In Retrospect, Canada's Past Decade Looks Pretty Good

Did We Grow as Much as Expected Over the Past Decade?

In 1998, Global Insight forecasted that, over the upcoming decade, Canada's population would grow 12%, but it actually grew only 10%. It is surprising but gratifying, then, to note that economic growth over the period was a cumulative 38% relative to the forecasted 27%. That is, over the past decade our economic growth averaged 3.8% per year, considerably above the 2.7% per year forecasted, while population grew 1.0% per year, a shade below forecast. Over the past decade, GDP per capita—the most common and accepted measure of Canada's standard of living—grew an average of 2.6% per year, relative to the forecast of only 1.4% per year. Thus, today Canada's standard of living is a full 10% higher than we forecasted it would be a decade ago. This is warm news in the midst of a cold Canadian winter!

Why Have We Done Better Than Expected?

The stronger-than-expected growth in our standard of living was very much due to the stronger economic growth component. Both population and labor force growth were just slightly below forecast, while the labor force participation rate was about 68%, as forecasted. Nevertheless, despite a smaller population and labor force than expected, Canada had about 1% more people working in 2007 than we had forecasted, with men and women equally represented. This was almost entirely due to unemployment being significantly lower than forecasted, at 6.0% in 2007 as opposed to the 7.9% forecasted in 1998.

With GDP growing 10% more than forecasted over the decade and employment growing 1% more than forecasted, GDP per employee obviously grew much more than expected. Hours worked per job remained in the 33–34 hours per week range over the decade, so increased "work intensity" per employee did not contribute significantly to the increased GDP. In the late 1990s, we were obviously very pessimistic about Canada's ability to increase labor productivity (GDP/employee). We had observed weak economic growth, high unemployment, and weak labor productivity in the early 1990s. Against that poor record, we forecasted weak labor productivity growth over the upcoming decade, and only a modest reduction in the unemployment rate.

Fortunately, Canada performed much better than we expected, with GDP per employee (as well as per hour worked) growing above forecast over the 1997–2007 decade, and thus Canada's standard of living growth also outpaced the forecast. Most (about 85%) of the strength in GDP above forecast over the past decade was due to productivity, with only about 15% being due to employment.

We Narrowed the Canada/U.S. Standard of Living Gap Over the Past Decade

In 1997, Canada's standard of living was almost 82% of the U.S. level. Canada's cumulative GDP growth of 38% over the past decade well outpaced the U.S. growth of 33%, while population in both countries grew about 10%. Thus, GDP per capita grew considerably more in Canada over the past decade, at 26%, than it did in the United States, at 20%. This allowed us to close the Canada/U.S. standard of living gap, from the 82.0% of the U.S. level in 1997 to 84.4% in 2007, with a peak of 86.0% in 2002.

How Were We Able to Narrow the Standard of Living Gap?

With matching population growth in both countries, clearly it was Canada's stronger GDP growth that closed the standard of living gap. The base for this was not labor productivity (GDP per employee), which grew about 12% over the decade in Canada, compared with 18% in the United States. Instead, the powerhouse behind Canada's higher GDP growth was employment growth, which soared by 23% over the decade, compared with just 13% in the United States. There were two drivers of Canada's relatively greater employment growth. First, the labor force participation rate increased in Canada, while it fell slightly in the United States. Second, Canada reduced the unemployment rate significantly, from 9.1% to 6.0%, while it fell only slightly in the United States.

In 1997, Canada's labor force participation rate and unemployment rate left significant room for improvement. Today, labor markets are operating much more effectively. Thus, over the next decade, to increase its standard of living, Canada cannot count on such a high level of employment growth. The only way to increase the standard of living on a sustained basis will be to increase labor force productivity.