There has been a lot of concern over the slow increase in living standards of the average Canadian over the past few decades.
In the long run, economists say that the key to increasing real – corrected for inflation – wages is to increase productivity of those in the labour force. How to actually do that is complicated. And it’s even harder to implement the potential solutions, which can be politically dicey.
The first thing, and the longest-term thing, is to increase the skills of workers.
Canada does a reasonably good job in its public education system of having graduates who are literate, numerate, technically aware and able to absorb further knowledge in the post-secondary system of vocational, technical and university education.
However, some resource misallocation exists: surplus people in ‘soft’ humanities and social sciences programs, not enough in science, technology, engineering and mathematics (STEM) programs.
Yet on the whole, Canada’s workforce is well-trained. The post-secondary educated represent half the total, and that’s near the top of the list of Organization for Economic Co-operation and Development (OECD) nations.
Another crucial thing is confidence in the rule of law and ease of doing business in a country, both for foreign investors, and local or national ones.
In this regard, Canada is mediocre, ranking only 22nd in the World Bank’s 2018 assessment. Many other developed nations are more attractive for investors. Anyone trying to get a mine, pipeline or construction project started can attest to this. Also, sectors such as communications, media, transportation and health care are highly regulated, deterring interest.
The other major factor affecting long-term productivity is the deployment of capital investment for the ultimate benefit of the skilled workforce. Again, Canada is doing badly in this regard.
From 2016 through 2018, non-residential private investment grew from $154 billion to $157 billion, or just three per cent, far lower than the growth rate in nominal (not adjusted for inflation) gross domestic product of about five per cent.
Potential rates of return must increase to encourage capital investment, and the productivity improvements and wage growth that follow.
Policy changes must be made, including to corporate income tax.
Like Quebec, the new Alberta government in Alberta is embarking on such a change. It will gradually lower its tax rate on corporate income from the current 12 per cent down to eight per cent by 2023. This will make the combined federal and provincial corporate tax rate in Alberta 23 per cent, unless the federal government changes rates in the interim.
This will help make Alberta not just competitive with the rest of Canada, but with the United States, too. In the U.S., the combined federal and state rate averages about 26 per cent.
However, the U.S. has another advantage: immediate expensing of all capital expenditures. Only some sorts of machinery receive such treatment in Canada, while other equipment, instruments, structures, intellectual property and vehicles are not included.
The U.S. reforms undertaken since the election of President Donald Trump have already boosted corporate capital investment and raised productivity and wages, with little effect on revenues to government.
It should also be noted that Ireland’s low corporate rate of 12.5 per cent has been vital to that country’s rise from poverty to prosperity.
Canada can’t just wait around for the oil price to recover or pipeline projects to finally get built. Our leaders must make the country more attractive to investors by encouraging investment.
As higher levels of investment and productivity improve our trade balance, the loonie will rise, further increasing individual purchasing power.
Without these policy changes, our standard of living will keep rising very slowly.
Ian Madsen is a senior policy analyst with the Frontier Centre for Public Policy. Anderson Agbugba, a Frontier Centre intern, contributed to this article.
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