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Canada’s Productivity Puzzle

                  In 1994, the Nobel Prize winning economist Paul Krugman once said, “Productivity isn’t everything, but in the long run it’s almost everything”.   Krugman was right then and now.  In the long run a nation’s standard of living is inextricably linked to its ability to improve productivity, or the total output per hour worked.  Higher productivity means faster economic growth, more goods and services to consume and most importantly higher real incomes for workers.  Thus, in light of its importance, it is critical to ask how Canada is doing with regards to this important economic variable.  The results are not pretty. From the end of the Second World War to approximately the mid 1970s, Canadian productivity growth roughly tracked the United States and the rest of the developed world.  However, from 1974 onwards there was a sharp divergence.  Labor productivity has grown at around 2.2% annually in the United States, but only 1.4% in Canada. The implications of this slowdown are profound: lower productivity growth has left Canadian GDP per capita stagnant at around 80% percentage of US GDP per capita.  If not addressed, this gap could have major implications for Canadian living standards, leaving future generations of Canadian’s with lower incomes and diminished economic prospects. Twenty years ago, most economists could have given you a laundry list of detrimental factors inhibiting productivity growth.  For example, large federal and provincial budget deficits that pushed up interest rates, high tax rates on corporate income and business investment, and an antiquated and inefficient sales tax system.  Nowadays, however, most of these problems have been addressed. The federal deficit was eliminated, Canada has a reasonably competitive business tax regime, and the GST replaced the export killing manufacturers sales tax.  Yet despite making most of… Read More

No, liberalization will not kill Canadian whisky

In a recent op-ed for the Toronto Star, the President and CEO of the Association of Canadian Distillers argued that the Ontario government’s plan to slightly liberalize the sale of alcohol in the province would “kill” Canadian whisky companies. The problem, says Jan Westcott, is that selling beer and wine in grocery stores would give these products an unfair advantage over spirits. This unfair advantage means fewer people would drink hard alcohol. He comes to this conclusion because “we have seen it happen in Quebec” when it started allowing the sale of booze outside of the government monopoly. Well, not exactly. The SAQ, Quebec’s alcohol overlord, began allowing wines on private shelves in 1978. In the previous year, Quebecers drank 9.2 litres of wine per capita, according to Statistics Canada. By 2013, that number reached 23.4 litres, a 154% increase. In the same time, spirit sales went from 6.9 litres per capita to 4.2, a 39% decrease. Wine drinking in Ontario during that same period passed from 8.2 litres to 15 litres per capita, an 83% increase; and spirits decreased from 11.5 to 7.9, a 31% drop. So while Westcott’s argument that the consumption of spirits did indeed drop in Quebec is correct, it dropped at a similar rate in Ontario as well, making his point moot (for those keeping tabs, beer drinking fell dramatically in both provinces). In terms of hard liquor, the two provinces follow a nationwide trend of drinking fewer spirits in favour of the grape. While both provinces drank more wine, Quebec’s rate increased at a much larger level. That should be attributed to cultural factors – including French influence – rather than more access, especially since the stuff sold outside the SAQ is generally considered undrinkable. What’s Ontario’s reason? Statistics aside, Westcott’s argument that the… Read More

Extra costs of government employees – $20 Billion in 2010

If government employees in Canada received the same wages and benefits as private sector workers, Canadian taxpayers would have saved $20 billion in 2010, according to a new report from the Canadian Federation for Independent Business (CFIB). In fact, Ted Mallett, the CFIB’s chief economist and the author of the report, says that $20 billion is likely to be an underestimate. According to the CFIB, employees of the federal government receive a salary premium of 13.0% above what private sector workers make, even after controlling for differences in occupation, age, and education. Provincial government employees enjoy a 5.5% salary premium, and municipal government employees enjoy a salary premium of 8.9%. However, when other benefits – such as working hours and pensions – are taken into account, the premiums jump to 33.2% for federal government workers, 21.2% for provincial government workers, and 22.3% for municipal government workers. The CFIB’s numbers are disputed by the very left-wing Canadian Centre for Policy Alternatives, which published a paper last year claiming that “when you compare occupations that exist in both the public and private sector, full-time wages in the public sector are 2.3% higher than in the private sector.” It must be noted this figure takes into account only full-time wages, and not the benefits that the CFIB says accounts for most of the premiums that government employees enjoy. Still, the 2.3% figure is much lower than the salary premiums that the CFIB claims government employees receive. In addition, the Canadian Union of Public Employees (CUPE), whose reason for existence is to increase the wages and benefits of government employees, claims that the wage premium is only 0.5%. The CCPA used data from 2011, while CUPE used data from 2006. The CFIB’s study is for the year 2010. While left-wing think tanks and public… Read More

Unions make the rich poorer – but do they make the poor richer?

