Despite an increasingly educated and well-trained labour force, Canada’s productivity growth over the past 25 years has been sluggish due to a lack of investment in physical capital, according to a Conference Board of Canada report.

“Canada’s slow productivity growth over the last 25 years cannot be attributed to its labour force,” says Alan Arcand, a principal research associate with the Conference Board. “Labour quality has improved steadily since 1961.” He explains that capital intensity—which grew rapidly in the ’60s and ’70s—slowed between 1983 and the mid-2000s. “It’s therefore no surprise that Canada’s productivity growth also began to slow around the same time and pales in comparison to other developed countries.”

The Board’s report, Canada’s Lagging Productivity: The Case of a Well-Educated Workforce Lacking the Much-Needed Physical Capital, analyzes the evolution of Canada’s human and physical capital from 1961 to 2008 and compares the relationship between the two. It finds that Canada has a very high proportion of college- and university-educated workers in the labour force compared with other developed countries.

While the study does not claim that Canada’s education level is optimal, it illustrates a need for further investment in physical capital to maximize the existing potential of the labour force.

According to the report, empirical evidence suggests that a more educated labour force should spur investment in physical capital, which enhances its productivity potential. Canada’s capital-to-labour ratio is weaker than it should be, given the high levels of education. The country’s labour productivity grew by an average of 2.8% annually from 1962 to 1983, but slowed to an average of 1.3% between 1984 and 2008.

The Conference Board offers five potential reasons to help explain the slow growth in the capital-labour ratio:

• the introduction of the capital tax by the federal government in 1985;
• fluctuations in the exchange rate;
• an underperforming Canadian venture capital market;
• insufficient public infrastructure investment; and
• burdensome government regulations.

“Most of the issues hindering productivity growth can be tackled by Canadian governments and businesses expediently,” says Arcand. “Tax reform alone would go a long way toward securing a better economic future for Canada.”

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