Productivity and Prosperity in Quebec Overview

Transcription

1 Productivity and Prosperity in Quebec 2014 Overview

2 Editor-in-Chief Robert Gagné Director of the Centre for Productivity and Prosperity Contributors Jonathan Deslauriers, writer Jonathan Paré, professional researcher Production Co-ordinator Liette D Amours Translators Pamela Ireland Terry Knowles French revisers Josée Bolduc Louise Letendre Computer graphics Brigitte Ayotte, Ayograph Productivity and Prosperity in Quebec 2014 Overview is an initiative of the HEC Montréal Centre for Productivity and Prosperity. The HEC Montréal Centre for Productivity and Prosperity, created in 2009, has a twofold mission. First of all, it is devoted to research on productivity and prosperity, mainly in Quebec and in Canada as a whole. The Centre then shares its research findings, making them widely accessible and, in the end, educating people about productivity and prosperity. For more information on the Centre or for additional copies of this study, visit or write us at info.cpp@hec.ca. Mailing address: Centre for Productivity and Prosperity HEC Montréal 3000 chemin de la Côte-Sainte-Catherine Montreal, Quebec H3T 2A7 Canada Telephone: Legal deposit: 4 th quarter 2014 ISBN : (print version) ISBN : (PDF version) Legal deposit: Bibliothèque et Archives nationales du Québec, 2014 Legal deposit: Library and Archives Canada, 2014 This publication was produced with financial support from the Ministère des Finances du Québec. Cette publication est aussi disponible en français, à Centre for Productivity and Prosperity, HEC Montréal This document was printed with plant-based ink on 100% recycled post-consumer fibre, produced with biogas energy. The paper is also EcoLogo and Processed chlorine free certified. Cover photo: istockphoto/graffizone

3 Productivity and Prosperity in Quebec 2014 Overview

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5 TABLE OF CONTENTS Introduction 6 CHAPTER 1 PRODUCTIVITY AND STANDARD OF LIVING, AN UNDENIABLE CAUSE AND EFFECT RELATIONSHIP 7 Economic prosperity: how does Quebec measure up? 8 Anemic growth over three decades 12 Where does the standard of living come from? 14 Productivity: a fundamental economic lever 17 CHAPTER 2 Productivity: a lever for increasing quebeckers incomes 23 Standard of living growth: powerful repercussions 24 Productivity and compensation: basic income components 24 The standard of living, a determinant of household consumption 26 The vicious circle of Quebec productivity 31 Cumulative underperformance with serious consequences for Quebec households 32 Conclusion 40 Productivity and Prosperity in Quebec 2014 Overview 5

6 INTRODUCTION In keeping with a tradition started in 2009, the Centre for Productivity and Prosperity publishes an annual Overview examining the key issue of prosperity in Quebec. Looking at the central themes of the concepts of productivity and the standard of living, year after year this series of publications has pursued the same objective: to examine productivity and standard of living trends in Quebec and suggest ideas for improving Quebeckers standard of living. Now in its sixth edition, this year s Overview is divided into two sections. As in previous years, the first section is a thorough analysis of labour productivity and standard of living trends in Quebec. In addition to comparing the province s performance with the 20 main OECD countries and the other Canadian provinces, the analysis identifies the factors underlying the growth in the standard of living in countries where there has been a significant increase: labour productivity, work intensity and employment rate. As a result, we see that, in the long term, labour productivity growth is the only lever that enables a society to achieve a lasting increase in its standard of living. The second section builds on the first, analyzing trends in Quebec households disposable income and explaining how GDP growth is beneficial for households. This section also addresses an important question concerning Quebec s relative performance: is there a cost of living gap that could compensate for Quebec s lower standard of living? Drawing on a Statistics Canada measurement that makes it possible to properly calculate the cost of living in the 10 Canadian provinces, we compare the situation of Quebec households with that in other provinces while taking into account this possible cost of living gap. The analysis shows that, even if the cost of living is in fact lower in Quebec than elsewhere in Canada, the benefit of lower prices rapidly disappears. In closing, we should mention that in addition to Productivity and Prosperity in Quebec Overview, the Centre for Productivity and Prosperity conducts various research projects on productivity and the standard of living in Quebec and throughout Canada, their trends and determinants. All our studies are published, some in English, and available free of charge. Interested readers can consult our website at for information on all our publications. 6 Productivity and Prosperity in Quebec 2014 Overview

