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Canada's productivity numbers reveal a real structural weakness

Special to Globe and Mail Update

Never mind repeated assurances from Finance Minister Jim Flaherty that our “fundamentals” are healthy. In fact, there's mounting evidence that our economy is stuck in deep mud. Canada is now preceding the United States into recession. Unemployment is growing. Full-time employment is falling. And we're headed for our first non-petroleum trade deficit since 1975 (totalling $3-billion, seasonally adjusted, from January to April alone).

The final nail in the coffin, however, must be last week's miserable productivity report from Statistics Canada. Output per hour fell 0.3 per cent in the first three months of 2008. That follows a decline of 0.7 per cent in the last quarter of 2007, and earlier results that ranged from sluggish to pathetic.

In fact, real output per hour of work is now lower than in the first quarter of 2006 – when Stephen Harper was installed in office, pledging to unleash the productive power of private enterprise. This government may yet become the longest-lived minority in Canada's history. But it might also be the first government in history (since we started gathering these statistics, anyway) to leave national productivity lower than it found it.

No one knows more about Canadian productivity than the folks at the Centre for the Study of Living Standards in Ottawa. They have produced shocking data on Canada's lousy longer-run performance, measuring Canadian output per hour (in the business sector) as a percentage of U.S. productivity from the Second World War to the present.

Initially, Canada was America's poor cousin, with productivity in 1947 equal to about 70 per cent of U.S. levels. Then, led by rapid industrialization, strong business investment, and big spending on schooling and health care, we rapidly closed the gap. By 1984, we produced 91 per cent as much per hour as the Americans.

But then the Canadian recipe began to fall apart. Productivity relative to the United States has fallen dramatically, and almost continuously, since 1984. By 2006, when their data ends, we'd fallen back to 74 per cent of U.S. productivity. Throw in the abysmal last two years (when U.S. productivity grew 4 per cent, while ours declined – despite Ottawa's aping of U.S. policies), and we're back to where we started: as poor cousins.

What happened in 1984 to throw Canada's postwar productivity engine into reverse? Brian Mulroney's Tories came to power. They dismantled regulations on foreign investment, and began two decades of cutbacks in public programs, followed by big tax cuts. Oh, and don't forget: In 1985 the Macdonald Commission urged Canada to negotiate free trade with the U.S., on the explicit promise that it would eliminate our residual productivity disadvantage.

It turned out, however, that free trade was the beginning of the end of Canada's productivity boom. It explicitly pigeon-holed Canada as continental petroleum supplier, with its unique energy-sharing provisions. It prohibited restrictions on foreign ownership and many other measures that once fostered technological transfer and Canadian content in high-productivity industries.

All this set the stage for today's energy boom, which subsidizes, for now anyway, our crumbling performance in all other industries. Due to that energy boom and the resulting currency appreciation, high-productivity jobs in manufacturing are disappearing in droves. The latest is 2,600 truck-assembly workers, producing $300,000 worth of value-added per year each, who'll be on the street next year if GM abandons its Oshawa plant (located squarely in Jim Flaherty's backyard). Jobs at Tim Hortons and Wal-Mart won't help our national productivity performance.

A few jobs have been created in petroleum, but not nearly enough – barely one for every 20 lost manufacturing jobs. And here is Canada's dirtiest productivity secret of all: Output per person in mining, including petroleum, is plunging, down 20 per cent since 2003, as profit-obsessed companies throw caution to the wind in their rush to develop incremental deposits.

In short, Canada's negative productivity growth under the Harper government has its roots in a deeper, longer-term trend: our emerging role as resource supplier to other, more advanced economies, and the abandonment by policy-makers of the pro-active tools that, until 1984, helped us boost productivity and diversify our economy.

Trouble is, the Harper government celebrates this pigeon-hole, and calls for more of the same: more free trade, more tax cuts, more deregulation. And that will undoubtedly give us more of the same on the productivity front. Namely, nothing much at all.

Jim Stanford is an economist for the Canadian Auto Workers and author of Economics for Everyone

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