Canadians' Living Standards in Jeopardy Unless Productivity Growth Increases

Contact:

Jason Clemens, Director of Fiscal Studies,
The Fraser Institute, (604) 714-4544 Email: jasonc@fraserinstitute.ca

Release Date: 31 January 2000

VANCOUVER,BC>>> Canada is suffering from a serious productivity problem that will leave the living standards of Canadians in jeopardy unless addressed. Productivity growth is essential if Canadians want a high and rising standard of living confirms a new study, Productivity and Economic Performance, released today by The Fraser Institute.

"Ultimately, productivity growth is what helps to produce the wealth of nations," says Jason Clemens, Director of Fiscal Studies at The Fraser Institute.

Canada's productivity growth has been among the worst in the Organization for Economic Co-operation and Development (OECD) since the 1970s. Our manufacturing productivity growth has been the weakest among G-7 countries: the annual growth rate of output per hour in Canada's manufacturing sector from 1979-96 was 1.8 percent a year, compared with a G-7 growth rate of 3.2 percent a year. In addition, Canada is the only G-7 country to experience negative productivity growth during the 1979-96 period.

In terms of average labour productivity growth, Canada also fares relatively poorly. The annual growth rate of average labour productivity declined in Canada from 1.5 percent in the 1970s to 1.0 percent in the 1980s and 1990s, again giving Canada one of the lowest rates among the G-7 countries

As a result of these declines, real income per capita has stagnated: during the 1990s, Canada's per capita income dropped from third to ninth place among OECD countries. "Most economists agree that productivity growth - being able to produce more with less - is necessary for long run increases in per capita income. Developed countries are wealthier than Third World countries precisely because they are more productive," concludes Marc Law, Research Fellow at The Fraser Institute and author of the new study.

Estimates suggest that productivity growth accounts for one-quarter to one-third of the increase in real living standards in the post-World War II era, making productivity growth the cornerstone of economic growth and wealth creation.

It is becoming increasingly clear that without certain reforms, in particular, tax reform and more deregulation, Canada will continue to fall behind. Canada's current tax structure is not conducive to the accumulation of higher quality inputs - more productive machines and equipment, and more highly educated personnel.

There is growing evidence that high marginal tax rates on personal and capital income have imposed large efficiency losses on the economy. Many studies suggest that in the absence of significant reductions in personal income tax rates, Canada will continue to lose many of our best and brightest innovators to the United States. A necessary ingredient for a pro-productivity growth economic policy is a reduction in marginal tax rates on personal and capital income.

Clearly, if advancing the standard of living of Canadians is a major objective of government policy, then the government must provide an institutional environment that is conducive to the creation and diffusion of new knowledge and new technologies - the sources of productivity growth.

This, in turn, requires an institutional framework that rewards individual effort and entrepreneurial activity. "Simply put, countries with a stable legal and political framework that reward investment and innovation are likely to have faster rates of productivity growth," says Clemens.

Established in 1974, The Fraser Institute is an independent public policy organization based in Vancouver.

For further information contact:

Suzanne Walters, Director of Communications,
The Fraser Institute, (604) 714-4582,
Email suzannew@fraserinstitute.ca

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