7 CHAPTER 1 PRODUCTIVITY AND STANDARD OF LIVING, AN UNDENIABLE CAUSE AND EFFECT RELATIONSHIP

8 ECONOMIC PROSPERITY: HOW DOES QUEBEC MEASURE UP? To be able to evaluate Quebeckers prosperity, we have to be able to measure it. There are very few adequate indicators, however, for evaluating and comparing a country s wealth. Either they are not systematically comparable among the countries in question, or they are not totally objective. The standard of living, measured by gross domestic product (per capita GDP), is one of the rare measurements that can be used to concretely evaluate a country s economic prosperity. In the same way as a household s wealth is determined on the basis of family income, GDP is used to determine a country s wealth by adding up all the revenue generated in the country over the space of a year. In short, GDP measures the wealth produced by households, businesses and governments over one year. By dividing this wealth by the population, we get a per capita measurement that can be used to directly compare the economic prosperity of two countries of different sizes. 1 Nonetheless, this measurement of economic prosperity tells us little about the quality of life or how this wealth is distributed among citizens. In short, people in two countries with identical standards of living can in theory have diametrically opposed qualities of life. For instance, one individual may hold 99% of the wealth produced in economy A, whereas in economy B the same wealth may be shared evenly among citizens. In the end, the standard of living in the two countries would be similar, but their citizens would have vastly different qualities of life. While there is no such gap in the countries with which we compare Quebec, we must keep in mind that the standard of living as measured by per capita GDP is primarily an indicator of an economy s ability to generate wealth, rather than of quality of life. Now, when we compare the standard of living in Quebec with that in the other Canadian provinces and OECD member countries 2 (Figure 1), the unavoidable conclusion is that Quebec is lagging in terms of economic prosperity. With a standard of living of $44,499 per capita in 2013, only seven countries and provinces out of the thirty analyzed had standards of living lower than that in Quebec. This finding is worrisome, to say the least, if we consider that two of the four countries ahead of Quebec in this ranking are facing severe economic problems 3 and that in Canada only the Maritime provinces have standards of living lower than Quebec. 1 For instance, Switzerland and the United States have very different GDPs: CA$537 billion for Switzerland and CA$20,746 billion for the United States. In other words, the American economy is about 39 times larger than the Swiss one. But Switzerland has a smaller population than the US, as there are approximately 40 Americans for every Swiss. In the end, when their countries respective wealth is reduced to a common basis of per capita GDP, it can be seen that the two countries have similar standards of living: $66,927 per capita in Switzerland and $65,555 per capita in the United States.. 2 the OECD countries used in our analysis were chosen mainly according to what historical data was available, since our study covers the years from The OECD has 34 member countries, i.e. the 20 selected countries plus Austria, Chile, the Czech Republic, Estonia, Greece, Hungary, Israel, Luxembourg, Mexico, Poland, Portugal, Slovakia, Slovenia and Turkey. 3 italy and Spain. 8 Productivity and Prosperity in Quebec 2014 Overview

9 FIGURE 1 STANDARD OF LIVING AT PURCHASING POWER PARITY IN 2013 (PER CAPITA GROSS DOMESTIC PRODUCT IN 2013 CANADIAN DOLLARS) 46,948 44,932 44,791 44,499 43,450 42,982 42,216 41,514 41,001 40,351 39,779 54,844 54,026 53,890 53,870 53,816 53,715 53,031 52,289 51,965 51,340 50,121 49,362 49,261 48,461 84,390 81,057 75,229 67,839 66,927 65,555 Alberta Norway Saskatchewan Newfoundland and Labrador Switzerland United States Australia Germany Denmark Canada Sweden Netherlands Ireland OECD Average Belgium Ontario British Columbia Iceland Finland Manitoba France Japan United Kingdom Quebec Italy New Zealand New Brunswick Nova Scotia South Korea Spain Prince Edward Island Source: This standard of living ranking illustrates the impact of natural resource exploitation on economic prosperity. In 2013, the four economies with the highest standards of living obtained much of their GDP from their natural resources. 4 Alberta, Norway, Saskatchewan and Newfoundland and Labrador all had standards of living of up to 1.9 times higher than Quebec. 4 in 2010, natural resource exploitation accounted for about 41% of GDP in Newfoundland and Labrador, 33% in Saskatchewan, 27% in Alberta and 30% in Norway. By way of comparison, natural resource exploitation accounted for 7% of Quebec GDP in The industries linked to the exploitation of natural resources are agriculture, forestry, hunting and fishing, mining, oil and gas, and public utilities such as electricity production, transmission and distribution and natural gas distribution. Productivity and Prosperity in Quebec 2014 Overview 9

10 The analysis also underscores the fact that a number of economies sharing some characteristics with Quebec are in much better shape. For instance, Sweden, the Netherlands and Denmark have standards of living 21% higher than Quebec. Yet these are small economies, where the government plays just as large a role as it does here. In other words, the high level of government intervention in Quebec does not justify the province s low prosperity. If we refocus our analysis on the Canadian provinces, Figure 1 emphasizes the wide standard of living gaps within Canada. While the provinces that owe much of their GDP to natural resources are at the top of the heap, some other provinces are at the bottom. Alberta, Saskatchewan and Newfoundland and Labrador occupy three of the four top spots in the ranking, while New Brunswick, Nova Scotia and Prince Edward Island hold three of the bottom five positions. The conclusions to be drawn from this are worrisome: not only is Quebec one of the poorest provinces, but there is a substantial gap between Quebec and the Canadian average ($53,870 per capita). n WHAT DOES PURCHASING POWER PARITY MEAN? When we make economic comparisons among different countries, we have to be sure that we are comparing their performance in a common currency. The underlying objective is quite simple: knowing that the per capita GDP of Sweden was 379,249 kronor in 2013 is not very useful if we are trying to evaluate Quebec s relative performance ($44,499 per capita). To properly compare these two economies, we must first convert their national currencies to a common currency. There are two ways of doing this. Market exchange rate We can start by converting data using the official exchange rate, meaning the rate at which a bank would convert your dollars if you travelled outside Canada. For instance, when this report was written, the exchange rate for Swedish currency was 6.33 SEK to the Canadian dollar. Using this rate, the per capita GDP in Sweden, measured in Canadian dollars, would be $59,913. While this approach has the advantage of being simple to use, it also has some serious flaws. Official exchange rates are subject to sharp and sometimes drastic fluctuations. These short-term variations may be completely unrelated to the country s actual economic conditions and could bias international comparisons. 10 Productivity and Prosperity in Quebec 2014 Overview

