Business Data Lab Podcast EP2
SUMMARY KEYWORDS
Canada's productivity, productivity emergency, labour productivity, capital intensity, labour composition, multi-factor productivity, negative productivity growth, GDP per hour, population growth, regulatory burdens, generative AI, investment incentives, tax environment, business adoption, economic health
SPEAKERS
Marwa Abdou, Andrew DiCapua
Marwa Abdou 00:10
Marwa, welcome to Canada's economy explained the business data lab podcast, an initiative of the Canadian Chamber of Commerce with your host. Marwa Abdu, Senior Research Director, using real time data and actionable insights, our experts and guests will break down the trends that are shaping Canada's Economic and Business landscapes to help you make better decisions. Let's dive in.
I'm really excited to dive into today's conversation. Not that you haven't heard this word a million times before we're going to tackle Canada's productivity what we're calling an emergency that's been 40 years in the making. I'm joined today by my colleague Andrew dicapua, who is senior economist at the Canadian Chamber of Commerce. Andrew and I have been working together for the better part of a year, and we could not be in better hands to have this conversation. Andrew, welcome to the show. Hey, Marwa. It's great to be here. Thank you for joining me as an economist and a researcher. Productivity is, you know, something that we talk about every day, and the pedagogy and the framing of productivity had always been not only central to our understanding of a country's economic performance, but also understanding how that country stands relative to its peers, and hearing that Canada hasn't has been kind of slipping in terms of its productivity relative to its peers. We have the data around that, and I'm really excited to kind of dig into that conversation, because with productivity, people often start with a common set of assumptions. So, you know, productivity is generally a good thing. You know that a strong economy depends on high productivity, and that the three elements that really contribute to that stronger productivity are capital intensity. So giving workers better physical tools like machinery and using technologies to improve efficiency and output have labor composition, which is really all about how we can improve workers skills and training and multi factor productivity, so using capital and labor more efficiently. But the thing is, is that there's so much that's been published about productivity, and there's a reason for that. Productivity is a bigger conversation, and one that extends beyond the numbers. The reality is, there's nuance to those assumptions, and not everyone understands productivity always in a positive light, especially if it leads to greater job losses and job insecurity at the expense of the bottom line. So whether it's due to automation or efficiency gains, the aim from really, today's episode is to level set and lay some of those foundational pieces. I don't think that this is going to be the last time that we talk about productivity on this podcast, and I don't think that it should be. There are a lot of questions to unravel, and there's a lot of data around productivity that we need to better understand and to really challenge the framing that we have on productivity and really explore the paths forward, not just the ones that are revolve around exhausting our resources, which include our land, our capital, our labor, to efficiency limits, but to perhaps think more broadly beyond performance and from the vantage point of economic health. So without further ado, I wanted to kind of bring Andrew in the conversation and ask Andrew, productivity is something that's very obviously that we talk about as economists. We have a general understanding of it. If I was coming into this conversation without an understanding of what productivity is, can you explain to me, in very simple terms, how you would define productivity?
Andrew DiCapua 04:02
It is one of those things where not a lot of people know about it. We've been hearing a lot about it in Canada recently, because we've been, unfortunately experiencing about 11 quarters of negative productivity growth. So, you know, really, in a nutshell, you know, productivity is, you know, how are we improving the way we're producing goods and services with the limited resources that we have? And a lot of people can relate to this in their everyday jobs. You know, if you've got us, you know, if you've got yourself, your knowledge and you know, you've got some equipment that you need to do to be able to produce, you know, a good or service, how much of that can you do within an hour? So that's really what it comes down to. When you actually think, when you actually look at what productivity is from a ratio perspective, it's really GDP. It's how much can we produce in the economy per hour worked, and so over time, increasing product. Activity has led to higher wages, and when you can grow the pie that is GDP, the idea is that, you know, companies are able to pay their workers more, they're able to lower prices, they're able to absorb certain shocks that come their way. And so really, that, at the end of the day is we should all want to improve that as a country. And unfortunately, since 2020 we really haven't been able to stabilize that number and also reverse its course. And so there are a lot of things contributing to that, and I'm sure we'll get into that, but that's really why it's important, and what it means.
Marwa Abdou 05:40
I think that that really sends home the understanding of what productivity is, why it's important. Now, the controversial question is, always, is productivity always a good thing? What do you think?
