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Why is our standard of living progressing so slowly?

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As a general rule, the old industrialized countries, already rich, see their standard of living increase much more slowly than the others, and vice versa.

In itself, this is hardly surprising. Developing countries like Estonia are increasing their standard of living much more than others like Austria. They are catching up with the wealthy as they upgrade their workers to modern practices, with the investments to make it happen.

The problem is that Canada and Quebec, for several years, have been lagging behind the other rich countries to which they compare themselves. And that at the rate things are going, this trend will not weaken in the next 40 years, on the contrary.

A recent OECD study ranks Canada 26and rank out of 38 for GDP per capita growth since 2007. Worse: Canada will fall to 38and and last rank by 2030 and will maintain this last rank for the next 30 years. In other words, Canada will become poorer compared to other countries like Denmark, South Korea, the United States, etc. Ouch!

The annual difference is not always very large. In countries similar to Canada, such as Austria or Norway, the standard of living is expected to grow by 0.8% per year by 2030, compared to 0.7% for Canada, according to the OECD study . It is essentially explained by the weak growth of one of the main components of the standard of living: labor productivity.⁠1.

Little by little, this gap eats away at our economy and therefore our ability to finance our public services, such as health and education. Above all, this gap is very large with our main competitor: the United States.

Indeed, Statistics Canada drew up a portrait of Canada-United States productivity on March 4. The finding is striking.

By combining the years 2020 and 2021, a question of avoiding the roller coaster of the pandemic, we see that in Canada, labor productivity in businesses grew by 0.3% per year, on average. In comparison, in the United States, productivity has increased by 1.9% per year!

You will tell me that the Americans turned a blind eye to COVID-19 patients, unlike Canada. Very good. Except that during the three years preceding the pandemic, productivity there rose by 1.5% per year, on average, compared to 1% in Canada.

Why are Canada and Quebec dragging their feet? For several years, the main reason invoked has been the too low level of business investment.

The standard of living has made some gains despite the anemic productivity of our businesses, particularly in Quebec, but it is thanks to the massive increase in women’s work, helped by reduced-contribution daycare centres.

Chrystia Freeland is trying to apply the same family policy to the rest of Canada, but in Quebec, future gains are now limited, since we have almost reached the maximum in this regard.

In its study, the OECD argues that the aging of the population will have major effects on the weak growth in the standard of living. And the report argues that an increase in the normal retirement age (typically 65) would lessen its impact.

Labor shortage

The public policies of our elected officials also have effects on long-term productivity and standard of living. And in Quebec, the question of productivity is all the more crucial as the economy is facing a serious labor shortage.

In a study published last week, the Center for Productivity and Prosperity (CPP), of HEC Montreal, maintains that this shortage will not be resolved with policies for training and requalifying workers. For the CPP, it is rather necessary to increase the productivity of organizations and reduce their tax burden.

Not only would productivity make it possible to produce more with fewer employees, in particular thanks to better equipment, but it would allow companies to generate more profits, which they could use to raise salaries and attract staff, argues the CPP.

The problem is that these productivity gains have been lacking in recent years and it is not possible to draw any fruit from them in the short term.

To help companies finance wage increases to attract workers, in addition to increasing their investments, the CPP therefore suggests abolishing the mandatory contribution to the Health Services Fund. This payroll tax, the highest in Canada, costs businesses some $4 billion a year⁠2.

Another suggestion to stem the labor shortage, and therefore increase our standard of living: gradually end subsidies on the salaries of employees in companies.

These subsidies, paid in particular to the computer and video game sectors, have the effect of stimulating the demand for employees for these sectors and accentuating the shortage. In 2020, Quebec paid out $2.1 billion in tax credits targeting salaries, according to the CPP.

This policy might have made sense 25 years ago, when Bernard Landry launched it, but today it hurts more than it helps.

1. The standard of living is measured by the gross domestic product (GDP) per capita, while labor productivity corresponds rather to the GDP per hour worked. The two are similar, since it suffices to know the work effort of the inhabitants (rate of hours worked per inhabitant) to deduce the standard of living from productivity.

2. In 2015, the CPP reviewed several studies according to which these payroll cuts have the effect of reducing salary increases significantly.



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