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How is productivity measured and why is it important to the Canadian economy?

Productivity is generally measured as a unit of output per number of hours worked, which at first glance seems to be a fairly straightforward concept calculated through a fairly simple equation. Definitions of productivity do differ. For example, the federal government defines productivity as “the amount of output (what is produced) per unit of input used” (www.canadianeconomy.gc.ca). The Bank of Canada defines productivity as “a measure of how efficiently an economy transforms its labour, capital and raw materials into goods and services” (www.bankofcanada.ca).

In order to calculate this amount you will have to pull together various financial records such as tax records, insurance policies, real estate records, household bills, pension account statements and loan repayment schedules. Difficulty arises when we try to compare Canadian productivity not only to that of other countries (most notably the United States and the European Economic Union) but also to that of past years. It is not easy to assess what “output” is represented by the services provided in areas such as health care, education and the public sector. Empirical increases or decreases in productivity are tied to a complexity of factors such as relative value of the Canadian dollar, unit labour costs, inflation, taxation rates etc. While a decrease in productivity is considered to be a prediction of a parallel decrease in Canadian standard of living, this is not so easily quantified. Standard of living is determined by a whole host of considerations such as availability and quality of education, life expectancy, and quality of life. This makes it particularly challenging to fairly compare the Canadian and U.S. experience as the two societies function quite differently in terms of health care, education, government involvement and public service. To further complicate matters, there are two schools of thought regarding how to increase productivity. One camp believes that the Canadian taxation policy, an over-reliance on corporate and income taxes versus a user-pay principle (consumption taxes), and stifling of the free-market system have all negatively affected Canadian productivity levels. The other side believes that productivity is threatened by an under-trained workforce, an unstable economic policy and resulting fluctuations in interest rates and inflation. While Canadian productivity rates will continue to be compared against those of other industrialized nations, it is important to weigh this information against other measures of economic growth and stability in order to get an accurate picture of the state of Canada’s economy.