Higher productivity can meet the labour shortage challenge

labour help wanted
Photo by Tim Mossholder
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But governments must first reduce the tax burden on companies to give them the room they need to improve their productivity

Nathalie Elgrably-LévyQuebec has a shortage of workers.

Before the start of the pandemic, the lack of labour was already one of the top concerns of Quebec companies. The situation hasn’t improved since then.

In the fourth quarter of 2019, Quebec companies had over 126,000 job vacancies. Today, that number has practically doubled to 246,230 job openings in the province.

Unless a pool of workers roughly the size of the population of Longueuil suddenly appears, these positions will not be filled anytime soon just by relying on recruitment.

Thankfully, there’s another way to meet the challenge of a staffing shortage: increasing productivity.

labour help wanted
Photo by Tim Mossholder
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Being more productive doesn’t mean putting in more hours and sacrificing one’s weekends. To measure productivity, we divide the size of the province’s economy by the total number of hours worked.

Productivity, therefore, represents the average contribution of an hour of work to the province’s economic activity (salaries, taxes, profits). Increasing productivity means producing more per hour worked.

In 2021, the most recent year for which the data are available, Quebec’s average productivity was $54.50 per hour worked. In Ontario, productivity averaged $59.40, while the Canadian average was $61.50.

The gap might seem small, but when multiplied by the number of hours worked by all Quebec workers, this lower productivity costs Quebecers billions of dollars each year.

And comparing ourselves to other developed countries is no better. A study from HEC Montréal’s Centre for Productivity and Prosperity shows that the productivity gap between Quebec and OECD countries has grown wider since 1981.

While Quebec’s productivity lag dates back to the start of Confederation, we shouldn’t be fatalistic about it. Ontario workers themselves have nothing on Quebec workers.

Instead, it’s the quality of the physical capital available to workers (such as machinery, equipment, and infrastructure) that is the main determinant of productivity. And that’s where the gap comes from.

So if Quebec underperforms in terms of productivity, it’s because our provincial and local governments have not managed to create an environment conducive to investment in productive physical capital.

We’re paying the price today for their failings, with lower incomes and living standards than our fellow Canadians and a heavier tax burden for a comparable basket of services.

And since this gap stems from our governments’ decisions, it’s up to them to introduce the most favourable public policies to stimulate investments in productivity.

The economic literature is very clear on the relationship between companies’ tax burden and their level of investment in machinery, equipment, and infrastructure.

For instance, a 2010 study looking at 85 countries, including developing countries, found a “consistent and large adverse effect of corporate taxes on both investment and entrepreneurship.”

Same thing for a 2019 study looking specifically at Canadian provinces. Its authors confirm that there is an inverse relationship between the level of corporate taxes and the level of investment, productivity, and economic growth.

Just this past July, another study from the National Bureau of Economic Research noted that corporate tax cuts lead to increases in GDP and productivity, with a maximum effect five to eight years after the cuts.

It’s true that there are some studies that refute the impact of the tax burden on investments in productivity. It should be noted, however, that these remain marginal compared to the overwhelming majority of economic literature that confirms the inverse relation between taxes and investment levels.

Quebec companies are calling for help, loud and clear. But governments are not magicians: they can’t just conjure up a quarter of a million workers out of thin air.

What they can do, however, is reduce the tax burden on companies to give them the room they need to improve their productivity. That’s the public policy governments should look at, if they really want to relieve the adverse effects of the labour shortage.

Nathalie Elgrably-Lévy is a senior economist at the Montreal Economic Institute.

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By Nathalie Elgrably-Levy

Nathalie Elgrably-Lévy has taught economics at HEC Montréal since 1992. She also taught economics for several years at the University of Montreal and at UQAM. She is the author of La face cachée des politiques publiques, published in 2006 by Les Éditions Logiques, and she produced a Quebec adaptation of the 6th edition of Microeconomics, by Pyndick and Rubinfeld. She is also a columnist with Le Journal de Montréal and Le Journal de Québec. She worked during part of 2008 as a senior economist with the Fraser Institute. She holds a master’s degree in management from HEC Montréal, with a specialization in applied economics and a thesis on the federal budget deficit. Her research interests focus on assessing public policy.

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