Report

Human Capital and Labour Productivity in Canada – HC contribution to productivity growth is substantial

“The good fortune of bountiful natural resources is not enough to ensure rising incomes for Canadians in the long term. Growing labour productivity is the most important determinant of future economic welfare and on that measure, Canada is falling behind its major trading partners.” writes Serge Coulombe in Lagging Behind: Productivity and the Good Fortune of Canadian Provinces on cdhowe.org.

“Increasing labour productivity does not mean workers working harder for less money, a common canard. It means more investment in one of three factors: 1) human capital (education or other learning); 2) physical capital (plants or other infrastructure); or 3) technology.”

As a component of labour productivity, “human capital accumulation has been less important in the four Western provinces than elsewhere in Canada.” adds Coulombe.  But, overall, “the contribution of human capital accumulation to productivity growth is substantial. On average, for the 10 provinces, human capital accumulation accounts for a 0.38 percentage point increase in labour productivity per year. This number is even larger than the average contribution of physical capital (0.31 percent per year).”

Capture d’écran 2015-07-13 à 08.37.49

“Newfoundland and Quebec are the clear leaders of human capital accumulation among the provinces over the period from 1984 to 2009, with Ontario in third place. Alberta is clearly in the last position. Newfoundland’s faster pace is a catching-up process since the province was last in terms of the level of human capital for the whole period.”

Quebec’s ranking improved from seventh to fourth place.”

“Two points are worth discussing regarding the measure of the contribution of human capital. First, (the author is) using a measure of human capital based on the years of schooling achieved instead of a direct measure based on the results of tests devoted to measuring skills such as the international Programme for International Student Assessment (PISA) and the International Adult Literacy Survey (IALS). A measure based on years of schooling is appropriate for analyzing the human capital of people that received education of comparable quality, such as within the same country.”  One might think that the use of a Labour Force Quality Index would have bonify the human capital contribution.

The author note that “the larger contribution of human capital accumulation in poorer provinces results from a catching-up process.”

“One clear policy implication is that an economy predicated on extracting natural resources will need to invest in other means of enhancing labour productivity to prepare for when natural resources have been exhausted or their productivity has declined. This is a rule of thumb known as the Hartwick Rule, which states that to sustain a constant flow of consumption, an economy that produces an exhaustible resource should invest the totality of the resource rents in reproducible capital. A resource rent is the difference between the market price of the resource and the cost of production. In other words, an economy that produced oil and gas should save and invest more than an economy that produces resources that are not exhausted after a single use, such as harvesting wheat and manufacturing goods. If the accumulation of capital (both physical and human capital) is not sufficient to compensate for the exhaustion of the resource, then the exhaustible resource economy’s living standards will inexorably decline.”

“For resource-boom provinces, saving non-renewable resource revenues in “rainy-day” funds is crucial. Provinces that benefit from high resource prices now should save and invest these revenues in ways that boost future growth, such as investments in education and productive physical capital.”

 

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