Insights & Analysis

April 1, 2021

Building a better Canada for the next generation (part four): Productivity—what should Canada do to enable growth

Productivity is about expanding our human potential—individually and collectively—to create more and better, with a limited amount of time and resources.

In the final commentary of this series on productivity, we now turn to perhaps the most important question of this work: what can Canada do to improve?

As we stated in Part I of this series, the pursuit of productivity growth is not, and has never been, fully elusive. In Naked Economics, Charles Wheelan wrote, “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.”

After a deeper dive into this topic, we concede that we still lack a precise blueprint for Canada. But what we do have is a better understanding of exactly the “kinds of things” which are likely to be most influential to help us to create a framework to drive improvement. Of note, some key lessons uncovered to guide this framing include the following:

  • The drivers of productivity growth have changed—technology adoption is increasingly important with high returns to businesses who do this well.
  • Canada shows weakness in areas most important in the knowledge economy—these include developing highly productive workers and new ideas, as well as enabling business growth, as larger businesses are more likely to invest and innovate.
  • Focusing on any one component in isolation is inadequate—factors that drive productivity growth tend to influence each other, so addressing one without addressing the others produces limited results.
  • Productivity growth does not necessarily translate to growth in wages—since the 1970s, productivity growth has “decoupled” from growth of the median worker wage.

Taking stock of these lessons in pursuit of improved productivity in Canada, a national framework can be boiled down into four elements.

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Increasing Canadians’ human capital across the life cycle

Human capital—the knowledge, skills, and abilities of the workforce—has been found to play an increasingly important role in driving a nation’s prosperity. Yet, our research found Canada is not fully developing its human capital—far from it—at a time when knowledge and ideas are the most highly valued resource.

Opportunities for society to enable—or limit—human potential begin at birth and do not end until individuals fully retire from the labour force.

Some of the most fruitful opportunities may be at the very beginning: research is increasingly conclusive that there is a large return on high-quality early childhood education, and that this return is highest among the poorest and most vulnerable children. If Canada wants to unlock its full potential, it must take steps to ensure it is not squandered from the start.

It is also time to rethink post-secondary—with the goal of building deeper, and more meaningful, learning experiences for all students. As the OECD has noted, “Increases in the supply of human capital will rely less on expanding the quantity of education and more on improving the quality of learning.” In other words, it is less of a box-checking exercise (Degree? Check.) and more about deeper learning and the student’s ability to meaningfully connect with and apply their knowledge in the world.  

But it does not end there. Continued training and development will be essential throughout Canadians’ lives, especially given how quickly technology is reshaping how we work. Here, the issue is not just creating a culture of lifelong learning, but making sure that all Canadians have access to those training opportunities. The OECD found that lower-skilled adults, individuals who need training the most, are also the least likely to have access.

READ MORE: Skilled by Design: A Blueprint for Alberta’s Future Workforce
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Emboldening growth and risk-taking

We noted in Part III that Canada’s disproportionately large share of smaller businesses is a drag on productivity. On average, larger businesses tend to be more productive than smaller ones, likely due to economies of scale, the potential for better management techniques, and greater financial capacity to take risks and invest in physical capital and R&D.

Why Canada has more smaller businesses is a little unclear, but one barrier to business growth is well known and frequently cited: an onerous business environment.

To improve the health of the business environment in Canada, the Business Council of Canada recommends the creation of an independent oversight agency to address this challenge—a model successfully employed in Germany and Denmark. This independent oversight agency would assess the impact of business regulation on Canada’s economy to help governments to prioritize reform efforts to increase transparency and accountability.  

All together, disincentives to growth and governmental interference get in the way of market dynamism—healthy competition which strengthens the economy. With a growing divergence between high and low-productive firms within industries, competition is essential in encouraging weaker businesses to improve or make way for newer ones. Businesses who best adopt and incorporate the latest technologies and processes are the best positioned to be highly productive and to employ and enable highly productive Canadians.  

Enabling greater innovation or technology adoption

Innovation in this context is a broad, catch-all term for new ideas which are valuable. It could be a better way to build a product, a new way of running operations, or it could be the creation of a new service. Innovative activity is closely linked with greater worker productivity.

The more Canada builds its human capital and creates a healthy business environment, the more innovation will naturally follow. Successful innovators come from or gravitate to places where “education, literacy and numeracy are high, where experimentation, collaboration and the dissemination of new ideas are not discouraged, and where innovation can be rewarded.”

Additionally, Canada has two advantages upon which it can build: the diversity of its workforce and its proximity to the US. The diversity of the labour force is known to engender innovation. Innovation requires fully engaging a breadth of expertise; not just researchers and engineers but also artists, marketers, and communications teams, as well as a variety of perspectives and cultural backgrounds.

Meanwhile, an important part of growing productivity is also the adoption of great ideas—such as those from our southern neighbours who are well-known early adopters themselves. There are important lessons to learn from the US when it comes to risk-taking, experimentation, and trying new ideas. Beyond building on its strengths, one missed opportunity for Canada is protecting the new ideas—the intellectual property—which it creates. As cited in A New North Star II, as a part of a broader challenge-driven industrial strategy, Canada needs a strategy for the development of intellectual property as well as its retention within our borders.

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Using policy to ensure the benefits of productivity are shared by all

A rapid pace of digitization of the economy coupled with a great amount of uncertainty of the future of work along with new types of work like the gig economy mean Canada is due for a rethink of the social safety net.

The impact of COVID has provided us some powerful lessons on the weaknesses of the current system. For instance, the pandemic has made clear that the current system of Employment Insurance not only has gaps but fails to swiftly respond to drastic changes in individual circumstances or the economy at large. Meanwhile, this financial support is also poorly tied with other essential support services necessary to help individuals to re-enter the workforce—such as education and training or mental healthcare.

Now is the time to reflect and reconsider: to support all Canadians, what does this safety net need? An OECD report, The Future of Work, outlines several considerations which can help Canada to ensure that productivity growth leads to prosperity gains, and that no individuals are left behind.

Conclusion

This work will not be fast nor easy—it will take collaboration, discourse, and, in many cases, a willingness to disrupt the status quo. But this is the most important work we can do: to set the foundation for greater opportunity and prosperity in Canada. To not lay this foundation—when it is needed more than ever—risks leaving Canadians behind. If we care about improving the lives of Canadians, generation after generation, it is time to get to work to increase Canada’s productivity, and prosperity.

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