Canada's Economic Challenges: Why We Must Act.

Canada's economy is an important baseline when forecasting. Here's some insight to help the business plan.

Did you know that, according to the OECD, Canada is expected to be among the slowest-growing advanced economies in the coming decades? Now, let's explore the reasons behind this concerning projection and compare our situation to our American counterparts.

The Wage Gap and Productivity:

One of the primary factors contributing to Canada's economic challenges is the wage gap. Canadians, on average, earn less than their American peers, and our overall productivity falls short. While some argue that this can be attributed to Canadians working fewer hours annually (1,685 hours compared to 1,791 in the US), even when we adjust for working time, Americans remain about 30% more productive, producing $66 USD in value per hour, compared to our $50 USD.

Industry Makeup Matters:

A significant contributor to this productivity gap is the composition of our industries. The United States benefits from high-income industry centers like Wall Street and Silicon Valley, which elevate their national average. In contrast, Canada lacks equivalent industry powerhouses, which limits our productivity growth. However, this doesn’t really give much insight to most participants in the economy, and Canada still lags behind in terms of productivity on a per-industry basis.

The Three Factors of Production:

To understand our economic challenges better, we must consider the three critical factors of production: land, labour, and capital.

Capital Investment: The U.S. invests much more in making their workers more productive ($20,500 vs $13,000  of capital per worker). Canada lacks capital investment compared to the United States, which boils down to the financing infrastructure, with the US having large public markets that attract domestic and international investors. While Canada does have its own public markets they aren’t as large and don’t attract the same type of international investment. 

Labor Mobility: Although we are allied with the U.S we do have a rivalry which comes in the form of a battle for talent, with about 45,000 Canadians moving to the U.S every year vs. only 9,000 Americans moving to Canada. This shift is seen based on opportunity, where top-income earners can make a lot more money by moving, paying less tax on said income and paying less on housing. While social security isn’t as great in America, this doesn’t matter much to high-income earners.

Land and Housing Affordability: The brain drain that Canada suffers means the talent shortage has to be filled by skilled migrants. Skilled migration is great but is has negative effects, with housing affordability being the biggest one. Higher land prices also further starve businesses out of money that could be invested in capital and make it harder for businesses to raise money because investors will choose to invest in the real estate market rather than the business financing market. Housing pricing issues only exacerbate the problem of skilled Canadians looking to move to American cities where they can make more and pay a lot less for housing.

Taking Action for a Stronger Future:

As Canadians, it's crucial to address these challenges head-on to ensure our economic competitiveness and growth in the coming decades. To do this, we must:

1.  Attract More Investment: Encourage investment in Canadian businesses by creating a more attractive environment for both domestic and international investors.
2. Invest in Our Workforce: Invest in skills development and education to enhance the productivity of our labour force.
3. Address Housing Affordability: Implement policies that tackle housing affordability issues, making it easier for businesses to retain talent and invest in capital.

By taking these steps, Canada can navigate its way towards a brighter economic future, ensuring prosperity for all its citizens. What are your thoughts on these challenges and potential solutions? Share your insights below!