition in their key industries, contributing to greater innovation and lower prices for consumers.

Expanding exports helps strengthen productivity and competitiveness, thereby sustaining economic growth (Chart 5.14).23 Exporting firms become more productive as they exploit scale economies, learn and adapt to global competition, and adopt best practices. For instance, a 2012 Statistics Canada study found that Canadian manufacturers entering export markets between 1990 and 2006 had annual productivity growth of 2.3 per cent — much larger than the 0.3 per cent for all continuing manufacturers.

4. Policies to Improve Productivity

Ontario has undertaken a number of policies to improve productivity and competitiveness.

The government has put in place a competitive tax system for business, streamlined regulations, and enhanced the safety and efficiency of capital markets. For example, since 2009 the marginal effective tax rate on new business investment has been cut in half. Still, many firms continue to underinvest in innovation and productivity-enhancing technologies such as R&D, new equipment and computer software.

Ontario is working with other levels of government, businesses and various groups to enhance the innovation system through improving regulatory frameworks, making strategic infrastructure investments, supporting labour-market efficiency and flexibility, and pursuing policies to expand trade.

Ontario has adopted three fundamental principles that encourage enhanced business productivity and give Ontarians access to good jobs:

  • Investing in people;
  • Investing in modern infrastructure; and
  • Creating a dynamic and innovative business climate.

In its 2012 report, 24 the Jobs and Prosperity Council identified a number of policy levers that would help maximize Ontario’s export opportunities including organizing trade missions; leveraging connections between Ontario’s multicultural population and emerging market economies; building management expertise; and enhancing the export capacity of small and medium-sized enterprises.

There are various policy initiatives that could help strengthen Ontario’s productivity growth and competitiveness over the long term: streamlining regulations; trade expansion; strengthening labour markets; strengthening innovation; enabling productive investment; supporting an efficient and stable financial system; strengthening competition; and investing in public infrastructure.

Streamlining Regulations

The Ontario government’s Open for Business Initiative continues to make the province more attractive for business development while protecting the public interest. This initiative has reduced regulations by more than 17 per cent over three years, resulting in a reduced burden on business and stakeholders.

Trade Expansion

The Province is committed to expanding and diversifying its trade base. The Going Global Trade Strategy will expand the reach of Ontario’s trade, including with fast-growing emerging markets and would largely benefit advanced manufacturing (e.g., telecommunications, aerospace and machinery); financial, business and engineering services; agri-food; and primary commodities. This strategy will help Ontario companies — especially small and medium-sized businesses — increase their success exporting to global markets.

Trade agreements increase competition in Ontario markets. This benefits consumers and also increases the pressure on Ontario firms to innovate and compete aggressively.

Ontario is working with the federal government to finalize a historic trade and investment agreement with the European Union. The deal would mean expanded access to European markets for Ontario manufacturers and service providers, more sales of goods and services, and, as a result, more job creation. The Province is also broadening the reach of Ontario’s exports to high-growth emerging economies. This includes working with the federal government to pursue new trade agreements that increase market access abroad, including the Trans-Pacific Partnership currently involving 12 nations and a Canada–Japan trade agreement. On the recently concluded Canada–Korea Free Trade Agreement, Ontario is calling for a taskforce to monitor the implementation of this agreement, reporting on South Korea’s non-tariff barriers to identify if they are discriminating against Canadian-made autos.

Strengthening Labour Markets

Over the past decade, Ontario has made significant investments to ensure its workers have the skills and adaptability required to succeed in today’s and tomorrow’s economy. Greater availability of labour market information to support job matching could improve Ontario’s economic performance by better connecting people to jobs and employers. Improving the availability of reliable labour market information would help students, employers and job seekers make better-informed choices that are more aligned with the needs of the labour market and the economy.

Strengthening Innovation

The Ontario government has introduced numerous policies and programs to improve the climate for business innovation in the province’s economy. For example, the Province has reduced corporate income taxes and simplified the regulatory burden on businesses. As well, it offers significant support for innovation through generous R&D tax credits, investments in academic R&D, as well as a comprehensive suite of innovation-related programs.

Investments in innovation allow businesses to introduce new or improved products and services to the global marketplace, or reduce their costs to better meet customer needs. The government will continue to encourage and support innovation to help improve productivity growth in Ontario.

