Lack of physical capital slows productivity: Report

Despite highly educated workforce, productivity has slowed in past 25 years

Canada's workforce lacks the equipment and infrastructure necessary to maximize productivity, according to a new report from the Conference Board of Canada.

A lack of physical capital - machinery, equipment, infrastructure and buildings - partially explains Canada's sluggish productivity growth over the past 25 years, despite a well-educated workforce, found Canada’s Lagging Productivity: The Case of a Well-Educated Workforce Lacking the Much-Needed Physical Capital.

The report analyzed the evolution of Canada’s human and physical capital from 1961 to 2008 and compared the relationship between the two.

“Labour quality has improved steadily since 1961. However, capital intensity, which grew rapidly in the 1960s and 1970s, slowed between 1983 and the mid-2000s. Essentially, we have under-invested in physical capital. It’s therefore no surprise that Canada’s productivity growth also began to slow around the same time and pales in comparison to other developed countries," said Alan Arcand, principal research associate at the Conference Board.
The study found Canada’s capital-to-labour ratio is weaker than it should be, given Canada has a very high proportion of college and university-educated workers in the labour force compared with other developed countries.

Canada’s labour productivity grew by an average of 2.8 per cent annually from 1962 to 1983, but slowed to an average of 1.3 per cent yearly between 1984 and 2008.
The report proposes five reasons to explain the slower growth in the capital-labour ratio:

• the introduction of the capital tax by the federal government in 1985 (eliminated only in 2006), along with capital taxes by provincial governments (six provinces still tax capital, although Ontario plans to eliminate its tax this year)

• fluctuations in the exchange rate

• an underperforming Canadian venture capital market

• insufficient public infrastructure investment

• burdensome government regulations.
“Most of the issues hindering productivity growth can be tackled by Canadian governments and businesses expediently. Tax reform alone would go a long way toward securing a better economic future for Canada,” said Arcand.

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