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This transcript has been generated using machine learning technology. While this technology was trained with CIBC terminology, it may contain errors.
Introduction: Welcome to Eyes on the Economy by CIBC Capital Markets, a podcast series dedicated to addressing current issues in a concise format, helping to make sense of the evolving economic complexities, so that you can take action.
Helen Lao: Hello. Welcome to CIBC&#8217;s Eyes on the Economy podcast. I&#8217;m Helen Lao, an Executive Director at CIBC Economics, and today I&#8217;m joined by our Chief Economist, Avery Shenfeld, to discuss the results of a study that we co-authored together looking into the degree to which Canada&#8217;s lagging productivity growth has actually impacted living standards and spending power relative to our neighbor, the US. That work was inspired by a similar analysis of the US-Europe comparison by Paul Krugman. So Avery, GDP per capita and GDP per hour are two common measures used by economists to compare economic performance between two countries. But can you explain why sometimes slower productivity growth measured by these measures, real GDP per hour or per capita, might not translate one-to-one into the same growth gap of what people in each country can actually buy with their incomes they get from each hour worked or what they produced?
Avery Shenfeld: Yeah, so simply put, it&#8217;s because prices and what you can sell what you produce to the rest of the world also matter. So if Canada only produced oil and the US only produced computers, then what would also matter here is how much computing power you&#8217;re able to get for your hundred barrels of oil. And over time that can change. So in fact, you know, the US advantage in productivity lies significantly in the growth in output in the tech industry, where the value of the output or the actual quality adjusted value of the output keeps increasing. If this year&#8217;s computers are much more powerful than the computer last year, even if you make the exact same number of computers, your measured GDP or productivity goes up. But of course what&#8217;s also happened is technology goods have become cheaper over time. And so Canada can trade its barrels of oil, even if they&#8217;re not growing as quickly as the number of computers for more computing power. So relative prices also matter. And so what we&#8217;ve done in this study, mirroring what Paul Krugman did between the US and Europe, is take the market value of GDP in current prices in any given year, translate that into US dollars at what are called Purchasing Power Parity exchange rates. So the exchange rate the Canadian dollar would have to be at so when you do that conversion, you&#8217;re measuring the same amount of buying power in each country. How does that stack up year to year? And what we find and what Krugman found is it doesn&#8217;t always line up equally with the gap in productivity growth.
Helen Lao: So what did we find in the case of Canadian nominal GDP, so GDP in current prices, converted into US dollars at purchasing power parity exchange rates, and how that held up since 2000 relative to what we saw in terms of real GDP per capita or per hour worked?
Avery Shenfeld: Well, I wish we could say it was a great story here, but I think the reality is it was less bad. So for example, if you look at GDP per capita, real GDP per capita since 2000, it&#8217;s trailed the US growth rate by a cumulative 14% or so over that period. And if you measure instead what each year&#8217;s nominal GDP that Canada produces could buy, converted at purchasing power parity into US dollars, that’s only slipped by about half that amount, by about 7%. And it&#8217;s sort of the same thing if you measure instead of GDP per capita, if you measure GDP per hour, again, a huge shortfall in productivity, in real GDP growth rates, as economists have talked about, and I&#8217;m sure our audience has read. but if you look at nominal GDP converted at PPP, the decline or the relative decline is about half as much. So it&#8217;s dropped about 10% over that period of basically a quarter century. What&#8217;s interesting is though if you look at that GDP per hour statistic, it was kind of hanging in there, not really slipping on a relative basis to the US for most of the period we looked at, say from 2000 to about 2023 or so or 2022 actually. And then the last couple of years we&#8217;ve seen some pretty big slippage, which does tie into those being particularly weak years for Canadian productivity. So what we were able to conclude here is that it&#8217;s still not pretty. It&#8217;s not as bad as the real GDP growth rates would have suggested, but it&#8217;s still certainly a problem that Canada wants to address. Our weak productivity does still translate into some disappointments in terms of, what Canadians can buy at home and abroad with the value of what they produce each year?
Helen Lao: Our study also looked at how changes in income distribution in the two countries impacted living standards for the median worker or household in each country. And what were the highlights of our findings there then?
Avery Shenfeld: Well, here again, for the median Canadian, the typical Canadian in effect, things are again even less, less bad than they are for the grand total. So we don&#8217;t trail the US as drastically. And that&#8217;s because other studies have found, and this sort of backs this up, that a lot of the productivity gains that the US has seen, that Canada hasn&#8217;t seen, accrue in terms of income to the upper end of the income distribution rather than the median worker. So it is that Wall Street lawyer handling the big IPOs, it&#8217;s the CEOs and chief executives of the big tech companies, they reap a lot of the benefits of the scale of the US economy and the firms they run and the productivity improvements. Whereas the median American hasn&#8217;t really shared as much in that bounty. So when we looked at median personal incomes, for example. Actually, in Canada from 2000 to about 2013 or 2014, the median Canadian was actually gaining on the median American and ending up perhaps actually with a bit more spending power, again, measured at PPP exchange rates in US dollars relative to the median American. But all of that gain was then lost in a relative decline after around 2014. And that may not be coincidental as a turning point. That was when oil prices started to decline. So we lost the benefits of an improving terms of trade that it helped Canada in terms of what we could again, what the median Canadian could buy from what Canada produced relative to the median