Productivity, Eh?

The news is loaded with stories about declining productivity, accompanied by much hand-wringing and finger pointing (hard to do at the same time).

Canada’s productivity has been declining. Why that’s a problem for the economy (Global News).

Weak productivity is an economic ‘emergency,’ Bank of Canada warns (Global News).

Lack of investment slowed down labour productivity: Statistics Canada (Financial Post).

How record-high immigration could be hurting Canadian productivity (National Post).

Canada’s productivity slowdown could get worse (Financial Post)

What’s going on?

If we continue with the basic premise that productivity is an efficiency ratio describing the value of an output relative to the cost of its input, we have the opportunity to ask, where might the problem in Canada lie? Input? Output? Bit of both?

In my reading, there are some commonly identified factors. They are all primarily input factors. More on that later.

1. Innovation and Technology. Investment in innovation can improve the efficiency of productivity, often by doing things ‘better’. Technology often allows us to do things ‘faster’, coupling productivity to throughput.

Apparently Canada has a low rate of ‘innovation diffusion’ (a new term to me) Innovation diffusion describes how innovation spreads through a society. The factoids?

  • Investment in information and communications technology (ICT) as a share of GDP has been decreasing in Canada since the early 2000s, from 3.1% in 2000 to 2.04% in 2017. This places Canada at 16th out of 32 OECD countries in terms of ICT investment as a percentage of GDP. (Government of Canada)
  • Investment in R&D as a share of GDP has steadily declined since 2001, mainly due to low and declining business R&D expenditures, and lags well behind the OECD average. Canada would need to more than double expenditures to reach an R&D intensity on par with leading countries. (University Affairs

2. Investment. Overall, this speaks to how much we allocate to purchasing the capital goods (like equipment and technology above) required to produce goods and services. As a society, we don’t invest in upgrading our capital goods. Two factoids:

  • Investment per worker in Canada declined by 20% from 2006 to 2021 (Statistics Canada).
  • …new investment per available worker in Canada, adjusted for purchasing power, was only slightly above 50 cents for every dollar of investment per available US worker in 2021. That is lower than at any point since the beginning of the 1990s (C.D. Howe)

Business dynamism. Another new term for me (learning lots here!). Business dynamism describes the rate at which firms enter, grow, shrink and leave the market, and apparently a high level of this activity is sign of a ‘vibrant’ economy. This concept is also tied to another new-to-me concept: creative destruction (a term from Schumpeter describing how old economic structures are destroyed and replaced by newer (better?) ones).

The idea here is that in Canada there is less of that destruction-reallocation dynamism, suggesting we have a higher concentration of older, bigger (relatively speaking), fatter, lazier firms. I’m trying not to get even ‘small p’ political here, but it is hard not to see the anti-competitive realities of the Loblaws, Air Canadas/Westjets, Shaw/Rogers, etc… as poster children for this element.

Economic structure. This is as interesting as business dynamism (no, seriously!). Economic structure is a kind of roll-up of other factors like competition (see, Shaw/Rogers, see also, ‘none’) and resource allocation, and a new one: sectoral habits and shifts. A shift in the percentage of people are working in manufacturing to the working in service industries – when the latter has lower levels of productivity – has impacted overall Canadian productivity metrics.

Another made-in-Canada factor is our habit of seeing ourselves as being ‘hewers-of-wood-and-drawers-of-water’ or non-value-adding resource extractors. This is capital-intensive, low-labour-input activity that doesn’t help Canada’s productivity picture. Worse, this behaviour introduces an issue I brought up in the first article: long-term externalities. Environmental and community dislocation costs, for example, are not currently calculated in orthodox productivity metrics. But if a more comprehensive economic model were evolved, it would reduce the output value of the equation (subtracting, say, the downstream cost of environmental clean-up). You would also have to raise the input costs to recognize inputs were more ‘expensive’ than estimated when only considering the immediate and direct costs (not long-term externalities).

No factoid, but two resources worth looking at: Impacts of Structural Changes in the Canadian Economy and The true price of a resource economy in Canada’s North.

Busy as a Beaver?

Busy, maybe. Productive, maybe not so much.

Overall, how I interpret all of this is that the challenge of weak Canadian productivity is real. Enough of the input factors point in that direction, consistently.

I would characterize this as a weak culture of entrepreneurship. Canadian industry seems content to invest in capital-intensive, traditional activities like resource extraction and construction. We seem to have a high tolerance of anti-competitive concentrations of big old companies that just keep getting bigger, resulting in lower business dynamism. I don’t know if ‘self-employment’ is a meaningful proxy for ‘entrepreneurship’ (another thing for me to learn) but the numbers are not good. While public sector employment grew by 17% and private sector by 6% since the Pandemic, self-employment fell by 6% (Statistics Canada).

The picture isn’t pretty. Low rates of investment in innovation, the growing concentration of old firms, an unfavourable economic structure, all contribute to sub-par productivity. And that isn’t even counting the long term costs of externalities that aren’t being accounted for.

Monday Morning

Here are some practical takeaways and action items suggested by today’s exploration.

Invest in Technology and upgrade equipment: We touched on this in the first article in this series, but it is clearly still critical. There is no path to improved productivity in your business that doesn’t include investments in technology and equipment upgrades.

Commit to a Culture of Continuous Improvement: For me this is a big winner. A truly, formal, Lean/Agile culture creates a reinforcing loop / virtuous cycle in which we work side by side with our employees to find opportunities for improvement within the organization. This generates a sense of partnership, agency, and ownership that contribute to productivity, while generating cost reductions, quality improvements, and increased efficiencies in every nook and cranny of the business. Classical continuous improvement (Kaizen) is may be one of the most powerful tools for improving productivity (creating more value with fewer inputs) there is.

Expand Market Reach and Diversify: Look for opportunities to enter new markets or diversify product lines to reduce dependence on a single sector or commodity. This can help mitigate risks associated with market volatility and encourage growth in higher-value-added sectors. Scale matters. Balanced activity portfolios matter. Just seeking, looking, and exploring matters. Much the opposite of what we see in too much of the Canadian business landscape.

Enhance Business Dynamism: Like looking for new markets and ways to create value, this is part of that same deeply entrepreneurial activity. Embrace the principles of creative destruction, internally. This might mean pivoting business strategies, exploring new business models, or discontinuing unprofitable lines of business. Nurturing creative destruction in a spirit of ‘intrapreneurialism’ integrates well with a culture of continuous improvement.

What’s Next?

One of the things that struck me as I waded through the literature on the subject of Canadian productivity, is the near-absolute focus on inputs. If productivity is an efficiency ratio, why could I find so little (nothing, really) on the output side? I feel like I’m still not fully understanding the idea of productivity if it is truly supposed to be a ratio, but all of the levers to change how the ratio performs sit on one side of the equation.

For my next article, I’m going to dig into the question “What about output”?

Have your own questions about productivity? Leave a comment and I’ll explore your question in a future article.

About the Author

Clemens Rettich

I am an organizational consultant and educator with over 20 years of experience in supporting the improvement of organizations and organizational management across North America. I work at the intersection of people, systems, and change with a human-culture-first mindset that values joy, innovation, and collaboration. As a teaching professor at the University of Victoria's Peter B. Gustavson School of Business, I teach in the areas of leadership and organizational behaviour. In my work I explore the nature of the human organization in a post-colonial, post-technocratic society. I hold an MBA (Leadership and Organizations), and an undergraduate degree in music (Musicology, Performance). My areas of practice include management and leadership, organizational behaviour, process improvement, organizational change, and talent development and training.
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