Enabling Productive Investment

Greater investment can help firms become more competitive, while contributing to raising Ontario’s productivity. The government, in association with industry groups, could help companies measure and report their investments in innovation, training and technology, and benchmark them to global best practices, helping managers identify areas for improvement. Another potential way to increase productive investment by firms is through the use of incentives in the tax system to encourage incremental spending on R&D, physical capital and worker training.

Supporting an Efficient and Stable Financial System

A financial sector that is strong, resilient and efficient plays an important role in enabling the long-term growth of GDP and productivity. It not only channels capital for investment, but also helps promote the efficient allocation of capital and wealth as well as modern and well-functioning financial transactions — all contributing to productivity. Ontario’s financial sector remains strong and stable, home to the soundest banks in the world and a stock market, the Toronto Stock Exchange, that is the seventh largest in the world, based on market capitalization.

Ontario’s financial markets are well regulated and foster safe, stable and attractive investment opportunities. The government remains committed to modernizing securities laws and the regulatory framework to ensure sound and efficient markets. Ontario has long been a leader in advocating for the creation of a common securities regulator in Canada, a key to the country’s ability to sustain and grow its financial services industry. In 2013, Ontario, British Columbia and the federal government announced an agreement in principle to establish a Cooperative Capital Markets Regulatory system that is expected to be operational by July 1, 2015. It will better protect investors, support efficient capital markets and manage systemic risk.

Competitive Intensity

As noted, part of the productivity slowdown can be explained by inadequate competition in the Canadian economy, particularly in regulated “network” sectors such as transportation, telecommunications and financial services that have spillovers throughout the economy.25 A 2012 OECD report on Canada notes that barriers also exist in professional services, including at the interprovincial level.26 Measures to increase competition would strengthen incentives for companies in these sectors to innovate and commercialize their products, leading to higher productivity growth.27

Investing in Public Infrastructure

Investing in modern infrastructure enhances Ontarians’ quality of life and is a key driver of economic growth and prosperity. Since 2003, the Province has invested nearly $100 billion in public infrastructure to reverse the underinvestment that had accumulated over previous decades.

Ongoing investment is needed to help develop, maintain and renew the province’s infrastructure. Ontarians expect the current supply of public infrastructure to be maintained and that infrastructure investments meet the demand for increased service levels, foster economic growth and align with long-term trends. The Province will continue to make significant infrastructure investments in transportation, health care and education, consistent with Building Together, Ontario’s long-term infrastructure plan.

Building on its commitment to long-term infrastructure planning, in November 2013, the Province introduced Bill 141, the proposed Infrastructure for Jobs and Prosperity Act. If passed, the proposed long-term infrastructure planning legislation would help further align infrastructure planning with economic and demographic trends to maximize the value of provincial infrastructure investments.

Strategic infrastructure investments in transportation, including an efficient highway network, support the movement of goods along key corridors. Investments in public transit help improve mobility in urban centres — the areas that are expected to experience the fastest population growth over the next 20 years. Public transit investments improve the quality of life of Ontarians by helping to manage congestion and providing more transportation choices to reach schools, hospitals and jobs. These investments also result in significant economic benefits by providing businesses with a wider pool of workers and customers, and help make cities more attractive places to invest.

Recognizing the growing challenge of congestion in the Greater Toronto and Hamilton Area, the Province created Metrolinx in 2006 to lead the coordination and delivery of a regional transportation plan, The Big Move. Key projects identified in The Big Move are under construction throughout the region. The government will continue to invest in public transit infrastructure to give commuters more transit options.

Investments in health infrastructure, schools and postsecondary facilities support the delivery of high-quality health care and provide better places to learn. The Province continues to invest in state-of-the-art health care facilities and equipment in communities across Ontario to transform delivery of patient care. The Province is also supporting partnerships among colleges, universities and industry leaders to help ensure students are being trained for next-generation advanced manufacturing jobs.

The Province continues to explore innovative approaches to modernize public infrastructure. For example, it is leveraging private-sector expertise through Alternative Financing and Procurement (AFP) models. In addition, the Province’s Municipal Infrastructure Strategy is improving how municipalities plan for and prioritize their infrastructure needs. Through the strategy, the Province is providing support for municipal asset management planning and critical projects in municipalities with challenging fiscal situations.

