Making Canada the strongest economy in the G7 would require a cultural makeover that Canadians may not like
Anyone who has worked in Canadian politics over the last 40 years is familiar with economists' warnings about the impending crisis portended by Canada’s persistently lagging labour productivity growth.
Successive prime ministers, finance ministers, and industry ministers have repeatedly heard that unless we accelerate productivity gains, we could see an irreversible decline in our standard of living, putting Canada on the road to the national poorhouse.
The paradox for politicians is that, notwithstanding the almost annual ringing of the productivity alarm bell by business groups and think tanks, Canada’s GDP has grown sevenfold since 1980, ranking it as either the ninth or 10th richest country in the world, depending on how you measure it. So what's the problem?
In theory, political leaders understand that innovation in general and harnessing digital technologies in particular are key to increasing labour productivity. We know this because every government since 1984 — Liberal or Conservative — has launched and invested billions of dollars in set piece strategies designed to accelerate productivity growth through technological innovation: The Prosperity Initiative (1991); The Innovation Strategy (2001); The Science and Technology Strategy (2007); and, The Innovation and Skills Plan (2017). Yet after all of these bold plans and investments, there has been precious little productivity payoff.
But as a practical matter for politicians, productivity is a nebulous concept that is difficult to communicate in a way that translates into votes. Indeed, to the extent that the average Canadian has understood warnings about stagnant productivity, the bottom line for them has meant that they have to work harder with fewer resources and, in all likelihood, for less pay.
Vote-moving issue
The current political dilemma is that, after all these decades of working on the problem, we are only now starting to see symptoms of lagging labour productivity growth breaking through as a vote-moving issue for younger Canadians in the form of unaffordable homes and having to work two or three jobs to make ends meet. It's a dilemma because it could be a classic case of the trend becoming evident only after it is too late to reverse it.
This brings us to Prime Minister Mark Carney's goal of making Canada the strongest economy in the G-7. On one level this is a standard boilerplate government slogan. But it has resonated with Canadians because of the Trump tariff war. For the moment, there seems to be a public acceptance that adapting to the Trump phenomenon will require what has been described as the most fundamental Canadian economic transformation since the end of the Second World War.
While the Prime Minister has avoided packaging it as another in a long line of innovation strategies, its essentials are all about increasing labour productivity and include: acceleration of infrastructure projects and AI adoption, business and trade incentives to boost private sector investment, labour upskilling and increased mobility, and increased government efficiency through digital service delivery.
Obscured in the outbreak of Canadian patriotism is that to make Canada the G-7's strongest economy, we would have to match or overtake American productivity growth. To do this would require much more than government-led action; it might require what would amount to a Canadian cultural makeover.
Carney’s strategy is being implemented just as the U.S. has reasserted its global economic dominance through rapid productivity growth after decades of stagnation. Just after Trump’s re-election, the Financial Times reported “U.S. labour productivity has grown by 30 per cent since the 2008-09 financial crisis, more than three times the pace in the Eurozone and the UK,” adding that “The contrast with its northerly neighbour is harsh. Canada’s labour productivity has contracted for 14 of the last 16 quarters and was 1.2 per cent below its pre-pandemic level at the end of the second quarter of 2024.”
Secret sauce
U.S. productivity dominance is powered by a self-sustaining culture of entrepreneurship, rapid development, commercialization, and application of new technology, and a labour force that is habituated to moving where the jobs are.
As Carney aspires to outpace or match U.S. productivity growth, he would do well to consider some of the less entrancing side effects of American economic dynamism: higher income inequality, job insecurity, community disruption, public pension insolvency, and health care costs that cause over half of all personal bankruptcies. None of these would be a recipe for political popularity in the current Canadian context.
More fundamentally, Canada lacks the culture of entrepreneurship that is the secret sauce of the American model. Instead, as laid out above, business groups tend to approach the government with a plan to solve what in the United States would first be considered a problem for business to solve.
This is not to say that Carney will not succeed in ushering in a new era of Canadian productivity growth. We have to up our productivity game. However, overtaking the U.S. could result in a Canada that is neither recognizable nor acceptable to voters who now seem so bent on protecting the Canada they cherish today.
This is not to say that overtaking the U.S. should be off the table; just that our eyes should be open to the trade offs such an effort could entail.