11 More important still, official exchange rates do not take account of the differences in the cost of living between the countries being compared. Suppose, for instance, that a Swede has to pay twice as much as someone in Quebec for rent and groceries. What then are we to conclude concerning the respective standards of living of these two countries? Clearly the official exchange rate conversion does not take account of the large difference in the purchasing power of the two currencies (i.e. the quantity of goods and services one can buy with a dollar in comparison with a Swedish krona). Purchasing power parity exchange rate To avoid this kind of problem, some organizations like the OECD publish purchasing power parity exchange rates. In simplified terms, these exchange rates take account of differences in standards of living, by measuring the purchasing power of different currencies based on a standard basket of goods. Purchasing power parity exchange rates thus compare the amount of the national currency required to buy a specific quantity of goods and services, giving an exchange rate that compensates for the differences in prices from one country to another. For example, in 2013, the purchasing power parity exchange rate between Sweden and Quebec was 7.05 SEK per dollar. In other words, with 7.05 SEK one could buy the same quantity of goods in Sweden as with one dollar in Quebec. To properly understand what is hidden behind this conversion, suppose that someone living in Quebec wanted to move to Sweden and converted all her personal wealth into Swedish kronor. At the official exchange rate, she would receive 6.33 SEK per dollar. If the price level were the same in the two economies, this exchange rate would make it possible for her to buy exactly the same amount of goods and services once she had moved to Sweden. In fact, the cost of living is slightly higher in Sweden. It takes 7.05 SEK to purchase the amount of goods that one dollar could buy in Quebec. Consequently, her personal wealth would be insufficient to buy the same quantity of goods and services once it was converted into kronor at the market rate. Between provinces While similar price discrepancies may exist in theory among the 10 Canadian provinces, we cannot take them into account when making international comparisons. Prices have to be standardized in a single basket of consumer goods for all 10 provinces so as to obtain a single purchasing power parity rate for Canada. Productivity and Prosperity in Quebec 2014 Overview 11

12 ANEMIC GROWTH OVER THREE DECADES Overall, Figure 1 reveals that Quebec s lagging economy is cause for concern. Not only is the standard of living in the province lower than in many other provinces, but Quebec is ahead of only a small number of countries. Readers will not be surprised to learn that the roots of Quebec s lower standard of living lie in its sluggish economy. As shown in Figure 2, Quebec s standard of living grew much more slowly between 1981 and 2013 than that of many Canadian provinces and the selected OECD countries. FIGURE 2 TRENDS IN STANDARD OF LIVING BETWEEN 1981 AND 2013 (1981 = 100) Maritime provinces Ontario Quebec British Columbia OECD 20 Manitoba Alberta-Saskatchewan-Newfoundland and Labrador Source: 12 Productivity and Prosperity in Quebec 2014 Overview

13 Over this period, the standard of living in Quebec rose at an annual average rate of 1.23%, for overall growth of 48%. By comparison, the standard of living of the 20 OECD countries was up by 1.69% annually since 1981, for overall growth of 71%. Since Quebec s standard of living was practically on a par with the OECD countries in 1981, this means that a considerable gap developed over the past 30 years. The situation is no different when we compare GDP growth in Quebec with that in the other provinces. Out of the 10 Canadian provinces, only Ontario (47% or 1.22% annually) and British Columbia (34% or 0.92% annually) posted lower growth than Quebec. In both cases, the consequences of this weaker growth were partly offset by the fact that the standard of living was 16 to 25% higher than in Quebec in the early 1980s. Everywhere else, growth in the standard of living outpaced growth in Quebec. Provinces that rely on natural resources, in particular, posted growth of 69%, for an average annual increase of 1.65% while in Manitoba, the overall increase was 58%, or an annual average of 1.44%. The Maritime provinces also did well, with an overall increase of 72% or an annual average of 1.71%. Note, however, that in 1981, the average standard of living in these provinces was 19% lower than in Quebec, so this exceptional performance was due mainly to an economic catch-up effect. The fact remains that growth there was 1.5 times faster than in Quebec. In other words, Quebec is facing a daunting challenge. Not only is its standard of living lower than elsewhere, but it is not growing. The province will have to step up its efforts if it hopes to bridge the gap that has developed over the years. n Gross domestic product (GDP) measures the wealth produced by households, businesses and governments over a given year. Productivity and Prosperity in Quebec 2014 Overview 13

