Declining productivity in Canada’s economy presents a challenge to post-pandemic wage gains, one economist says. 

In a report Wednesday, Nathan Janzen, the assistant chief economist at RBC, said that although wage gains have been higher than normal, it appears “more modest” considering surging inflation and labour shortages. Additionally, the report highlighted that lower productivity growth is threatening future wage gains amid a softening labour market. 

“Canada’s weak productivity growth has gotten worse since the pandemic, increasing unit labour costs without the same rise in wages—and strength in U.S. productivity is cutting further into Canadian wage competitiveness,” the report said. 


“A further deterioration in Canada’s weak productivity performance since the pandemic is threatening the sustainability of wage growth, which has already been relatively modest when measured against surging inflation.” 

Janzen highlighted in the report that worker productivity, meaning an employee's output per each hour worked, is “inextricably linked to worker pay over time.” He added that lower Canadian productivity estimates are a cause for concern in the post-pandemic era after decades of underperformance. 

Over the past three decades, the report said real worker pay per hour has moved in accordance with productivity growth. 

“Slow productivity growth is not a new issue for Canada, but has gotten worse since the pandemic,” Janzen said. 

David Watt, the chief economist at HSBC Canada, said in an interview with BNN Bloomberg on Thursday that investment “continues to contract” following Canada’s fourth-quarter gross domestic product (GDP) figures released that same day.  

“What we're getting is that the productivity story is still a huge challenge for the Canadian economy,” he said. 

“So if we had high population growth and high productivity, it would be fantastic for the Canadian economy, but we're missing that productivity story which creates a number of hurdles for the economy and for generating income for all those new immigrants.”

Wage gains to slow

Power dynamics in the labour market are now shifting away from workers over the short term, the report said, as businesses are seeing easing labour shortages. 

“Furthermore, productivity underperformance versus the U.S. has increased relative unit labour costs in Canada by about five per cent. That makes Canadian production relatively more expensive and erodes competitiveness,” Janzen said in the report.

Over the near term, Janzen said he sees “little reason” for productivity to drastically increase amid relatively weak capital investment.  

“There are some obvious solutions to these problems, such as encouraging more productivity-enhancing business investment and improving the poor track record in Canada of utilizing the skills of new immigrants,” the report said. 

“However, sustained growth in worker pay significantly above the rate of inflation over the longer run—which is critical to ensuring living standards continue to improve—will also depend on ensuring that the weak productivity performance does not persist.”