Morneau is right. We need to have the conversation about productivity (but there is nuance)

Normally I don’t particularly like former politicians coming out against the government they worked in while still in power (there are exceptions). But I have to say I like Bill Morneau.  I have heard several interviews with him about his new book and most agree with what he is saying.

A big issue for him is productivity.  Specifically, that Canadian industry needs to become more productive as that will drive up real wages and the standard of living for Canadian workers.  He talks about a long period where Canada was witnessing strong productivity growth and that translated into real wage increases and then the recent years when GDP growth has been weak, productivity relatively flat and real wage growth limited.

The first issue I have with the productivity debate is that we never seem to clearly state that labour productivity – the kind Moreau is talking about - is highly sector specific.  In other words, there are industries that are highly capital and/or technology specific and therefore highly productive as measured by value-added per hour worked (there is also multifactor productivity but that is a subject for another day).

Which province had the largest increase in economy-wide labour productivity between 1997 and 2008 – by a wide margin?  You all should know this.  Newfoundland and Labrador.  Why?  Because the offshore oil and gas sector was attracting massive investment and labour productivity in offshore oil and gas is off the charts.  Even now NL is second only to AB for overall labour productivity. 

This is why we cannot have the discussion about growing top line productivity without acknowledging that you could make fairly good progress in less important industries but still not see overall productivity gains if your highest productivity sectors are in decline.

Here are the most productive industries in Canada as of 2021, in order.   Don’t shoot the messenger.  Maybe we can blow out our pay and specialty TV sector.

This doesn’t mean the conversation about productivity in all other sectors shouldn’t happen.  It absolutely should. Just to level-set, here are some examples of labour productivity improvement:

A manufacturer has a 1,000 workers – mostly assembly line.  The company deploys robots and reduces the workforce to 200 technicians with lab coats and iPads.  The skills required to do the job go up, so do individual wages.  Total payroll is down but average employment income is up. 

A call centre has a 1,000 workers.  The company implements AI and cuts its workforce to 200 to handle only the specialized customer service problems. The skills required to do the job go up, so do individual wages.  Total payroll is down but average employment income is up. 

A restaurant deploys electronic menus and other productivity tools  and reduces head count by 40% (you should see what they are doing in Japan – electronic order, conveyor systems to the table – you may never see a worker).

This absolutely applies in the public sector.  IRCC deploys AI to help with application processing and reduces the staff required per application by 50% (made up). 

A fourth example, which again we don’t really talk about much, is policy decisions that lead to whole industries significantly downsizing or closing completely.   The rump will presumably have made the productivity adjustments but potentially large scale investment disappears (see below).

What sectors are seeing the biggest gains in labour productivity across the country?  If you go all the way back to 1997 and look at the change in productivity between 1997 and 2021, some interesting sectors rise to the top.  Now, agriculture is still not among the most productive sectors in Canada – we still need lots of workers from labourers to veterinarians. But there have been substantial productivity gains and not just in crop production.  Many of the manufacturing sectors that are not at the top of the wage scale have been boosting productivity.

I prefer a proactive approach to a productivity agenda rather than a generalized labour market squeeze to force companies to boost productivity (in reality, I prefer both).

So, to sum up this rather long post, we must have the conversation about productivity, but it must be sector-specific.  If we are going to downsize investment in fossil fuel sectors, then it is a good idea to boost investment in other mining as that is high value, high wage activity (and critical to the global economy over the next 30 years).   As you know from other posts, I think Canada should continue to serve the global oil and gas markets as long as there is demand – a position that many are at odds with.

And if you want entire ‘low wage’ industries to disappear as happened with the introduction of NAFTA (i.e. not get more productive, just move the entire investment out of the country – which boosts value add per hour worked across the economy), then we had better have a conversation about community impact.  If there are other higher value sectors to replace the lower value add then hallelujah.  If not, then we had better have a serious conversation about the potential winners and losers.

Even The Economist magazine has lamented over the years that we didn’t think enough about the communities that would be left behind as a result of NAFTA and other free trade and that has given rise to much of the populist backlash and the imbalance in prosperity.