Canada Struggles to Keep Pace With Standard of Living as Labour Productivity Woes Persist

Canada is facing a significant gap in standard of living, or real GDP per capita, compared to other advanced economies, according to a report from TD Bank.

The report, titled “Mind the Gap: Canada is Falling Behind the Standard-of-Living Curve,” was published by economist Marc Ercolao on July 13. It highlights Canada’s struggle to keep up with its peers and identifies insufficient growth in real GDP per capita as the root cause of this disparity.

While Canadian economic growth has showcased resilience, especially during the COVID-19 pandemic-induced downturn, this has not translated into a proportional rise in the standard of living, said Mr. Ercolao. When adjusted for the rising population, Canada’s real GDP per capita has been deteriorating for many years. Since the 2014–15 oil shock, Canadian real GDP per capita has grown at an annual rate of 0.4 percent, in stark contrast to the 1.4 percent average growth in other advanced economies.

“GDP is one thing, standard-of-living is another, and when Canada’s economic performance is adjusted for the rising population count, it reveals a picture that leaves much to be desired,” he wrote.

Regionally, commodity-based economies like Alberta, Saskatchewan, and Newfoundland and Labrador have historically recorded high per-capita GDP levels. However, their leadership status has come under pressure over the past decade and worsened in the post-pandemic era. In the post-pandemic era, only British Columbia and Prince Edward Island have managed to recover back to their 2019 GDP per capita levels, according to Mr. Ercolao.

Lagging Productivity

Mr. Ercolao said it is common to point the finger at rapid population growth as the sole driver of poor per-capita GDP given that it has inflated the denominator of the calculation. But a closer examination shows that the real culprit behind the sagging performance in real GDP per capita is a persistent productivity issue.

For many years, Canadian labor productivity, measured on a real GDP per hour worked basis, has trailed behind its peers, particularly the United States. Despite a higher pace of job creation and total hours worked, Canada’s labor productivity has been consistently subpar.

Several factors contribute to this lagging productivity, including lackluster investments in nonresidential structures, machinery and equipment, and intellectual property since 2015. Additionally, a decline in research and development spending has also led to what Mr. Ercolao described as an “innovation gap” in Canada. As of 2021, the country’s spending on reach and development accounted for roughly 1.7 percent of GDP, half of the current U.S. share and lower than most other countries.

No Improvements for the Foreseeable Future

Looking forward, Canada’s standard of living is not expected to see significant improvements anytime soon, according to Mr. Ercolao.

The forecast for real GDP and real GDP per capita until the fourth quarter of 2025 indicates persistent contractions, he said. The economy is expected to suffer a “cyclical slowdown” in the coming quarters, as ambitious federal immigration targets continue to prop up population flows.

Canada is also one of the few advanced countries that has not recovered its pre-pandemic level of per capita GDP. Mr. Ercolao further cited the Organisation for Economic Co-operation and Development, which has projected that Canada will rank “dead last” among the 38-membered organization in real GDP per capita growth until 2060.

“Canada’s approach to productivity and growth needs fundamental changes to address these issues,” he said. “The crux of the problem remains the same: a sagging performance in labour productivity.”