PressProgress, a website run by the very left-wing Broadbent Institute, recently published a post about how unions are wonderful institutions because they result in less income inequality, and by extension, less poverty. To make its point, PressProgress reproduced graphs showing that income inequality is on the rise in Canada and that union density is correlated with less income inequality. Two of the graphs are from a newly published International Monetary Fund article, which is based on a forthcoming IMF paper. The first shows that over the past few decades, high-income earners in advanced economies have increased their share of total income. The second shows that lower union density is correlated with an increase in the top 10 percent income share. I won’t argue with the claims and data showing that high levels of unionization reduce income inequality. It must be noted, however, that income inequality is not itself a bad thing. Making poorer those who are doing well (as unionization seems to do) does indeed reduce inequality but may not make anyone better-off. Therefore, the question should not be whether unionization reduces income inequality, but rather, whether unionization helps the poor. According to PressProgress, it does. PressProgress reproduces a graph from Unifor, which is the largest private-sector union in Canada. The graph regresses the poverty rate against collective bargaining coverage in OECD countries and finds that countries with a higher level of collective bargaining coverage tend to have lower poverty rates.     However, the poverty rate statistic that Unifor used is the relative poverty rate in each country, which is defined as the percentage of the population that receives an income of less than 50% of the median. Needless to say, it is not the best measure to use when determining whether unions reduce poverty. Consider, for example, that… Read More

In Defense of Sweatshops

I have no desire to work in a sweatshop. Given that you are likely reading this from the comfort of a computer, I assume that you have no interest in doing so either. The deplorable working conditions and low wages that many in the developing world face lead many in developed countries to call for boycotts of sweatshop produced goods. However, despite the good intentions behind such movements, if we were to boycott sweatshop produced goods on mass, we would seriously damage and compromise the livelihoods of some of the poorest people in the world. Contrary to conventional wisdom sweatshops are actually good for those who work in them. Given that any employment other than slavery is voluntary, if workers choose to work in sweatshops, they must believe that such employment improves their welfare. A worker chooses a job because they believe it to be superior to other alternatives. While a job producing NIKE sneakers for 30 cents an hour would seem like an undesirable job to you or me, for many low skilled workers in the third world, it is the best choice given the limited economic opportunity in those nations. If it were not, most workers would quit and go elsewhere. Low wages in sweatshops also are not evidence of alleged exploitation by multinational firms. The primary reason that wages in developing nations are low is because workers in those countries are not particularly productive. They are less educated and work with fewer tools and capital equipment. This makes them less valuable to employers and thus leads to lower wages. Remember that employers don’t pay their workers to make themselves feel better. They try to pay the minimal amount necessary to entice workers to take available positions. The investment brought by multinational firms leads to a greater demand… Read More

CUPE lies to dodge Fraser report

In what will surprise no one, the Canadian Union of Public Employees has resorted to making things up after a newly published report by the Fraser Institute found that government workers in British Columbia make 6.7% more than private sector workers. The same report also found that compared to private sector workers, government workers retired earlier, had better pensions, were absent from work more often, and had much better job security. In response to this study, CUPE BC Secretary-Treasurer Paul Faoro said, “The Fraser Institute’s own research shows that the so-called ‘premium’ for public sector workers is nowhere near the magnitude they’ve been claiming for the past two years. In 2013, they claimed there was a 37.5 per cent premium, and today they’ve admitted that number is actually 90 per cent lower—though you won’t find that in their news release. But facts have never stood in the Fraser Institute’s way. Not only do they not acknowledge how shoddy and flawed their previous study was, they still use their findings to bash wages and benefits for working people, and to advocate for even less retirement security for all workers. No serious economist would give this ‘study’ any credence at all.” Unfortunately for CUPE, this entire statement made by its BC Secretary-Treasurer is a lie. The Fraser Institute’s 2013 study found that government workers in BC made a 37.5% premium before controlling for differences in education, job type, experience of workers, and other factors. After controlling for these factors, the difference dropped to 13.6%. Meanwhile, the 2015 study found that government workers made a 34.2% premium before controlling for the same factors, and 6.7% after. It is clear that the differences between these two studies are moderate, and reflect that the wage gap between government workers and private sector workers has changed somewhat in… Read More
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