We all wouldn’t mind at least a little more income. And most of us would like to see that increase spread around a little more evenly. But Canadian income growth, especially at the lower levels, has been slow or stagnant. Why is this and what can we do about it?
Income doesn’t fall like rain. It is the product of the work of companies and individuals. Productivity (output per unit of input like labour or capital) is the measure of how much wealth our work generates. Unfortunately, according to the Organization for Economic Co-operation and Development (OECD) productivity growth has been slowing around the world.
But let’s concern ourselves with Canada and the economic elephant we sleep with – the United States.
Between 2004 and 2014, labour productivity in Canada grew at less than one per cent – 0.9 per cent to be exact. That puts a very low cap on how fast incomes rise. And Canada’s labour productivity in the last decade was down from 1.4 per cent in the previous decade. In the U.S., too, productivity fell in the same period, from 2.5 per cent to 1.2 per cent. But still their productivity growth is better and that helps explain why the standard of living is higher in the U.S. than in Canada – and why that gap will continue to rise.
The OECD has looked at the factors that contribute to productivity growth, concentrating first on frontier firms. Frontier firms are the ones most productive, in industries, nations or globally. It is human capital, physical capital and especially the cutting-edge technology that puts firms on the frontier. Frontier firms tend to be young and fast growing. Then the technology and productivity gains developed and applied in frontier firms need to be diffused throughout the economy.
We should have many frontier firms because so many of us at the beginning of our careers aspire to start the next Google. And we should apply quickly and broadly what we can learn from those firms. What can we do to assure more success? The OECD offers some suggestions”
- We need to foster innovation and the spread of that innovation among firms.
- We need a market economy that will facilitate that innovation and its diffusion.
- We need to put our resources, especially people, to their most productive use by making sure that the labour force has the right skills.
Policies that enhance growth in productivity include:
- Reducing barriers to the entry and exit of firms.
- Research and development (R&D) and innovation policies balanced between basic and applied research as well as between start-ups and established firms.
- Encouraging superior management practices to increase competition against less efficient firms, so that those less efficient will not continue to misuse scarce resources and keep them away from a better allocation.
- Allowing for failure through a clear procedure for bankruptcy so that firms are not excessively penalized for leaving something that is not working to try something better.
- Having well functioning markets for goods, services, labour and capital so that resources can move easily to their most productive use, supported by an efficient and effective legal system.
- Public investment in basic research, including support and incentives for researchers.
- Taking advantage of global R&D through multinational corporations and competitive tax policies.
- Being open and mobile, with goods, people and ideas able to move freely, allowing us to participate more fully in an increasingly integrated world economy.
- Increasing labour market efficiency to reduce skills mismatch.
- Minimizing unnecessary red tape, which slows down an economy.
- Maximizing lifelong learning since productivity ultimately comes from people.
New, cutting edge firms at the frontier of technology will make Canada productive and rich. We need an environment where such firms can thrive and prosper.
We need ambitious people willing to take a chance by setting up such firms and succeeding, or trying something else if success is not forthcoming. We need well-educated, hard-working, flexible people to take the good jobs those firms can provide.
And then we need to get out of their way, since they will generate the income that supports us all.
Troy Media columnist Roslyn Kunin is a consulting economist and speaker.