14 WHERE DOES THE STANDARD OF LIVING COME FROM? At this point, one observation sums up Quebec s situation fairly well. Not only is its standard of living closer to that of the Maritime provinces than to the Canadian average, but growth in Quebec has been markedly slower than in those provinces. The result is that if the trend continues, as it will unless Quebec addresses the situation, the Maritime provinces will catch up to Quebec in terms of standard of living within 15 years. To reverse this trend, Quebec must accelerate its economic growth. While a wide range of solutions could be advanced for encouraging economic growth, one simple equation can be used to examine three concepts explaining where the standard of living comes from. This can help to properly guide strategies for economic recovery in Quebec. This equation, in short, assumes that the standard of living is determined by multiplying three factors: labour productivity, which measures the value of the wealth created per hour worked; work intensity, which measures the average hours worked per job; and the employment rate, which measures the number of jobs as a proportion of the total population. diagram 1 THE STANDARD OF LIVING EQUATION: THE THREE DETERMINANTS OF GROWTH STANDARD OF LIVING LABOUR PRODUCTIVITY WORK INTENSITY OVERALL EMPLOYMENT RATE GDP GDP Hours worked Number of jobs = x x Population Hours worked Number of jobs Population Based on this equation, Table 1 shows to what extent each component affects the standard of living of the 20 OECD countries and 10 Canadian provinces for First, the analysis shows us that labour productivity plays a key role in determining the standard of living. We can see that the top-ranked countries and provinces in terms of standard of living have remarkably high labour productivity. This is the case in particular for Alberta, Norway, Saskatchewan, Newfoundland and Labrador, Switzerland and the United States, which have labour productivity rates 26 to 94% higher than in Quebec ($55.40 per hour worked). On the other end of the scale, we can see that the countries or provinces with the lowest standards of living mostly have relatively low labour productivity. This is the case for Prince Edward Island, for instance, with productivity of $45.03 per hour worked, leaving it at the bottom of the standard of living ranking. 14 Productivity and Prosperity in Quebec 2014 Overview

15 table 1 COMPOSITION OF THE STANDARD OF LIVING AT PURCHASING POWER PARITY IN 2013 Standard of living Labour productivity Work intensity Employment rate GDP / Population Rank GDP / Hour Rank Hours / Job Rank Jobs / Population Rank Alberta 84,390 1 = x 1,827 3 x 56.65% 2 Norway 81,057 2 = x 1, x 53.58% 4 Saskatchewan 75,229 3 = x 1,777 6 x 52.43% 6 Newfoundland and Labrador 67,839 4 = x 1,806 5 x 43.14% 25 Switzerland 66,927 5 = x 1, x 60.32% 1 United States 65,555 6 = x 1,847 2 x 47.66% 21 Australia 54,844 7 = x 1, x 48.89% 18 Germany 54,026 8 = x 1, x 50.97% 10 Denmark 53,890 9 = x 1, x 49.39% 17 Canada 53, = x 1, x 51.40% 8 Sweden 53, = x 1, x 48.68% 20 Netherlands 53, = x 1, x 51.14% 9 Ireland 53, = x 1,815 4 x 40.54% 28 Belgium 51, = x 1, x 40.94% 26 Ontario 51, = x 1, x 51.91% 7 British Columbia 50, = x 1, x 50.91% 12 Iceland 49, = x 1, x 54.01% 3 Finland 49, = x 1, x 45.76% 24 Manitoba 48, = x 1, x 52.54% 5 France 46, = x 1, x 40.85% 27 Japan 44, = x 1, x 50.88% 13 United Kingdom 44, = x 1, x 46.67% 23 Quebec 44, = x 1, x 48.86% 19 Italy 43, = x 1,752 9 x 39.86% 29 New Zealand 42, = x 1,760 8 x 50.67% 14 New Brunswick 42, = x 1,767 7 x 47.14% 22 Nova Scotia 41, = x 1, x 49.56% 16 South Korea 41, = x 2,163 1 x 49.91% 15 Spain 40, = x 1, x 37.57% 30 Prince Edward Island 39, = x 1, x 50.93% 11 Source: Productivity and Prosperity in Quebec 2014 Overview 15

16 The conclusions are more nuanced when we look at the roles played by work intensity and the employment rate. On the one hand, countries like Norway and Switzerland have high standards of living although their work intensity is particularly low. The employment rate in these countries is high, however, offsetting the low number of hours worked per job. On the other hand, the relatively low employment rate in the United States or Newfoundland and Labrador is offset by high work intensity, allowing these two economies to maintain standards of living similar to that of Switzerland. In short, it is difficult to definitively assess the impact of these two components on the standard of living. A low employment rate may be offset by more hours worked, while lower work intensity can be offset by greater labour market participation. That being said, one fact remains: while productivity is a prerequisite for economic prosperity, the importance of the other two components cannot be ignored. We only have to look at the case of France to see that high labour productivity cannot make up for a very low employment rate and work intensity (40.85% and 1,478 hours per job, respectively). Table 1 is perfectly clear: while high labour productivity is a sine qua non for a high standard of living, the economy must also maintain a high employment rate and work intensity above a certain level for the virtuous circle of productivity to function. Unfortunately, the analysis shows that Quebec ranks toward the bottom in each of the components of the standard of living equation. Its labour productivity is lower than in the vast majority of the countries (22 nd ), its work intensity is among the weakest (22 nd ) and its employment rate is far from exceptional (19 th ). Under the circumstances, it is not surprising that Quebec s standard of living is lower than elsewhere. n The standard of living as measured by per capita GDP is an indicator of an economy s ability to generate wealth, rather than of quality of life. 16 Productivity and Prosperity in Quebec 2014 Overview