Andrew DiCapua 05:52
Well, going to quote a very famous economist, Paul Krugman, says, you know, “Productivity isn't everything, but in the long run, it is almost everything.” And, you know, it's, you know, I think when we, you know, as economists, or people doing this for living, we like to look at certain numbers and say things are going down. Or you can really cherry pick which economic facts you want to choose to be able to, I guess, explain what's going on in the economy. I think generally, we get fatigued with just all these sorts of numbers, right? I mean, GDP is going up, but GDP per capita is going down, but we're not in a recession. But then usually when that number goes down, we're in a recession. So I think it can get really confusing for people, it's not everything. You know, I think Canada has been in a very unique situation last year, and over the past couple years, we've had really strong population growth. We've welcomed a lot of new comers to the country. And traditionally, Canada has been really, you know, we've we've done really well in bringing in highly skilled workers to contribute to the Canadian economy, but we've had a lot of pandemic era scarring where we just haven't been able to match the newcomers that have come into the country with the jobs that they are qualified to work for. And so what's happening is we're not able to properly utilize the labor force that we have, the people that we have here, and we're just not able to put that into good use and actually create that in terms of increasing GDP, and so that sort of really unfortunately the situation that we're in right now.
Marwa Abdou 07:30
I think you bring up so many salient points. I can, at least at the top of my head, recite a number of stories of recent immigrants who have had the opportunity to speak with, and they come in and they have multiple degrees amongst them, if they're a couple or if they're on their own, you know, people with PhDs that are working jobs that are not matched to their skill level. And I think that really speaks to how much untapped potential we are leaving on the table, just in that department alone. Now I want to kind of go back. We've laid down a definition that everybody can access and understand. I wanted to kind of highlight, why are we at this critical impasse in terms of Canada's productivity? You know, the Bank of Canada has really sounded the alarm calling this a productivity emergency, that it's a crisis. So can we talk through some of these numbers and headlines? We know that Canada is the second least productive nation in the g7 labor productivity is growing at just point 9% annually over the past decade. How does that compare to the US and other economies? What are others Numbers that relate to kind of this productivity story that can help our listeners understand why this is such a big deal?
Andrew DiCapua 08:52
Yeah, we should probably at some point talk about the positives, but, you know, I'm sure we will. I think unfortunately, you know, since the pandemic, we really haven't been able to recover, and actually, we haven't been able to recover compared to our peer countries. The United States has been a little bit of an outlier, in a sense that we like to say it's been like this. US, exceptionalism, this resilience, where despite, I guess, the year, the Americans are able to attract investment the right people and are able to really utilize that. They've got a competition landscape that is just far superior to that of Canada's. I think when you look at the Canadian story, and you mentioned the sounding of the alarm from a Senior Deputy Governor of the Bank of Canada, Carolyn Rogers, at the beginning of last year. I think it's the beginning of this year, and we can officially sound the alarm again, and so maybe we can. I think a lot of people are talking about it. I think we haven't really had a thoughtful conversation how to fix it, but, but just before that, I think really in Canada, we've unfortunately or for I don't really. How we got into the situation, but we've have this over reliance on very low productive industries. We've got a lot of investment that's going to construction and real estate investment, when you look at the US in real terms. So accounting for inflation, residential investment accounts for about 3% of their GDP in Canada, it's more than double. It's about 9% in Canada, and it has, it has consistently remained around that growing since the night the 80s and 90s. And so when you look at when we're trying to attract capital from around the world as a share of GDP, we've got an over reliance on residential real estate. And it's not to say that that's not good, but if it's becoming more important than other industries, it's not really a productive part where we can grow our wealth and prosperity. And so when you look at investment in machinery and equipment, you know, non residential building and structures. So actually equipping our workers with the technology and the equipment that they need to be able to do their job. And yeah, upskilling the knowledge we are we are under investing in that. And when you account for inflation on a per worker basis, investment is around $11,000 per worker, it's back to 2004 levels. We've had these sort of peaks and troughs since we've got this under investment in Canada that's just causing a lot of issues. And I'm sure we could talk about regulatory burdens and all of that. So it's kind of a little bit of the nutshell.
