02:33 PM EDT, 03/28/2024 (MT Newswires) -- Avery Shenfeld noted Thursday this week's speech by the Bank of Canada's Carolyn Rogers drew "useful attention" to the symptoms of Canada's productivity malaise. "But," he said, "we're still left without much progress towards a diagnosis, the first step towards a cure, and that might explain why public policy efforts in this area have come up short."

Shenfeld in his 'The Week Ahead' column added: "Productivity has a cyclical component, and a sluggish Canadian economy since mid-2022, against healthy economic growth stateside, likely added to the productivity gap with the US. A ticket taker at the theatre will be twice as productive if attendance doubles. But we can't dismiss the fact that Canada has been trailing the US in productivity growth for decades.

"The impacts of soft productivity on living standards and inflation are serious, if not quite as dramatic as some make out. Greenspon, Stansbury and Summers found that Americans benefited from rising mean real wages as a reward for better productivity over the long run. But less wage inequality meant that Canadians kept pace in real median wage growth. The inflation impacts are cushioned by Canada's heavy reliance on imported consumer goods, and productivity growth in retail and wholesale trade hasn't been that soft over the period since 2019. But in other services and construction, weaker productivity growth could lift costs and prices.

"While our malaise may be partly a reflection of softer capital spending, that too is a symptom, not the underlying disease. It's not helpful to berate CEOs for failing to spend on new equipment. If there were opportunities to save more on labour than the costs of adding equipment they would presumably do so, even if they aren't pressured by competitors. If there's a barrier to capital spending right now, it's high interest rates, and since 2014, the less hospitable investment climate for large scale oil and gas projects.

"A few sectors stand out as long-term laggards or sources of current weakness. Construction output per hour is lower now than in 2019 in both the US and Canada, but we're still looking worse. A shortage of skilled trades is one hypothesis for that, but there's a need for better analysis of other impediments. It seems unlikely that we're digging holes by hand and using less machinery than in 2019. Canada has seen plunging output per hour in admin/support services, but that could be imprecision

in how we measure real output, or a shift in the composition of activity within that hodge-podge sector.

"Information and communications is another long term Canadian laggard. Statistics Canada research by Gu and Wilcox pointed

to a less competitive market, and less pressure to keep up with others. But Canadian telecom firms also pay more for their spectrum needs, which all else equal would cut into the value added attributed to their service.

"Carolyn Rogers also cited a lack of competitive pressures in Canadian industries, but there's a catch-22 for Canada when it comes to the potential benefits of having more competitors: the impacts on scale. Firm-level data examined by Baldwin and others found that having more small firms was a major source of Canada's lower level of labour productivity versus the US. There are large economies of scale for firms that spend on technology equipment and software, since up-front costs don't differ much if these are accessed by 10,000 customers or 10 million. In general, larger firms will opt for a higher capital-labour ratio, and are rewarded with better output per labour hour. That poses a trade-off between the benefits of competition versus scale when you're looking at a country like Canada that has a much smaller national market. We need a deeper dive to assess that tradeoff.

"Are lower cost, less-skilled temporary foreign workers undercutting Canada's output per hour, or incenting business to spend less on labour-saving technology? Adding immigrants with lower output per hour might not be a negative for the output per hour of those already here, even if it dilutes the average. Given our heavy reliance on immigration to counter the drag of an aging population, this is another area where hard facts, not guesswork, are needed.

"We also need a better understanding of whether we're getting enough bang for the buck from public funds spent to promote

innovative industries. Our tech entrepreneurs often end up cashing out with a sale to a US giant, so do we need more incentives for investors to encourage them to go public at home?

"We haven't even touched on the usual laundry list of motherhood issues: interprovincial trade barriers, our corporate tax system, training, and so on. They might be part of the story, but there's a need for deeper research to know how much they matter. Statistics Canada has the firm-level data to take the lead in this, perhaps working with top-level academics. It's time to

take a fresh look at the facts, so that we can better tailor any cure to the underlying disease."

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