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Productivity in Quebec: urgent action needed

December 9, 2014

According to a study by the HEC Montréal Centre for Productivity and Prosperity (CPP), Quebec’s lagging productivity is not only dragging down the province’s economic performance but having also a domino effect on society as a whole. “In the longer term, this effect threatens household’s purchasing power,” explains CPP Director Robert Gagné. “It is becoming essential, and urgent, that we improve labour productivity in Quebec, for that is the only real lever we have to reverse this harmful trend.”

 

A daunting challenge

Correcting the existing situation is a sizeable challenge for Quebec, though. When its standard of living is compared with those of the other Canadian provinces and the 20 OECD countries selected for this analysis, a disturbing finding emerges: Quebec has been falling behind in terms of economic prosperity for over thirty years.

“Given Quebec’s standard of living of $44,499 per capita in 2013, only the Maritimes are now in such weak shape on the Canadian scene. And if the trend continues, as it will unless Quebec addresses the situation, the Maritime provinces will catch up in terms of standard of living within 15 years,” warns Gagné.

More specifically, the analysis shows that any increase in productivity creates an economic spiral. When productivity rises, it carries compensation in its wake, allowing households to consume and save more; it expands governments’ tax base, so that they can then improve their public services and infrastructure; and it increases businesses’ income, and they can then invest more in equipment and materials. Since private investment is an important vector of productivity, boosting investment helps improve workers’ productivity, with the results we have seen.

To put an end to the vicious circle in which its economy has been trapped for more than 30 years, Quebec has to act quickly. Remember that in 1981, the province’s standard of living was close to the average of that in the industrialized countries, whereas now there is a gap of almost 18%. “Aside from economic concepts, our analysis shows that Quebec’s low productivity has direct and tangible repercussions for all Quebeckers. For instance, Quebec workers’ compensation has definitely increased less in recent decades, meaning that their purchasing power has fallen,” laments Gagné. “While all players in the economy benefit from an increase in GDP, citizens are the biggest winners.”

 

Some possible avenues

To correct the situation, the CPP makes two suggestions. In the short term, studies show, boosting productivity calls for private investment. If this is to happen, it seems urgent for the government to quickly establish a tax environment that makes it possible to attract and retain the top firms. Reforming assistance for business seems to be the most appropriate avenue if the government wishes to reduce companies’ tax burden without seeing its own revenue decline.

In the longer term, Quebec absolutely must focus on education. The logic is simple: increasing scientific knowledge and technical expertise encourages efficiency, innovation and creativity, making it possible to attract and retain the most successful businesses. Despite having one of the most financially accessible university systems in the Western world, Quebec is finding it difficult to boost university graduation rates. Yet the province must be able to count on a skilled workforce to ensure its economic prosperity.

Lastly, the study dispels a rather tenacious myth about the cost of living in Quebec. “While Quebeckers still benefit from lower prices than in other provinces, the gap is rapidly narrowing. At the rate prices are converging from one province to another, soon Quebeckers will no longer be able to count on a lower cost of living to offset their lower disposable income. So it is essential that we improve labour productivity in order to boost the standard of living and allow Quebeckers to maintain their purchasing power,” concludes Gagné.

For more information, consult the report, entitled Productivity and Prosperity in Quebec – 2014 Overview.


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