17 PRODUCTIVITY: A FUNDAMENTAL ECONOMIC LEVER If we apply the logic of the standard of living equation, Quebec has three ways to correct this situation: improve labour productivity, boost work intensity, and increase the number of jobs. Unfortunately, there are some obstacles limiting Quebec s options. On the one hand, the province has little room to manoeuvre when it comes to increasing the employment rate, since it is partly a demographic component over which it has very little control. It is also very difficult to increase the number of hours worked. Although this approach could hypothetically be used to increase the standard of living in the short term, it must be understood that is blocked by a substantial structural barrier. The different labour standards and agreements in place and the work culture specific to each economy make this kind of change difficult. In the end, labour productivity is the only lever for producing lasting improvement in a society s standard of living without affecting workers quality of life and choices. The idea behind increasing productivity is simple: do more with the same resources. It is worth looking at the example of Sweden to see just how much of an impact productivity can have. In 2013, work intensity in Sweden (1,607 hours per job) was slightly lower than in Quebec (1,644 hours per job), while the employment rate there was almost the same (approximately 49%). Despite these similarities, the standard of living in Sweden was 21% higher than in Quebec. The explanation is simple: Swedes benefit from greater labour productivity. In 2013, every hour worked in Sweden generated $13 more than an hour worked in Quebec, allowing Sweden to rank among the top countries in terms of standard of living even though it was below average in terms of employment and work intensity. The standard of living equation can also be used to illustrate the fundamental role of labour productivity in boosting the standard of living (see Understanding standard of living growth, p. 20). First of all, our analysis shows that labour productivity was the main driver of standard of living growth in Canada and in the OECD between 1981 and 2013 (Table 2, p. 18). Over this period, productivity accounted on average for 96% of the increase in the standard of living observed in the 30 selected economies. This trend also applies in Quebec. While the absolute increase in the standard of living was lower than elsewhere only British Columbia and Italy did worse it can be seen that most of the increase in the standard of living observed between 1981 and 2013 was attributable to rising labour productivity. Accordingly, out of an actual per capita increase of $14,453 in the standard of living, 85% or $12,215 was due to growth in labour productivity. Productivity and Prosperity in Quebec 2014 Overview 17

18 TABLE 2 SOURCES OF STANDARD OF LIVING GROWTH BETWEEN 1981 AND 2013 (Per capita gross domestic product in 2013 Canadian dollars) Variation in the standard of living between 1981 and 2013 Share of the variation in the standard of living attributable to a change in: Labour productivity Work intensity Employment rate Newfoundland and Labrador 39,941 27,683 2,464 14,721 Norway 35,563 35,687 6,711 6,587 South Korea 33,875 33,210 5,546 6,211 Ireland 33,567 33,679 6,429 6,317 Saskatchewan 33,184 27,720 2,802 8,266 Alberta 28,717 26,830 2,361 4,248 United States 27,562 25, ,067 Australia 23,398 21,299 3,499 5,598 Sweden 22,578 22,681 2,252 2,354 Germany 21,370 23,673 8,714 6,411 United Kingdom 21,350 19, ,775 Finland 21,236 28,365 4,039 3,090 Netherlands 21,033 17,295 4,991 8,729 Denmark 19,844 23,174 3, Belgium 19,626 18,971 2,881 3,536 Japan 18,968 25,480 6, Canada 18,390 16,539 2,656 4,507 Prince Edward Island 18,339 12,561 2,234 8,012 New Brunswick 18,164 11, ,568 Switzerland 17,795 13,479 2,073 6,389 Manitoba 17,747 16,337 2,851 4,262 Iceland 17,243 19,415 3, Spain 17,046 15,707 3,737 5,076 Nova Scotia 16,704 12,154 2,496 7,046 Ontario 16,472 17,251 2,456 1,677 France 16,002 23,294 7, New Zealand 15,012 15,752 1,955 1,214 Quebec 14,453 12,215 3,282 5,520 British Columbia 12,674 11,752 2,276 3,198 Italy 11, ,324 1,984 Source: 18 Productivity and Prosperity in Quebec 2014 Overview

19 It can be seen that work intensity contributed negatively to standard of living growth in Quebec, and this points up a discouraging trend: the average number of hours worked per job has seen a net decline since Quebec is not alone in this regard, however, since the vast majority of economies recorded a drop in work intensity between 1981 and Out of the thirty economies analyzed, only Sweden and the United States saw increases in work intensity. Note that Sweden is bucking the trend in this connection. In 1981, work intensity there was only 1,522 hours worked per job, leaving Sweden last in the ranking of selected countries and provinces. For the United States, the effect is marginal, since the average hours worked is quite similar today to that observed in the early 1980s (1,818 hours worked per job). n Labour productivity is the only lever for achieving a lasting increase in a society s standard of living without affecting workers quality of life and choices. The idea behind boosting productivity is simple: do more with the same resources. Productivity and Prosperity in Quebec 2014 Overview 19

20 n UNDERSTANDING STANDARD OF LIVING GROWTH By simply switching the standard of living equation around, we can determine how much each determinant contributes to standard of living growth over a given period. For instance, we saw that Quebeckers standard of living rose by 48% between 1981 and 2013, for average annual growth of 1.23%. Overall, the per capita standard of living in Quebec rose from $30,046 to $44,499, for a per capita increase of $14,453. The breakdown shows that 85% of this growth was due to an increase in labour productivity, i.e. $12,215 per capita out of a per capita increase of $14,453. The logic underlying this increase is simple: as the value generated by work rises, Quebec gets richer. In other words, labour productivity acts in the same way as workers wages. The higher their hourly wages, the richer they become. The growth in employment also helped to improve Quebeckers standard of living. Close to 38% of the increase in the standard of living ($5,520 per capita) observed since 1981 is attributable to an increase in labour market participation. Once again, the logic behind this increase is simple: the greater the proportion of the population holding a job, the wealthier the province becomes. So far, two of the three determinants explain 123% of the increase in the standard of living. This means that the third factor, work intensity, must have contributed negatively to standard of living growth in Quebec. Between 1981 and 2013, work intensity, or the number of hours worked on average per job, reduced standard of living growth by $3,282 per capita. All in all, this decrease means that the number of hours worked on average per job fell. Just as an increase in employment boosts collective wealth, a decline in the hours worked for these jobs reduces the wealth generated by the work. 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, ,000 4,000 6,000 Variation in labour productivity Per capita $12,215 Variation + in labour + employment = intensity Per capita $3,282 Variation in rate Per capita $5,520 Variation in standard of living Per capita $14, Productivity and Prosperity in Quebec 2014 Overview