Marwa Abdou 11:37
Yeah. I mean, you've touched on so many points, you know, I think I've been to rooms full of representatives from, say, the manufacturing industry, and I know this conversation in particular takes up so much space in the room, and there, there's, you know, so much to dig into that in terms of industry level considerations and regulatory barriers and under investment in specific industries. But I want to taking it back, so we now know some of the parts and pieces of why this is such a massive problem for Canada, and part of even on our first episode, when we talked about predictions for the upcoming year, this is not something new. You touched on it. It's, you know, it's been 40 years in the making, and yet we're not getting traction, and we're almost slipping worse. But I want to go back to your point and maybe touching base on some of the positives. It's not an irredeemable issue for Canada. So there's so much that we're not tapping into, but it's not inaccessible to us, and it's possible, and it's at our fingertips. So I want to dig into not just the what, but also the why of that. What can Canada capitalize on? Like, what are we really not tapping into in terms of resources? We at the business data lab published a report recently on Canada's natural wealth. So I'd love to hear a little bit more about some of the findings from that report as well, as you know, we also published a report on prompting productivity, which focused on the role of generative AI. So bring us into some of some of the points that came out of those reports. I know they're vastly different, but they touch on important points that I think are worthwhile considering.
Andrew DiCapua 13:19
Yeah, for sure, in terms of, you know what we can do, let's first paint a picture of like, which industries are the most productive. I mean, when you look at labor productivity, it's the most productive sectors are really the mining, the oil and gas extraction. You've got the tech sector, finance and insurance, wholesale manufacturing industries, some of which are very capital intensive and so require a little bit of that upfront investment to get the right equipment to be able to extract that. I think our natural resources sector, more broadly, forestry, you know, minerals, mining, oil and gas is really our strength, holds up our productivity in Canada. And if we were to remove that, our productivity would decrease and we would all be kind of worse off and poorer, unless we were to make up for that. And so there are a couple sectors that really haven't improved over the past 10 years. Per se, the construction sector really hasn't found ways to improve its productivity. And you know, in terms of what we can do about it, we really need to look at our tax and regulatory environment. I think Canadians are, you know, Canada in particular is really unfortunately good at getting in the way of ourselves, right? Yeah, right. I mean, we like to optimize for all these different objectives, but
Marwa Abdou 14:38
administrative burden is a real thing. Yeah,
Andrew DiCapua 14:42
You wrote something on small businesses Marwa. I mean, small businesses don't have time to fill up paperwork or the
Marwa Abdou 14:49
resources. Like, when you think about a business that has one or two employees, like, how are they supposed to keep up with what's happening within the business, let alone how to get the business up and running with. All of these burdens. So yeah, I think that's a huge point.
Andrew DiCapua 15:04
And the Bank of Canada asked businesses what their top challenges were, you know, and close to 40% of them in a recent survey last year said that, you know, tax and regulations are their top concern, and that that's only been increasing over the past couple quarters. So clearly, there's a sentiment in Canada where we need to re evaluate our competitiveness. We've got to spur competitiveness in a lot of different sectors. It's an investment issue, it's an attitude shift. It's a lot of different things. You know, what we can do? I mean, you know, you touched on a couple reports that we did, one of which was prompting productivity, which you can download at business datalab.ca, one of which was to talk about generative AI and how mainstream. You know this tool has become. It's now permeating so many different applications. You can, you can now, you know you can have a Word doc open, and you can, you can use artificial intelligence within your Word doc. And you know businesses are indicating that this is of significant value. Although adoption is still really low. I think we, in our report, we had 14% of businesses that were using it or planning to use it. But you can, you can, you know, I've used this, I'm sure you've used this, Marwa, in terms of helping with decision making. You can use this for, you know, operational efficiency, customer experience, these are things that businesses are saying that it's useful.
Marwa Abdou 16:24
When you think about also the role of upskilling and really teaching individuals how to fish like you have a labor force that's not only capable, that is educated, that is highly skilled, So if you were properly utilizing them in the tasks and the responsibilities that they would be best and most suited to give you the most output that they can per hour. And you free that, you know, free the rest up using the technology, when you think about the impact of that on an economy, on a per person basis, it can really send the message home of how businesses can play a role in terms of leveraging these factors of production, be it from a labor perspective, from the capital that they're investing in their business. Let me ask you kind of if you were to recommend Well, let's start with businesses. First, you touched on small businesses. You know, what steps are within the sphere of control of a small business owner, even just a general business owner. And then I also would love to hear from you on if you were kind of to talk from the policy side of things. You know, we touched on administrative burdens and regulatory barriers, even just from as info level. Touch on some of the recommendations that you read a lot on productivity. So what would you say are the top ones that really stand out to you?