5. The Role of Business in Improving Productivity

In order to sustain and enhance prosperity, Ontario must improve its productivity growth. There is evidence that weak productivity growth in the business sector has been caused by:

  • Weak capital investment in machinery and equipment, and particularly, information and communications technologies; and
  • The failure to adopt innovation as a core business strategy, through investments in R&D and related innovative activities.

There is also evidence that the business sector has not made sufficient productivity-enhancing investments in innovation and human capital. Over the last 10 years, the government has done much to improve Ontario’s business climate. It is essential that business takes the lead.

Business Underinvestment

A number of economists argue a key challenge today is turning around a risk-averse and complacent business culture.28 Others suggest that many Canadian businesses may be negatively affected by unrealistic perceptions of their investments in productivity and innovation.

In a 2013 study, Deloitte surveyed chief executives at almost 900 firms across the country. More than one-third believed their firms were as competitive as their peers, when in fact they were making fewer productivity-enhancing investments than their competitors.29

The Task Force on Competitiveness, Productivity and Economic Progress has highlighted how the focus on short-term goals may threaten the long-term viability of many Canadian businesses.30 Firms are often motivated to maximize short-term profitability in order to meet shareholder expectations. In these efforts, however, companies may be ignoring critical investments to enhance their productivity. A recent study found that privately held firms invest at nearly twice the rate of their public counterparts.31

Within Ontario specifically, evidence suggests that there are unique challenges, such as workplace training and innovation, where businesses must demonstrate a greater commitment to invest. Ontario businesses have been shown to underinvest in workplace learning compared to international competitors such as the United States, as well as most other provinces. Investments in labour quality are a key contributor to greater productivity growth.

In addition, Ontario’s business R&D expenditures have experienced a decline in real terms over the last decade, compared to rapid increases in R&D expenditures by developing countries such as China. In a globalized economy characterized by rapid technological advances, business investments in innovation and R&D are critical for maintaining competitiveness for Ontario-based firms.

Ontario businesses are well positioned to turn their productivity record around and increase investment for long-term sustainable growth. Businesses in Ontario have strengthened their financial positions despite a challenging global economic backdrop. The Bank of Canada and others have pointed to the generally strong balance sheets of Canadian businesses and concluded that the business sector has the capacity to make increased investments to improve innovation and productivity. As well, there is a great potential for Ontario businesses to tap into growing demand from emerging markets. Increasing Ontario’s exports beyond North America would support stronger future economic growth.

There is scope for businesses to work together to improve the collective performance of industries, thereby benefiting the economy. In particular, businesses should look for mechanisms to measure and report on investment in innovation, training and technology, and to showcase top performers against international benchmarks. If there are legal or regulatory barriers to cooperation between competitors, the government is prepared to work with industry to remove them.

The Challenge Facing Business

Although the Province is committed to working with industry, the responsibility for action lies largely with the business sector. As noted by economist Don Drummond, “Despite most of the public policy agenda that was put forward to improve productivity being implemented, productivity growth in this country since 2000 has actually deteriorated. This suggests that the private sector bears more responsibility for Canada’s productivity malaise than previously thought.”32

In the face of these challenges and rising competition from emerging economies, more work remains to ensure Ontario’s economy continues to grow and create jobs. Ontario’s business sector can do more to seize growing opportunities in export markets. It can take advantage of Ontario’s low tax rates, access to skilled labour and affordable health system to make more productivity-enhancing investments. The government’s role is to build a supportive environment in which firms and entrepreneurs can take risks, make investments, create jobs and drive innovation.

1 Productivity is the relationship between output and inputs or factors of production. Labour productivity, the focus of this chapter, is defined as the ratio of output to labour input.

2 Terms of trade are defined as the ratio of the price of exports to the price of imports.

3 This chapter uses Statistics Canada’s Canadian Productivity Accounts database covering the 1984–2011 period for Canada and Ontario. While Statistics Canada revised its productivity series at the industry level in November 2013, these series only cover 2007–2012. Statistics Canada recommends using the longer-term “original” series until the new revised series with data going back to 1997 become available later this year.

4 Task Force on Competitiveness, Productivity and Economic Progress, “Course Correction: Charting a New Road Map for Ontario,” The Institute for Competitiveness & Prosperity, (November 2013).

5 In particular, Ontario’s productivity gap contributed $8,300 to the prosperity gap of $8,000 (offset by Ontario’s “work effort advantage,” amounting to $300).