21 At this point, we understand that Quebec s lagging economic performance is largely attributable to its weak labour productivity growth. Figure 3 is very informative in this respect. It shows that the province has among the weakest rates of growth in labour productivity. Only three economies under-perform Quebec s average annual growth of barely 1.04%: Switzerland (0.73%), Italy (1.02%) and British Columbia (0.85%). As a result, the average annual growth in Quebec s standard of living between 1981 and 2013 was just 1.23%, one of the lowest among the 30 selected economies. figure 3 LABOUR PRODUCTIVITY AND STANDARD OF LIVING GROWTH BETWEEN 1981 AND 2013 (AVERAGE ANNUAL GROWTH EXPRESSED AS A PERCENTAGE) 6% South Korea 5% Standard of living (GDP in 2013 Canadian $ per capita) 4% 3% 2% Prince Edward Island Netherlands Nova Scotia New Brunswick Belgium Saskatchewan Australia Spain United States Newfoundland and Labrador Switzerland Norway United Kingdom Quebec Finland Germany Japan British Columbia Sweden France 1% Denmark Italy Iceland Canada New Zealand Alberta Manitoba Ontario 0% 0% 1% 2% 3% 4% 5% 6% Ireland Labour productivity (GDP in 2013 Canadian $ per hour worked) Source: Productivity and Prosperity in Quebec 2014 Overview 21

22 The conclusion is very clear: in the long term, standard of living growth inevitably calls for an increase in labour productivity. Consequently, Quebec is facing a substantial challenge. If it wishes to bring its standard of living up to an acceptable level, it will have to considerably increase its performance in terms of productivity, to close the widening gap with other economies. All initiatives in this direction are worth considering. The Centre for Productivity and Prosperity has proposed a number of solutions in recent years. The previous editions of Productivity and Prosperity in Quebec all emphasized the importance of Quebec s lagging performance in terms of university graduation rates as compared with many OECD countries and other Canadian provinces. Despite having one of the most financially accessible university systems in the Western world, Quebec is finding it difficult to boost university enrolment. Yet the province needs a skilled workforce to ensure its economic prosperity. The Centre has also shown that Quebec has found it difficult to stimulate business investment in machinery and equipment. This is an important vector of productivity. Since improvements in production equipment like industrial machinery, computer hardware and telecommunications lead directly to improvements in workers output, the underinvestment we have seen in Quebec inevitably hinders productivity growth and consequently reduces GDP growth. A lower business tax burden, financed by reducing government assistance to businesses, is one possible way of stimulating this kind of investment. At present, Quebec companies bear a much heavier tax load than their counterparts in neighbouring economies. At the same time, government transfers to businesses are more generous than elsewhere. In other words, the government takes from all businesses to support only a few of them. In the long term, a lower tax burden financed by reducing government assistance would lead to increased income for companies, from which they could finance investment, all without affecting government revenue. Note that there are considerable savings to be had simply by focusing on the effectiveness of assistance to businesses rather than on its fairness. In other words, we must seek to encourage successful companies rather than scattering assistance over the entire sector with too many inefficient measures. The conclusions of the Centre s study on better equipping the manufacturing sector (Mieux outiller le secteur manufacturier: entre politique et adéquation des besoins) are clear: to revitalize Quebec s declining manufacturing sector, the focus must be on productivity. One of the approaches identified involves speeding up the transition from traditional to high-tech sectors, since the latter hold more promise for the future of the manufacturing sector. Note, in passing, the urgent need for improvement in this sector s performance, given its important contribution in terms of productivity. In addition to focusing on the main determinants of productivity, we must keep Quebec s particular characteristics in mind. The Centre s study on regional aspects of productivity growth (Croissance de la productivité: une perspective régionale) clearly found that the different Quebec regions make very distinct contributions to the province s productivity growth. Some, such as the resource regions, punch above their weight in the Quebec economy, while others, like Montréal, fall short of expectations. The conclusion is that efforts to improve Quebec s productivity performance must target each region s specific needs. In this connection, it must be understood that further exploiting Quebec s natural resources would lead to substantial productivity gains for the province. 22 Productivity and Prosperity in Quebec 2014 Overview

