A new study shows that labour productivity improvements explain nearly all worker pay gains in Canada over the past four decades.
The Fraser Institute study examined data from 1981 to 2024 and found that a one-percentage point increase in labour productivity resulted in a 0.98-percentage point change in hourly compensation, which includes salaries, wages and pension benefits.
“Despite any claims to the contrary, the best available evidence clearly shows that gains in labour productivity explain almost all the gains in income,” said Philip Cross, senior fellow at the Fraser Institute and author of the study titled “Higher Labour Productivity is the Key to Faster Income Growth.”
Canada faces productivity crisis
The findings come as Canada experiences what the study calls a productivity crisis. Labour productivity in Canada has increased by only 3.6 per cent since 2015, compared to 4.1 per cent in 2000 alone.
This sluggish productivity growth helps explain why inflation-adjusted incomes in Canada are currently declining, according to the research.
Labour productivity measures the ability to convert inputs such as labour and raw materials into useable goods and services. For worker compensation to increase, Canadian workers must become more productive at converting inputs into outputs for each hour worked.
Policy implications for governments
The study’s results suggest that governments seeking to improve living standards and increase incomes must prioritize policies that boost productivity rather than other approaches.
“If governments in Canada want to help increase incomes and improve living standards, they must focus on policies to improve productivity,” Cross said.
The Fraser Institute is an independent Canadian public policy research organization with offices in Vancouver, Calgary, Toronto, Montreal and Halifax. The institute says it does not accept government grants or research contracts to maintain its independence.