6 During the past decade, the impact of the 2008–09 recession on productivity growth in these industries, particularly manufacturing, was more pronounced than for prior recessions over the 1985–2000 period.

7 In fact, the decline in transportation equipment manufacturing occurred even though Canada’s automobile assembly plants have been found to be more productive than plants in the United States or Mexico. See, for example, J. Stanford, “Productivity in the North American Auto Assembly Industry, 1998–2007,” Canadian Auto Workers, (January 2009).

8 According to a 2011 Conference Board of Canada study, between 2006 and 2010, Canadian organizations spent an average of 64 cents for every dollar that American organizations spent on learning and development activities per employee. Another Conference Board of Canada study published in 2009 showed that Ontario organizations dedicated 1.5 per cent of their payroll to annual training, learning and development expenditures from 2004 to 2008, less than other provinces, except for the Atlantic provinces.

9 Unit labour cost measures the average cost of labour per unit of output or production. It is calculated as the ratio of total labour cost (or compensation) to real output or, equivalently, as the ratio of average labour cost per unit input to labour productivity (output per unit of input).

10 The latest year of available data from the OECD for Canada is 2010. As a result, the same end year was used for all countries included in the chart.

11 When expressed in national currencies, unit labour costs increased by 26 per cent for Ontario over the 1997–2010 period — less than the 30 per cent increase for Canada and the 28 per cent increase for the United States.

12 Other factors are typically referred to as multifactor productivity (MFP). MFP is a “residual” in GDP growth accounting that reflects hard-to-measure factors such as technological improvement and innovation, firm size and turnover, entrepreneurial “know-how,” management quality, public infrastructure, regulatory impediments, intangible capital and so on. There is some debate over the relative contributions of capital and MFP to labour productivity growth. Studies by Statistics Canada have generally concluded that MFP’s contribution in Canada has been weak relative to the United States and also that MFP growth in Canada has slowed over the past decade. However, others such as Diewert and Yu (2012) find that MFP performance has been reasonably satisfactory in Canada and that capital’s contribution has been weak.

13 Workshop presentation by P. Nicholson (Rotman School of Management, Toronto, 2013): http://www.economics.mcmaster.ca/productivity/Nicholson%20Presentation.pdf. Also see, “Paradox Lost: Explaining Canada’s Research Strength and Innovation Weakness,” Council of Canadian Academies, (2013).

14 The communications equipment manufacturing is an R&D-intensive industry that experienced a drop in economic output from peak levels in 2000.

15 Task Force on Competitiveness, Productivity and Economic Progress, “A Push for Growth: The Time Is Now,” The Institute for Competitiveness & Prosperity, (November 2012).

16 N. Bloom, C. Genakos, R. Sadun and J. Van Reenen, “Management Practices across Firms and Countries,” Academy of Management Perspectives, (February 2012).

17 T. Muntean, “Intangible Assets and Their Contribution to Productivity Growth in Ontario,” 2013. Forthcoming in International Productivity Monitor, Spring 2014. 2008 is the latest data available at the provincial level.

18 2006 data, B. Van Ark, J. Hao, C. Corrado and C. Hulten, “Measuring Intangible Capital and its Contribution to Economic Growth in Europe,” European Investment Bank Papers
No. 1 (2009).

19 Ibid.

20 2008 data, J.R. Baldwin, W. Gu and R. Macdonald, “Intangible Capital and Productivity Growth in Canada,” The Canadian Productivity Review, Statistics Canada, (2012).

21 D. Leung and L. Rispoli, “The Distribution of Gross Domestic Product and Hours Worked in Canada and the United States Across Firm Size Classes,” Statistics Canada, (March 2014); and J.R. Baldwin, D. Leung, and L. Rispoli, “Canada–United States Labour Productivity Gap Across Firm Size Classes,” Statistics Canada, (January 2014).

22 The Statistics Canada studies define small firms as having 0 to 499 employees (and large firms as having 500 or more employees). However, many analysts refer to the firms with 0 to 499 employees as small and medium-sized firms.

23 The same study also suggested that exporting to other Canadian provinces generates similar productivity benefits for manufacturers.

24 Jobs and Prosperity Council, “Advantage Ontario,” (2012).

25 See G. Bishop, “Competition Matters,” Canada 2020, (January 2013) and M. Carney, “The Virtue of Productivity in a Wicked World,” Remarks at the Ottawa Economics Association, (March 24, 2010).

