The Productivity Blueprint

Canada’s Standard of Living Challenge

Years of weak productivity growth have eroded Canada’s relative living standards, widening the gap not only with the United States but with other advanced economies as well.

The broadest measure of living standards is a country’s gross domestic product (or GDP) per capita, which measures the total value of goods and services it produces each year, divided by its population. This is a rough gauge of how much income is available, on average, to support each person’s standard of living. Although Canada’s inflation-adjusted, or real, GDP per capita tracked that of the United States between 1994 (the year the North American Free Trade Agreement [NAFTA] came into effect) and 2014, it has fallen considerably behind since (Figure 1), as the US has surged ahead of other economies on that metric (Figure 2).

Since 2014, Canada has also trailed other countries, including small, open economies like Australia and Sweden (Figure 3).

As we will see below, Canada’s GDP per capita performance is directly linked to its productivity performance. In March 2024, Bank of Canada Senior Deputy Governor Carolyn Rogers called Canada’s poor productivity a “break the glass” moment. That warning came before the latest US administration’s tariff threats and heightened geopolitical instability. With Canada’s economy facing these external pressures alongside its longstanding underperformance, addressing the country’s lagging productivity is more urgent than ever.

The C.D. Howe Institute has spent decades building the rigorous, evidence-based analysis needed to understand and address Canada’s economic challenges. Our Productivity Blueprint brings together this work into an action-ready agenda to spur productivity-enhancing investment and, ultimately, raise Canadians’ standard of living.

Why Productivity Matters

High living standards depend significantly on people’s access to the material goods and services they need or desire, whether provided privately or publicly.

Improving the availability of these goods and services depends, in turn, on our ability to produce more of them, improve their quality, or produce something we can trade for them with sellers in other countries. The sum of this production, typically termed gross domestic product or GDP, is, mechanically, the number of hours worked multiplied by the amount produced in each hour. This latter variable – output per hour – is called labour productivity.

This matters directly for household incomes. Productivity growth is a key source of sustained growth in worker compensation over time. Without it, higher pay is difficult to sustain without raising prices or squeezing margins. In practice, Canadian compensation growth has not perfectly matched productivity gains in recent decades (although it has tracked them closely), but weak productivity growth makes the underlying problem worse, not better. Higher productivity means more or higher-quality products are available, fewer hours are needed to produce them, or both. In other words, access to the material goods and services people need or want, along with more time for ourselves, depends on productivity.

Canada’s Productivity Challenge

In recent decades, Canada has performed poorly on labour productivity compared with peer countries – especially the United States. Figure 4 illustrates the widening gap in what Canadians and people in other countries can produce and, in a broader sense, afford per hour of work. Canada has consistently lagged multiple peer jurisdictions in GDP per hour worked, with the gap growing especially large against the United States. Other countries have increased their productive capacity faster than Canada has.

An economy’s productivity – i.e., GDP per hour worked – is not the sole driver of overall well-being for its residents. For one thing, GDP per capita is an average measure that does not account for how the fruits of production are distributed across the population. And as the adjective “gross” indicates, GDP does not subtract the depreciation of the capital used to produce output, including non-renewable natural capital, although other measures do.

Despite these limitations, GDP per capita – and the labour productivity that contributes to it – is strongly correlated with the more subjective measures of well-being, like self-reported life satisfaction. These measures, while important, lack the concreteness needed for policy decision-making. GDP also correlates directly with governments’ ability to raise revenues to finance public services. In general, higher GDP expands the resources available for a country’s residents to enjoy a good life.

Why Investment Matters

Policymakers can influence several factors that are key to a country’s productivity. One is the quality of the labour force: workers’ education, skills, and training determine how well they can put available technology to use. Another is firms’ willingness to invest in equipment, facilities, and knowledge, together known as fixed capital, which gives workers more capital to work with and makes them more productive. Innovation is also a driver of such investments, as new technologies that better meet human needs often reach the economy through new capital investment, or through better ways to use the existing human resources and fixed capital.

Canada also lags on such fixed capital investment – in machines, equipment, and technology – consistent with its weak productivity performance overall. Canada trails most peer countries on capital available per worker (Figure 5). It also lags on investment as a share of the economy – Canada has invested less than most of its peers in gross fixed capital for the past three decades and ranked second last among the countries shown in 2024 (Figure 6).

Boosting this investment performance would give Canadian workers the tools they need to catch up with their peers and produce the goods and services that underpin Canadians’ material well-being.

How Canada Can Boost Productivity

Investment is driven by whether companies see real opportunities to make more, better, or new goods and services that customers, businesses, and governments want, at a price that at least covers the cost of producing them. When those opportunities are not visible or are too uncertain to act on, investment and firm growth stall. But when opportunities exist and government policy gets in the way, whether by blocking good jobs, useful products, or the growth of small firms into larger, more efficient ones, the resulting investment shortfall is self-inflicted and can be addressed through policy. Beyond keeping macroeconomic fundamentals like inflation and public debt stable, “microeconomic” policies also shape investment decisions by individuals and businesses.

Economists often organize the drivers of investment and productivity using a “growth accounting” framework (Figure 7): increasing the capital each worker has to work with (capital deepening), improving the skills and training of the workforce (human capital deepening), and using both more efficiently through innovation, competition, and sound regulation (total factor productivity). These drivers are all reflected in the Blueprint’s eight actionable policy areas, though many recommendations can cut across more than one (tax reform is a good example) rather than forcing every recommendation into a single theoretical category.

They are:

1. Tax policy, which can encourage work and production over consumption, and support or discourage business growth and innovation.
2. Regulation, which, when well-designed, can raise living standards and improve firm performance, but, when badly designed, can create unnecessary barriers to adopting new technologies and techniques, discourage risk-taking, and fragment markets.
3. Competition policy, which can help strike a critical balance between the benefits of scale and maintaining enough competition to encourage innovation.
4. Human capital policies, which can help build and better match Canadians’ skills and competencies to available technologies and emerging growth opportunities.
5. Innovation and commercialization policies that support research and development (R&D) and research partnerships, encourage the early adoption of innovation through government procurement, and improve IP management, marketing support, and trade diplomacy.
6. Policies designed to help businesses grow from formation to scale and sustainability by improving access to capital, business advice, and support for technology adoption.
7. Improving Canada’s trade and transportation infrastructure and removing obstacles to supply chain efficiency to give Canadian businesses the best opportunities to grow.
8. Fiscal discipline that improves value for money in the design and delivery of government programs and boosts government productivity more generally. Rapid public sector expansion financed by deficit spending, without commensurate improvements in service quality or efficiency, reduces growth opportunities by increasing debt, which can crowd out private investment and signal higher future taxes.

Built on decades of C.D. Howe Institute research and updated as new work is published, the Productivity Blueprint gives policymakers a clear plan to tackle the barriers that keep Canada from reaching its massive potential.