Economic growth may not be as strong in the future as it has been in the past. This conclusion is critical for policy-makers, since expansion of national income fuels government revenues that are, in turn, used to fund social priorities.
Economic growth comes from having more workers or using the available workforce more productively. Consider the post-Second World War environment. The postwar baby boom created a large number of future workers, and there was a rise in the labour force participation of women, increasing the overall number of workers. Canada also experienced strong productivity growth over the decades following the war. The confluence of these trends generated strong economic and tax revenue growth, with the result that the central issue for governments was deciding what new benefits they would offer Canadians.
The tide has now turned. The first of the baby boomers hit age 65 in 2011. Their labour force participation will decline in the coming years, and the ratio of workers to retirees will decline. Meanwhile, women’s labour force participation has stabilized to just modestly below that of men. The result is slower labour force growth that will not be adequately offset by increased immigration. Over the next decade, the trend rate of growth in Canada’s labour force will slip down toward 0.5 percent per annum.
Canada is also challenged by weak productivity growth, both relative to that in many other industrialized countries and in absolute domestic terms. Economists have not been able to explain adequately why productivity has been so weak and on a declining growth path. The everlasting hope for stronger productivity growth has consistently met with disappointment. Unless there is a significant change, productivity will be hard pressed to grow faster than 1.5 percent annually.
This combination of limited labour force growth and sluggish productivity gains means the Canadian economy will be lucky to grow at a 2 percent annual growth rate in the years ahead. This is roughly one-third slower than the trend rate that economists expected in the 1990s. Adding 2 percent inflation, the Bank of Canada’s target, to the projection for 2 percent economic growth produces an outlook for annual income (nominal GDP) growth of 4 percent. This is one-fifth slower than the 5 percent widely assumed a decade ago. This fundamentally changes the issue for governments to one of how they will afford the public services that Canadians deserve and require.
Are we doomed to this fate? The answer is that every challenge creates its own opportunities. The moderation in labour force growth is inevitable, but we can improve labour market outcomes. The Aboriginal, immigrant and youth labour force is underutilized. The key is to ensure that these groups have the skills that employers require and that businesses better appreciate the contribution that these groups can make. Barriers to career development for women, minorities, the disabled and those who face discrimination over sexual preference must be removed, so the full potential of these groups can be unlocked.
There is also scope for greater investment in productivity-enhancing capital and more innovation by businesses. Canada’s business culture needs to become more entrepreneurial and competitive. While the onus is on the private sector to rise to the challenge, public policy can help by incentivizing greater saving and investment. Superior labour market outcomes and stronger productivity could lift the trajectory of the economy.
Some observers speculate, in apocalyptic terms, about the end of growth. It is a ”Chicken Little” prediction. But policy-makers cannot assume that growth will resume at postwar levels. Unless Canada changes the path it is on, the outlook is for slower-trend economic growth in the years ahead.