23 section 2 PRODUCTIVITY: a lever for INCREASING QUEBECKERS INCOMES

24 STANDARD OF LIVING GROWTH: POWERFUL REPERCUSSIONS The conclusions that emerge from the previous section clearly illustrate the relationship between labour productivity and the standard of living: in the long term, productivity is the only lever that makes a lasting increase in the standard of living possible. While such an increase is desirable simply from a strictly economic viewpoint, the question arises: what would an increase in the standard of living mean for Quebeckers? In concrete terms, would it benefit Quebeckers as a whole? There is no doubt about the answer: any increase in the standard of living has direct and tangible repercussions for all Quebeckers. Not only does it improve households ability to pay for their consumer spending, but at the same time they enjoy better government services, better workplaces and more and higher-quality public infrastructure. In other words, an increase in the standard of living in Quebec contributes directly to boosting Quebeckers wealth and improving their environment. The rest of this section is organized so as to show that, beyond the theory, Quebeckers would benefit in practical terms from standard of living and labour productivity gains. We will see how boosting productivity directly contributes to raising workers wages and household income available for consumption and savings. At the same time, this section will dispel a myth about the cost of living in Quebec. We will see that while in the past Quebeckers lower income in comparison with the other provinces was partly offset by a lower cost of living, this situation is now disappearing. Quebeckers have every interest in boosting their labour productivity if they want to maintain their purchasing power. PRODUCTIVITY AND COMPENSATION: BASIC INCOME COMPONENTS The main result of labour productivity growth is higher compensation for workers. Economic theory dictates that workers wages are determined by their productivity. The greater their productivity, the more their compensation increases. While the factors determining compensation are much more complex in practice, one fact remains: workers compensation increases as labour productivity rises. Figure 4 is very informative in this respect. It can be seen that the economies where compensation 5 is rising fastest are generally those with high labour productivity growth. Inversely, the economies with the smallest increases in compensation are almost always those with the lowest labour productivity growth rates. So everything indicates that the pace of growth in workers compensation is closely tied to growth in their productivity. 5 Compensation in this case refers to wages and other benefits (pensions, housing, commissions, tips, directors fees, sick pay, military pay and allowances). 24 Productivity and Prosperity in Quebec 2014 Overview

25 figure 4 LABOUR PRODUCTIVITY AND WORKERS COMPENSATION GROWTH BETWEEN 1981 AND 2013 (AVERAGE ANNUAL GROWTH IN PERCENTAGES) 6% South Korea 5% Average hourly compensation (In 2013 Canadian $ per hour worked) 4% 3% 2% Prince Edward Island Netherlands Alberta Saskatchewan United States Australia Denmark Norway France Japan Finland Ireland Canada New Brunswick United Kingdom 1% Switzerland Quebec Germany Italy Sweden Spain Belgium Manitoba Ontario Newfoundland and Labrador British Columbia Nova Scotia 0% 0% 1% 2% 3% 4% 5% 6% Labour productivity (GDP in 2013 Canadian $ per hour worked) Source: The cases of Finland and Quebec very clearly show how labour productivity influences compensation growth. Between 1981 and 2013, labour productivity in Finland rose at an annual average rate of 2.38%, one of the strongest performances among the 30 selected economies, with the result that Finnish workers have seen their actual compensation rise by 2.13% per year since Only Ireland and South Korea have done better in this respect. 6 At the other end of the scale, Quebec s weak labour productivity growth (1.04% on average per year since 1981) limited growth in workers compensation. Between 1981 and 2013, Quebec workers actual compensation rose by just 0.53% a year. Only Nova Scotia, New Brunswick and British Columbia fared more poorly. 6 in both cases, this was an economic catch-up effect. In 1981, the economies of both countries were lagging. Productivity and Prosperity in Quebec 2014 Overview 25

26 It might be tempting to minimize the significance of the gap between wage growth in Quebec, among the lowest, and that observed in Finland, among the highest. After all, the gap is merely 1.6 percentage points. It must be remembered, however, that we are referring to average annual growth. Accumulated over three decades, this gap looks quite different. In fact, between 1981 and 2013, Finnish workers average compensation doubled, while in Quebec, it rose by just 19%. As a result, while in 1981 average compensation in Quebec was 1.6 times higher than in Finland, today Finns make more, on average, than Quebeckers ($26.22 per hour worked vs $24.81, respectively). So in the end, the evidence is clear: Quebec s productivity gap has direct consequences for Quebeckers. Insofar as weaker labour productivity growth translates into lower wages, it can easily be deduced that Quebec s low labour productivity leads to lower household income, in the long term, and hence lower consumer spending. THE STANDARD OF LIVING, A DETERMINANT OF HOUSEHOLD CONSUMPTION While the close relationship between labour productivity and compensation easily illustrates the consequences of low productivity for workers, we should note that Quebec s lagging productivity affects Quebec households in more than one way. To show the influence of labour productivity on Quebeckers as a whole, we will return to the concept of standard of living, as measured by per capita GDP. Thus far, we have looked at GDP as the sum of all income generated over the course of a year. According to this approach, GDP measures the aggregate wealth created by the Quebec economy in one year. Another way of looking at it is to measure GDP by evaluating all the expenditures in the economy over the course of a year. In that case, we add up consumer spending and investment by households, governments and the private sector, and then add exports and subtract imports, to obtain the sum of the wealth created during a given year: GDP by expenditure = Household consumer spending + Consumption expenditures and investment by governments + Capital investment by the private sector + Exports Imports. Although these two methods of calculating GDP are equivalent, the expenditure approach tells us more about the benefits associated with an increase in GDP. We can see that higher GDP benefits households, which are better able to afford their consumer spending. It also benefits governments, which finance the goods and services they provide for citizens. Higher GDP helps to improve public and private infrastructures by increasing investment. While all players in the economy benefit from higher GDP, citizens are the biggest winners. Not only does GDP growth favour household consumption, but they also enjoy better government services, better workplaces and more and higher-quality public infrastructure. 26 Productivity and Prosperity in Quebec 2014 Overview