26OECD Economic Surveys: Canada,” (2012).

27 Bishop (2013) and Carney (2010).

28 Council of Canadian Academies, “Innovation and Business Strategy: Why Canada Falls Short,” (2009).

29 Deloitte, “The Future of Productivity: A Wake-up Call for Canadian Companies,” (June 2013).

30 Task Force on Competitiveness, Productivity and Economic Progress, “A Push for Growth: The Time Is Now,” The Institute for Competitiveness & Prosperity, (November 2012).

31 J. Asker, J. Farre-Mensa and A. Ljungqvist, “Corporate Investment and Stock Market Listing: A Puzzle?” Working Paper, Stern School of Business, New York University (January 27, 2014).

32 D. Drummond, “Confessions of a Serial Productivity Researcher,” International Productivity Monitor 22, Centre for the Study of Living Standards, (Fall 2011).

Description of graphics

Chart 5.1: Ontario Labour Productivity, Output and Hours Worked

This line chart breaks down real gross domestic product growth for business sector into two parts: growth in hours worked and growth in labour productivity (defined as output per hour worked). The chart covers the period 1984–2011 indexed at 1984=100. Over this period, growth in hours worked has been the more important contributor to real GDP growth. In particular, (i) during the 1980s, hours worked tracked real GDP closely, implying weaker labour productivity growth; (ii) in the early 1990s, labour productivity increased steadily while hours worked declined, a reflection of job losses during 1991–93 recessions; (iii) during the latter half of 1990s, hours worked, labour productivity and real GDP all grew strongly; and (iv) over the past decade, while hours worked increased steadily, labour productivity has plateaued.

Return to Chart 5.1

Chart 5.2: Ontario Labour Productivity Compared with Advanced Economies

This line chart compares Ontario’s Total Economy labour productivity with selected advanced economies with an index of 1984=100. Labour productivity is estimated as real output per hour worked (in 2005 U.S. dollars at purchasing power parity). The chart includes Japan, G7, Germany, U.S., Canada and Ontario for the period 1984–2011.

Productivity growth in Canada and Ontario lagged that in other G7 countries over 1984–2011. Japan, Germany, and the G7 countries experienced higher productivity growth relative to the U.S, while Ontario and Canada lost considerable ground in productivity relative to their U.S. neighbour.

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Chart 5.3: Labour Productivity in Ontario, Canada and the United States

This line chart compares labour productivity (i.e., real output per hour worked) for the business sector of Ontario, Canada and the United States. The period covers 1984–2011 with an index of 1984=100. The table shows average productivity growth during 1985–2000 and 2001–2011. Ontario and Canada have faced a widening productivity gap and declining productivity growth relative to the United States. In particular; (i) between 1985 and 2000, productivity growth averaged 1.3% annually in both Ontario and Canada compared to 2.1% in the U.S; and (ii) since 2001, the productivity gap has widened further, as productivity growth slowed to 0.4% in Ontario and 0.8% in Canada, while in the U.S. it picked up to 2.4% annually.

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Chart 5.4: Labour Productivity Growth in Ontario Sectors

This bar chart shows business sector average annual per cent change for labour productivity (i.e., real output per hour worked) for two time periods: 1985–2000 and 2001–2011. It shows that Ontario has experienced a decline in productivity growth in a number of its important high-productivity sectors, notably manufacturing, utilities and mining, oil and gas.

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Chart 5.5: Labour Productivity Level by Sector in Ontario

This horizontal bar chart shows level of labour productivity (i.e., real GDP per hour worked in 2002 dollars) for selected sectors in Ontario. The dark shaded bar is for 2000 and the light one is for 2011. The left column shows average annual per cent change in productivity and the right column percentage point change in nominal GDP shares. The high-productivity sectors (including utilities, mining, and manufacturing) have experienced notable declines in productivity growth during 2001–2011 (-0.4%, -6.0% and 0.2%, respectively) relative to 1.2%, 0.4% and 2.7% during 1985–2000, as shown in Chart 5.4. The size of Ontario’s manufacturing sector relative to the overall economy has declined significantly from 2002 to 2011 (-9.3 percentage points).

