Canada’s lagging productivity and economic growth, especially relative to the United States, should be concerning.
For many, including me, it is very concerning indeed.
But there are some who argue that Canada does not, in fact, have a productivity problem at all.
According to recently published research, for example, “the observed stagnation during the last 20 years is accounted for entirely by the oil sector.”
“When [the researchers] netted out the oil components of the economy and looked at productivity in the rest of the economy,” explained a Globe and Mail article covering the paper last month, “they found it rose at about the same rate as in the past and compared with the U.S.”
The implications for some are “don’t worry about the productivity of the Canadian economy” and “Canada’s oil industry is a drain on productivity.”
I disagree. Strongly.
Far from being a drain, the oil industry—and the resource sector more generally—is a boon. Without it, we would be poorer and our economy worse.
Before getting into the weeds, I want to make it perfectly clear that I don’t take issue with the paper itself—just the flawed conclusions that some have drawn from it. I say this for a few reasons. Economists have multiple definitions of “productivity,” and the one where Canada has a clear problem is not the one the paper is about. Most importantly, too many people are confusing productivity levels with growth.
Productivity in oil and gas
Productivity is how much output we get for each bit of input. If it takes a significant number of workers, land, and capital to produce a single piece of output, then productivity is low. One approach to measure this (called “total factor productivity”) tosses in many inputs and finds productivity in the resource sector has indeed been falling over the past two decades. From 2000 to 2015, for example, it fell nearly in half.
But measuring this for the oil and gas industry is a challenge since key inputs are not measured properly, such as the quality of the natural resource. This matters a lot. If oil prices are high, producers move into more difficult plays, extracting deeper or more challenging resources that require far more capital investment per barrel and consequently lower productivity.
Graphic credit: Janice Nelson.
Falling (measured) productivity in this case is a consequence of a strong and growing resource sector—with corresponding benefits for Canada’s economy—not the reverse.
A simpler measure of productivity is what’s called “labour productivity,” which measures the amount of output you get for each hour that a typical worker puts in.
This is what “productivity” typically means, especially outside of academic economics circles. And it’s here where Canada has a problem.
Internationally, we’re behind not only the United States but the European Union as well. And growth since 2015 has also been lacklustre, which, as I wrote in a previous piece for The Hub, closely tracks with our stagnant real incomes.
Overall, business sector labour productivity between 2015 and 2023 grew by 0.4 percent per year, compared to 1.5 percent per year in the United States. But key resource sectors, thankfully, have outperformed. For non-conventional oil extraction (like oilsands), for example, labour productivity growth averaged 1.6 percent!
Graphic credit: Janice Nelson.
That’s anything but a drain.
Growth versus levels
More important than growth rates is the overall level of productivity.
And it’s clear that Canada’s resource sector leads the pack. In 2023, labour productivity here was just under $200 per hour (adjusted for inflation). In the non-conventional oil extraction sector, labour productivity is even higher, at nearly $580 per hour. That’s roughly ten times the rest of the economy.
Graphic credit: Janice Nelson.
It’s true that some of the additional output produced per hour worked in the oil and gas sector compensates capital owners who invested considerable sums, leaving less for workers. Despite this, total labour compensation is still far higher in oil and gas.
In 2023, mining and oil and gas extraction as a whole paid over $72 per hour in total compensation. This is much higher than the $43 per hour that we see on average for the entire business sector in Canada. Non-conventional oil extraction pays even more, at over $104 per hour.
Simply put, high labour productivity translates into high average incomes.
Graphic credit: Janice Nelson.
What we produce matters
Without oil and gas, productivity and earnings across Canada would be lower. Instead of $59 per hour, Canada’s productivity would have been about $56. That’s a five percent drop attributable to this sector alone. That’s massive.
Put another way, without the resource sector, Canada’s economy would be nearly $150 billion per year smaller than it is—equivalent to nearly $3,700 per Canadian in lost income.
This doesn’t mean we should seek to artificially increase resource sector activity through subsidies (the current government’s preferred tool to boost some sectors at the expense of others). But artificial barriers to its growth, such as delayed and uncertain regulatory processes or inefficient climate policies, can have large effects on Canada’s economy.
Consider the past few years. In 2023, mining and oil and gas extraction accounted for 2.1 percent of total hours worked in Canada, down from nearly 2.5 percent a decade earlier. I estimate that if the share of total hours worked had remained at 2.5 percent—meaning the mining, oil, and gas sectors saw employment increases that kept pace with the rest of the country—overall labour productivity in Canada would be nearly one percent higher than it is today. That may not sound like much, but in a three trillion dollar economy, it’s considerable—equivalent to about $26 billion per year or over $600 per person.
The more we move away from high-productivity sectors like these, the smaller our economy becomes and the lower our living standards will be.
Far from being a drain, Canada’s resource sector is its productivity powerhouse.
Trevor Tombe is a professor of economics at the University of Calgary, the Director of Fiscal and Economic Policy at The School…