27 To illustrate the extent to which each economic player is represented in GDP, Figure 5 (see p. 28) takes the standard of living ranking presented in Figure 1, and instead considers the share of GDP attributable to household spending. Overall, it shows that household spending represents a considerable share of per capita GDP. Out of the 30 selected economies, we can see that from 41% (Norway) to 72% (Nova Scotia) of per capita GDP is attributable to household consumer spending. In Quebec, household consumer spending represented 60% of per capita GDP in 2013, or approximately $26,801 of per capita GDP of $44,499. n Between 1981 and 2013, Quebec workers actual compensation rose by just 0.5% a year. Out of the thirty provinces and OECD countries analyzed, only New Brunswick, Nova Scotia and British Columbia fared more poorly. Productivity and Prosperity in Quebec 2014 Overview 27

28 figure 5 HOUSEHOLD CONSUMER SPENDING AND STANDARD OF LIVING AT PURCHASING POWER PARITY IN 2013 (PER CAPITA GROSS DOMESTIC PRODUCT IN 2013 CANADIAN DOLLARS) 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 Alberta Norway Saskatchewan Newfoundland and Labrador Switzerland United States Australia Germany Denmark Canada Ireland 10,000 0 Sweden Netherlands Belgium Ontario Household spending British Columbia Finland Manitoba France United Kingdom Quebec Japan Italy Standard of living New Zealand New Brunswick Nova Scotia South Korea Spain Prince Edward Island Source: It might be tempting, in looking at this graph, to minimize the impact of a high standard of living for the public, since household spending does not necessarily increase when per capita GDP is higher. For instance, Alberta and Norway have per capita GDP almost twice that in Quebec, but their household consumer spending is only 24 to 28% higher. In short, these findings suggest that Quebec households are doing well, even though per capita GDP in the province is lower than in many economies. This assumption neglects many of the benefits of higher GDP, however. 28 Productivity and Prosperity in Quebec 2014 Overview

29 Remember that governments and the private sector also benefit from higher GDP. Public spending 7 and private investment also rise when per capita GDP increases. If we reconsider the standard of living ranking by adding the share of government and private-sector spending in GDP (Figure 6, p. 30), we can see that most of the economies with greater per capita GDP than Quebec also have higher public- and private-sector spending. That is the case, in particular, for Alberta, where per capita public spending and private investment are twice as high as in Quebec. This means that households benefit from greater GDP: their consumer spending is higher, governments have more money to pay for services and infrastructure for citizens, and the private sector contributes more by increasing its investment. n When productivity increases, it carries compensation in its wake, allowing households to spend and save more. 7 Spending by public administrations encompasses consumer spending and gross fixed capital formation (investment). Productivity and Prosperity in Quebec 2014 Overview 29

30 figure 6 STANDARD OF LIVING AT PURCHASING POWER PARITY IN 2013 BY TYPE OF SPENDING* (GROSS DOMESTIC PRODUCT PER CAPITA IN 2013 CANADIAN DOLLARS) 90,000 80,000 70,000 60,000 50,000 40,000 30,000 Alberta Norway Saskatchewan Newfoundland and Labrador Switzerland United States Australia Germany Denmark Canada Ireland Sweden Netherlands 20,000 10,000 0 Belgium Ontario British Columbia Finland Manitoba France United Kingdom Quebec Japan Italy New Zealand New Brunswick Nova Scotia South Korea Spain Prince Edward Island Household spending Spending by public administrations Private investment Standard of living Source: * When the aggregate spending by households and public administrations and private investment exceeds the standard of living, the economy is in a trade deficit situation, i.e. the value of imports exceeds the value of exports. In the end, it can be seen that productivity creates an economic spiral. When productivity increases, it carries compensation in its wake, allowing households to consume more; it expands governments tax base, so that they can then improve their public services and infrastructure; and it increases businesses income, and they can then invest more. Since private investment is an important vector of productivity, boosting investment helps improve workers productivity, with the results we have seen. 30 Productivity and Prosperity in Quebec 2014 Overview

31 THE VICIOUS CIRCLE OF QUEBEC PRODUCTIVITY Now, if we analyze trends in per capita GDP in Quebec using the expenditure approach, we can see that Quebec households have greatly benefited from the increase in the standard of living (Figure 7). Between 1981 and 2013, household consumer spending rose from $16,700 to $26,801 per capita, for a 60% increase in real terms. Another way of looking at this is that on average every Quebecker today has about $10,100 more than in 1981 to devote to consumer spending. Figure 7 also shows that government spending and private investment have also increased since 1981, albeit by less than household consumer spending. Government spending rose from $8,729 to $13,188 per capita, for an overall increase of 51%, while private investment went from $5,115 to $7,493 per capita, for an overall increase of 47%. In short, while Quebec s performance over the past 33 years may seem satisfactory from the point of view of households, the same is not true when it comes to the province s performance in terms of investment. Because of its particularly sluggish growth, private investment is now weaker than in most OECD countries (Figure 6). This weakness has serious consequences. Since investment is an important vector of productivity, the spiral started by productivity becomes a vicious circle: the lack of private investment leads to lower productivity gains, and this reduces the aggregate growth of the Quebec economy, with predictable consequences. figure 7 TRENDS IN THE QUEBEC STANDARD OF LIVING USING THE EXPENDITURE APPROACH (GROSS DOMESTIC PRODUCT PER CAPITA IN 2013 CANADIAN DOLLARS) 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, Household spending Spending by public administrations Private investment Standard of living Source: Productivity and Prosperity in Quebec 2014 Overview 31