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Chart 5.6: Labour Productivity Level by Manufacturing Sector in Ontario

This horizontal bar chart shows level of labour productivity (i.e., real GDP per hour worked in 2002 dollars) for selected manufacturing sectors in Ontario. The dark shaded bar is for 2000 and the light one is for 2011. The left column shows average annual per cent change in productivity and the right column percentage point change in nominal GDP shares. The chart shows that the relative size of the very high-productivity transportation equipment and chemical industries saw marked declines (-3.7 and -0.9 percentage points) from 2002 to 2011.

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Chart 5.7: Ontario Has Highly Educated Workforce Relative to OECD Countries

This chart shows share of adult population (aged 25 to 64) with a postsecondary credential in Ontario and the Organisation for Economic Co-operation and Development (OECD) countries. In 2011, 64% of Ontario’s adults had a postsecondary credential, higher than any country in the OECD and much higher than the OECD average of 35%.

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Chart 5.8: Unit Labour Costs in Advanced Economies

This bar chart shows the per cent change from 1997 to 2010 in unit labour costs for total economy in selected advanced economies. Unit labour costs for each economy are expressed in US dollar market exchange rates. Unit labour costs are calculated as the ratio of total labour cost (or compensation) to real output. The chart shows that unit labour costs increased significantly for Ontario (69%) and Canada (75%) while they only increased by 28% in the United States.

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Chart 5.9: M&E Investment in Ontario Relative to Canada and the United States

This line chart shows investment in machinery and equipment (M&E) as a per cent of nominal GDP for Ontario, Canada and the United States. The time period is 1981 to 2013. The chart shows that Ontario’s M&E investment relative to the size of the economy (as measured by nominal GDP) has remained below that of the United States since 1981, and has declined considerably since 1998.

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Chart 5.10: ICT Investment per Worker in Canada Relative to the United States

This line chart shows the gap between Canada and the United States in investment in information and communications technology (ICT) per worker. Total ICT is divided into computers, communications and software. ICT gap is shown for the business sector in current dollars at purchasing power parity for the period 1987–2012. The 100 line implies that there is no gap, while points above 100 point to Canada’s ICT investment per worker being higher than the U.S. and those below mean that Canada’s is lower. The chart suggests that investment in ICT in Canada has underperformed that of the U.S. The gap is most pronounced in software.

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Chart 5.11: ICT Net Capital Stock per Worker in Canada Relative to the United States

This line chart shows the gap between Canada and the United States in net capital stock in information and communications technology (ICT) per worker. Total ICT is divided into computers, communications and software. ICT gap is shown for the business sector in current dollars at purchasing power parity for the period 1987–2012. The 100 line implies that there is no gap, while points above 100 point to Canada’s ICT capital stock per worker being higher than the U.S. and those below mean that Canada’s is lower.The chart suggests that Canada’s ICT capital-stock per worker is around 45% of that in the United States, implying that Canada’s capital-stock per worker gap is around 55%. While Canada’s ICT gap for computers has generally improved relative to the United States, the gap is more pronounced in communications and software.

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Chart 5.12: Research and Development Spending in Ontario Relative to Canada and the United States

Ontario businesses continue to underinvest in productivity-enhancing activities such as research and development (R&D). Business R&D as a percentage of GDP in Ontario has continuously lagged behind the U.S. Between 2001 and 2011, Ontario’s business R&D as a percentage of GDP declined from 1.7% to 1.2%, while the U.S. remained at 1.9%.

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Chart 5.13: Ontario’s Business-Funded Higher Education R&D Compared to Selected Countries

Ontario outpaces most other advanced economies in higher education R&D funded by business. Business funding of higher education R&D is a measure of industrial-academic cooperation in R&D and technology transfer. In 2010, Ontario businesses funded 7.6% of the R&D performed by higher education institutions. Ontario’s proportion of business-funded higher education R&D exceeded the OECD average, as well as the U.S. (5.2%) and the U.K. (4.1%). Among the G7 countries, only Germany (13.9%) had higher education R&D funded by business than Ontario.

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Chart 5.14: Exporters Achieve Faster Productivity Growth

This bar chart shows average annual per cent change in Canadian manufacturing productivity growth for 1990–2006. The chart divides firms into Export Entrants, Continuing Exporters and All Continuing Manufacturers. It finds that Canadian manufacturers entering export markets between 1990 and 2006 had annual productivity growth of 2.3%, which is larger than 1.7% for continuing exporters and significantly larger than the 0.3% for all continuing manufacturers.

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