Insights & Analysis

February 3, 2021

A story of progress (part one): Productivity—what it is, and why you should care

Economists have something of an obsession with a concept known as productivity. Already this year, Canadian economists have made for some sensational headlines regarding the country’s productivity. Just over the last couple of weeks alone, they have made the following claims:

  1. Canada’s productivity growth has been falling behind its peers and we need to act now;
  2. Low productivity is what is making Canada poor; and
  3. Fixing the “productivity problem” is essential to paying down the federal government’s growing debt from COVID.   

So, what is all the fuss about productivity? Is it really the be-all end-all economists are making it out to be? In this commentary, we explain why productivity is not just an esoteric concept or a directive to get people to work harder. And, if you care about issues like poverty and spending quality time with your loved ones, then it’s something you care about, too. This is part one in a series on Canadian productivity. 

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A story of progress

The role of productivity in making our lives better is best captured when we think back to life for our great grandparents. A hundred years ago, the average employed Canadian worked about 45 hours a week, and between 30% and 40% of their wages went to food alone. At this time, roughly 5% of Canadians lived in extreme poverty defined as a “severe deprivation of basic human needs.”

This meant traveling for a vacation was rare and international travel was an option for only the very wealthy; enjoying a small pleasure like a candy bar was often saved for special occasions; and keeping in touch with someone a couple of provinces away meant sitting in a Model T—if you were fortunate enough to own one—for about double the time it would take today or waiting weeks for mail to be sent and returned (most households did not have their own phone).

Fast forward to current times (for a fair comparison, prior to COVID). Canadians in the workforce work an average of 33 hours a week, with an extra 12 hours of leisure a week and about 10 more days of vacation per year. Just 9% of the average Canadian’s wages go to food; and less than one half of one percent live in extreme poverty. Vacations are not just for the wealthy, small pleasures can be enjoyed regularly, and catching up with a friend “face-to-face” in Manitoba or Quebec is just a phone call away. The sum total? Average income, as measured by GDP per capita, increased from $9,300 in 1920 (in today’s dollars) to about $60,000 today. Underpinning all this growth and improvement in living standards was an increase in productivity.

This is what economic progress looks like. It is not about money; it is about the quality of life and freedom of choice that comes with it. At the heart of this progress is that all-important concept: productivity. Productivity growth is therefore an obsession with reason. It is not dry and humanless, as it sometimes sounds. On the contrary, it is a fundamental part of being human: it represents a desire to continuously improve and advance, always seeking to do better with the abilities and resources we have been given.

Looking to the future

While looking back 100 years paints a pretty rosy picture of an improving life in Canada, there is no doubt that challenges remain and there is still room for improvement. About 7% of Canadians earn less than what has been defined as the “low-income cut-off” (families that allocate 20 percentage points more of their income than the average family on basic necessities); there remains a large “connectivity gap” in access to reliable, high-speed internet connection (something now a necessity for most work and education); and Canadians’ earnings, on average, have been stagnant over the last five years.

If we want our children and the next generation to have more and greater opportunity for a fulfilling life, the answer is the same as what got us from where we were in 1920 to today: productivity growth.

So, what exactly is productivity and how does it affect our standard of living?

Economists define productivity differently from how it is sometimes used conversationally. When a friend asks if you had a productive day, you might answer based on how hard or how long you worked that day.

Productivity in the economic sense is actually the opposite: it’s about being able to do the same amount of work with less time, energy, or resources. Alternatively, you could think of it as doing more with the same amount of time, energy, or resources.

As an example, it used to take over 100 hours of labour to produce a car. Now, it takes just 30. This improvement is thanks to the ingenuity of individuals who figured out how to utilize tools and software (i.e. robots) to do the literal heavy lifting of the process. Now, instead of a production line of workers, humans work side-by-side with robots as an integral part of the production process.  

This example highlights two important ways in which productivity growth increases our standard of living. First, when we can produce more cars in fewer hours, it lowers the cost of each vehicle and makes them more affordable to more people. Second, each individual worker produces more cars in a given week and is therefore more valuable than the individual workers on the production line 100 years earlier. This drives up wages as each worker is “worth” more.   

