Labour Productivity

WHY LABOUR PRODUCTIVITY MATTERS:

Labour productivity, defined as Gross Domestic Product (GDP) produced by an hour of labour PPP, has long been a key measure of national economic performance. Over the long term, labour productivity and its growth rate has proven to be one of the most important determinants of a country 's income and efficiency. But beyond acting as a barometer of the economy 's overall economic performance, it also plays an important role in measuring well-being. Since productivity growth makes firms more profitable, it allows them to also hire more workers and raise wages. Together these factors drive up purchasing power, increasing the aggregate living standards of a population. For these reasons, policymakers, politicians,

These factors generally fall into three categories: physical capital, human capital, and technological change. In order to increase the labour productivity rate, government policies centre on targeting investments in these three areas.

To increase the stock of physical capital involves investments in new physical infrastructure such as buildings and new tools such as machinery and equipment. Growth in human capital, referring to levels of knowledge, skills, habits, can be targeted in a variety of ways including improving access to education and on-the-job training, as well as general health.

However, in seeking sustained growth of labour productivity rates, increasing investments in physical and human capital stock is faced with diminishing returns. The third factor of labour productivity growth-technological change-plays a central role in sustaining this growth rate and reducing the diminishing returns of both human and physical capital. As a result, investments in the creation and adoption of new technologies has often been directly associated with efficiency and improved labour productivity.

TECHNOLOGICAL CHANGE AS A KEY FACTOR IN THE US-CANADA LABOUR PRODUCTIVITY

SMEs have long been globally recognized as engines of innovation and technological change. In comparison to the US, SMEs are also relatively more important in the Canadian economy in terms of employment but lag behind in productivity. Faced by high entry costs, low competition and lack of funding, SMEs in Canada have not performed as well as those in the US. The annual "Ease of Doing Business" survey, conducted by the World Bank, has repeatedly ranked the US (#4) higher than Canada (#19) especially in areas of accessing credit, and starting a