American. And we&#8217;ve ended up, in fact, a little bit below the US in terms of median personal income. When we measure median earnings of the typical worker, so now we&#8217;re moving beyond a comparison that might include fewer Canadians working, for example, or working fewer hours. If you look at median weekly earnings, it shows a similar pattern. We gained on the median American up until around from 2020 to about 2013 or so, ended up actually at a higher level and basically gave all of that back. But at the end of that period, the last year we were able to look at was 2024. The median Canadian was actually, really in terms of what they could buy, not appreciably different than the median American. So a lot of the relative advantages of the US accrue to the top. And that was a similar result to a Bank of Canada study done in 2024 that found that the top ten percent of the income distribution in the US accounted for about two-thirds of the measured productivity gap between Canada and the US and compensation then also reflected that. So that top 10% of the income distribution in the US accrued most of the gains in terms of what they earned relative to Canadians.
Helen Lao: Americans have also been doing very well in terms of wealth gains, which have translated into additional spending power beyond what incomes alone would suggest. How do Canadians stack up on that score?
Avery Shenfeld: Again, not as well as Americans. So that rapid productivity growth does reap rewards in wealth in terms of the value of assets in the US relative to the value of assets in Canada. Now, if you include housing, you sort of get a bit of a misleading comparison that, you know, Canadians have actually been gaining on Americans and have almost closed the gap in their wealth relative to their income. But that housing wealth, it&#8217;s not easy to spend and for younger Canadians, it&#8217;s certainly more of a curse than a benefit that house prices have gone up more in Canada than in the US over the same period. If you just measure financial net worth, then the US back in 2000 had more financial worth relative to household income than the average Canadian household. And if you then look at 2024, that gap has actually widened. So one of the advantages that we see in the US economy right now is Americans are able to dip into that wealth or save less of their current income and spend more of it than Canadians. And that too could be related to productivity gains because, you know, the rapid growth and productivity of the companies listed in the US markets also translates into a growth in the value of their shares. Now, again, a lot of that financial wealth will accrue to the top, you know, quartile or quintile of the American income spectrum. So the median Canadian may not be as disadvantaged there relative to the median American, but certainly overall Americans have gotten some benefits financially in wealth levels from their more rapid productivity growth. So you know that&#8217;s really all suggesting that while the results of our study collectively show that the productivity disadvantage in Canada hasn&#8217;t fully translated into income differences, it&#8217;s certainly not been a plus. And in recent years we&#8217;ve been slipping more, so it really does still leave that as an issue that public policy needs to address as soon as it can.
Helen Lao: Thanks, Avery. We&#8217;ll wrap this up here. But for those who want more of the details, check out the CIBC Economics website where we&#8217;ve posted the full story. Thanks for joining us for this edition of the podcast. Until next time, we&#8217;ll be keeping our eyes on the economy and calling it as we see it.
Disclaimer: The information and data contained herein has been obtained or derived from sources believed to be reliable, without independent verification by CIBC Capital Markets and, to the extent that such information and data is based on sources outside CIBC Capital Markets, we do not represent or warrant that any such information or data is accurate, adequate or complete. Notwithstanding anything to the contrary herein, CIBC World Markets Inc. (and/or any affiliate thereof) shall not assume any responsibility or liability of any nature in connection with any of the contents of this communication. CIBC World Markets Inc. or its affiliates may engage in trading strategies or hold positions in the issuers, securities, commodities, currencies or other financial instruments discussed in this communication and may abandon such trading strategies or unwind such positions at any time without notice. CIBC Capital Markets is a trademark brand name under which different legal entities provide different services under this umbrella brand. Products and/or services offered through CIBC Capital Markets include products and/or services offered by the Canadian Imperial Bank of Commerce and various of its subsidiaries. For more information about these legal entities, and about the products and services offered by CIBC Capital Markets, please visit www.cibccm.com. Speakers on this podcasts are not Research Analysts and this communication is not the product of any CIBC World Markets Inc. Research Department nor should it be construed as a Research Report. Speakers on this podcast do not have any actual, implied or apparent authority to act on behalf of any issuer mentioned. The commentary and opinions expressed herein are solely those of the individual(s), except where the speaker expressly states them to be the opinions of CIBC World Markets Inc. Speakers may provide short-term trading views or ideas on issuers, securities, commodities, currencies or other financial instruments but investors should not expect continuing analysis, views or discussion relating to these instruments discussed herein. Any information provided herein is not intended to represent an adequate basis for investors to make an informed investment decision and is subject to change without notice. CIBC World Markets Inc. or its affiliates may engage in trading strategies or hold positions in the issuers, securities, commodities, currencies or other financial instruments discussed in this communication and may abandon such trading strategies or unwind such positions at any time without notice.

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Productivity

Mind the gap: How much has Canada’s lagging productivity hit living standards?

Mind the gap: How much has Canada’s lagging productivity hit living standards?

CIBC Economics

Avery Shenfeld

Managing Director and Chief Economist

CIBC Capital Markets

Helen Lao

Executive Director, Economics

CIBC Capital Markets

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