As Canada’s economic productivity continues to slump, economists say it presents an additional challenge to affordability when coupled with elevated inflation.

Trevor Tombe, a professor of economics at the University of Calgary, said in an interview with BNNBloomberg.ca last week that when people think about affordability issues, they often focus mainly on prices but that stagnant productivity could present a larger challenge to the economy than current inflationary pressures.

He said that if prices increase at a faster-than-normal rate, it presents problems due to reduced purchasing power. However, income growth is heavily tied to productivity. 

“While recent inflation is certainly presenting challenges to affordability, lower productivity growth [means] lower income growth and that strains us as individuals and as families,” Tombe said. 

Productivity is a measure of the number of goods or services produced in a certain time period relative to inputs used for production, according to Tombe, where higher productivity means getting more while using less for each hour worked.

Tombe said that high inflation in Canada means that price levels are now around 6.5 per cent higher than they would have been if we maintained inflation levels from January 2020 at two per cent. 

“But think about the last five years of lagging productivity growth, our incomes would be about eight per cent higher had we just kept pace with the United States,” he said. 

“Affordability, [meaning] how much stuff we can buy, is more than just prices and it’s the lagging growth [of] productivity that affects incomes to a larger degree than inflation has eroded purchasing power.”

Higher productivity growth is associated with higher living standards, Tombe said. 

Katherine Judge, a senior economist at CIBC Capital Markets, said in a note Monday that Canada’s productivity has slowed since the beginning of the COVID-19 pandemic and that high employment levels have not resulted in gross domestic product gains. 

Judge said that addressing lagging productivity could also help to reduce inflationary pressures.

“Higher productivity is a straightforward way to limit inflationary pressures, and it doesn’t come along with the negative ramifications of higher interest rates, which are currently heading to levels that will stall growth on both sides of the border over the remainder of the year,” Judge said.

Francis Fong, a managing director and senior economist at TD, said in an interview with BNNBloomberg.ca Wednesday that he doesn’t see inflationary pressures and lagging productivity as separate issues.

Instead, Fong said he sees inflation as the “affordability challenge of the moment.”

“Whereas I see the low level of productivity growth being like an added challenge to that. There's a deep connection between productivity gains and real wages,” Fong said.

“If you have low productivity growth, you're not seeing the real wage gains that are necessary to keep people above board, especially in a high inflationary environment.”

Currently, the economy faces the dual impacts of workers not “necessarily seeing real wage gains” coupled with rising costs of living, Fong said.

Despite widespread acknowledgement that lagging productivity presents a challenge to the Canadian economy, Fong said it is one that is not well understood.

“The reason why productivity is as low as it is, is [because it’s] not as well understood as we would like it to be. If we understood it deeply, we could propose policy solutions to address it,” Fong said.

Productivity is a measure of the number of goods or services produced in a certain time period relative to inputs used for production, according to Tombe, where higher productivity means getting more while using less for each hour worked.

In the first quarter of the year, Statistics Canada reported earlier this month that labour productivity of Canadian firms fell 0.6 per cent, which marked a similar decline of 0.5 per cent in the previous quarter. 

According to Statistics Canada business output continued to grow during the first quarter, coupled with growth in working hours that outpaced output growth.

Productivity fell during the first quarter for businesses producing both goods and services, Statistics Canada said. Canadian firms producing goods saw productivity decrease by 1.4 per cent in the first quarter, while service-producing businesses saw a 0.4 per cent decline in productivity.

‘CHALLENGE OF A GENERATION

Amid falling levels of economic productivity in Canada, Fong said it presents the “greatest economic challenge of a generation.”

However, he said it is more of a longer-term challenge with implications for Canada’s social programs, broader infrastructure and quality of life. Fong said the issue relates to economic sustainability and the ability to fund programs like health care and social security, which depend on “our ability to continue to grow the pie.”

The problem of continuing to fund existing programs could worsen, according to Fong, when factoring in things like the old age dependency ratio, which is the number of people working relative to older age individuals.

“That old-age dependency ratio, due to our aging population, has been falling significantly. And it's expected to continue to fall further, again,” he said.

“You can see this affordability crisis coming at us like a freight train.”

The only way to change the trajectory of the dependency ratio and address the issue, according to Fong, is through productivity growth “which also isn’t very good.”