How do we measure a concept like productivity in a modern world?

Though there are many ways to measure a country’s productivity, our future analysis will focus on one of the most common measures: labour productivity. Labour productivity is the value of goods or services an average worker produces in an hour.

For some types of work, this might be straightforward. For instance, we could pretty easily calculate the productivity of a hair stylist by taking the dollar value of services they provide in a typical day divided by the number of hours they work per day.

For other work, it’s less obvious. Imagine an individual who plays a supporting role for a company—say, HR or finance or accounting—or someone who works to increase user engagement at a social media company. In cases like these, the best way to think about increasing productivity is whether or not these individuals have the tools and knowledge to complete the same amount of work in less time.

Though it’s conceptually important to understand what a productivity increase would look like for each of these workers, it is not necessary to calculate the individual productivity of each. This is because the economic value of all workers in Canada in aggregate can be estimated by Canada’s total GDP, which can then be divided by the total number of hours worked to give us our measure of productivity.

How does a country increase its productivity?

As Charles Wheelan says in Naked Economics, “fostering productivity growth is like raising children: we know what kinds of things are important even if there is no blueprint for raising an Olympic athlete or a Harvard scholar.” The “kinds of things” that are important are the following, which we will discuss in greater detail in forthcoming commentaries:

  • Human capital—the whole of the knowledge, skills, experience, and ingenuity of the workforce
  • Physical capital—all of the things—tools and technologies—that help workers to do their job (e.g. cash registers, computers, software, trucks, excavators, AI)
  • Political institutions—this includes all of the ways in which institutions can support the growth of 1 or 2

Doesn’t productivity reduce the number of jobs available?

The biggest misconception with productivity is the assumption that if workers become more productive, fewer people will be needed to work and more individuals will be out of a job. This is known as the “lump of labour fallacy,” an idea that the amount of work in an economy is fixed over time. Productivity growth can and does cause a shift in demand for specific jobs and industries over time, but it does not lead to lower overall employment. In our auto plant example above, there may be fewer workers on the assembly line than there were 100 years ago, but there are more people employed in programming, software development, and robot repair and maintenance.

Similarly, in the 1920s, about 33% of the workforce worked in agriculture. Now, that number is under 2%. But, instead of massive unemployment, the result instead has been lower food prices; higher incomes; and the creation of new industries, products, and services. For instance, there has been an explosion of work and jobs that support digital connection and the development of social media platforms and phone apps. App development may seem trivial next to having food on your plate—and it is—but the point is that we can now afford to devote time to making those apps because our farmers have become so productive.   

Gains can be unequally shared or come at a cost to the environment.

Nonetheless, productivity growth can displace some workers whose skills become redundant or unneeded. That can contribute, at least temporarily, to widening inequality. For instance, the invention of the automobile increased the productivity of many types of work, from delivering mail to stocking grocery stores. However, this “creative destruction” meant most blacksmiths and stable hands soon found themselves out of a job because demand for horses plummeted. While there were new types of work emerging, their specific skillsets were rendered obsolete—a blow to anyone whose pride and identity is closely tied to their work.

Furthermore, productivity growth can come at the expense of the environment. If greater production corresponds with higher GHG emissions and poorer air quality, individuals and industries will eventually be harmed, if not immediately then down the road.

This means it is essential that a policy framework to increase productivity consider the broader impacts on society—including the impact on those who could be displaced and on the environment—as opposed to just increasing productivity at all costs.

Conclusion

While the benefits are seldom evenly distributed, an investment in productivity is an investment in Canadians’ future. If we care about decreasing poverty and raising the standard of living over time, we should think deeply about how we can invest in productivity growth, in a way that benefits all Canadians. But big questions remain: Why has productivity growth been lagging globally? Is Canada falling behind its peers? And if so, what does Canada need to do to turn things around? We will tackle these questions in upcoming commentaries. Canada is on the cusp of great change and economic recovery from COVID. If there was ever a time to dig deeper into the concept of productivity, that time is now.

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