Andrew DiCapua 17:49
Yeah, well, first recommendations for businesses is try a lot of this stuff is free, and it's integrated in almost every app that I see now. And so I think from the adoption perspective, one of the biggest challenges businesses are, or were telling us, when doing the report was, you know, the barriers to entry to adopting new technology, it's always it's the cost, it's they don't have time, it's all this stuff. And a lot of these tools are free, and so I think really, everyone has got to start using it, because that's going to become the competitive advantage if you, if you don't use it and adopt it, you could fall behind. So that we got to increase, you know, competitiveness in that respect, a couple ways that I use it, but also businesses have indicated as well. When we were looking at, I mean, over 70% of businesses indicated that they plan to use generative or AI on content creation, right? So it's all about creativity there, increasing automation, so getting rid of, like, the annoying tasks, right? I mean, even sometimes, you know, you draw a blank and you want to write an email to somebody just to get their opinions on something, you know, throw a couple bullets in there, get it out. If you can save like, 20 seconds, 30 seconds, a minute, here or there. I mean, you know, you feel like you've accomplished some stuff. You can move forward in your day, and you can actually get a lot more done. So from that perspective, I think that's what it is. You know, in terms of, like, the overall Canadian business environment, we really need to incentivize investment here in Canada. You've got to find ways we are never going to compete with the Americans when it comes to money, if let's just even take a look recently of, you know, the announcements coming out of the US with Stargate, you know, $500 billion in AI infrastructure investment. I mean, that is a behemoth. And even if the Canadian government wanted to try to match it, it would be really difficult, if not impossible. So, you know, really, at the end of the day,
Marwa Abdou 19:43
Bearing in mind, bearing in mind that Canada is a 10th of the size of the US.
Andrew DiCapua 19:47
That's right, right? For that, like, it's true, right? Like, but it's true. Yeah, we're never gonna win. We can, we can try to knock down some of these interprovincial traders that we've talked about. Let's try to look. At our our the way we do our tax system. You know, let's look at, how can we build competition within the country? We don't have as many people, we don't have as many businesses, but we've got smart people, we've got smart businesses, and we've
Marwa Abdou 20:13
got a diverse population that we've really, really kind of left hanging and no with the immigration thing, and this is a whole separate issue. I think part of it is there wasn't a coherent plan in terms of how we're going to bring those folks in the fold. And I think it also adds to the vast considerations that we're heading up against in terms of the challenges that Canada is facing. Many thanks Andrew for joining us in the conversation today. Andrew decapua, my colleague Andrew. You can find him and follow his economic insights through his LinkedIn. At Andrew decapua, he also does our commentaries, which are a really useful kind of synopsis of what's happening and a snapshot of what's happening in terms of inflation, in terms of economic growth, how that might be playing into the outlook ahead. So I highly recommend that you head over to his social and check his insights out. Thank you so much, Andrew.
Andrew DiCapua 21:12
Thanks for having me, Marwa and and Marwa also does a lot of great research, so I'm just going to plug her, because thank you for the plugs there at BDL, we're doing a lot of cool stuff, and it's it was great to be on so thanks for having me.
Marwa Abdou 21:25
Yeah, we're definitely very lucky to be working as a as a strong team. So BDL is up to a lot of great things, and we're really looking forward to sharing more and more of what's coming up the pipeline in the next couple of months. Now, just to summarize today's conversation, Andrew talked about the urgent need for investment and the transformative potential of generative AI. We talked about productivity and really level set where Canada is, where Canada needs to go, the importance of technology adoption, collaboration and sustainability. And we're thinking how we're going to set up our industries and our sectors to be utilized to their fullest potential and to really tap into our incredible diverse and rich labor force, which is ripe for, you know, being equipped and being offered The opportunities to put their skills into our economy and to help this country prosper and grow the way that it can. That's it for the episode. Thanks for listening. Please follow the business data lab podcast and the Canadian Chamber of Commerce for updates. Be sure to visit our website at business data lab.ca for tools and insights to help boost your business's productivity. We have dashboards galore. We have reports that really dig into what's happening in Canada and you know, including our business insights quarterly, which really offers a line of sight every quarter in terms of what's on top of businesses minds. And we have a lot that's coming out in the next couple of months. So please stay tuned and have a terrific day. Thank you so much.
Outro 23:05
Thanks for listening to Canada's Economy, Explained. Follow us for updates and visit businessdatalab.ca for free tools and insights, and be sure to join us next time.