Explaining Slower Productivity Growth: The Role of Weak Demand Growth

Using panel data on Canadian industries and OECD countries, this article examines empirically the role of growth in domestic and external demand in labour productivity growth. The findings suggest that most of the post-2000 slowdown in business sector labour productivity growth was the result of weak demand growth, which impacts productivity directly by reducing economies of scale and scope and by affecting key productivity drivers such as investment and R&D. With an expected slowdown in both domestic demand growth in Canada and external demand growth for Canadian exports, the medium- to long-term outlook for productivity growth, and hence for real income growth of Canadians, is expected to be weak. CANADA’S BUSINESS SECTOR labour productiv-ity growth increased at a meager 0.8 per cent per year since 2000, slightly over half of the pace registered during the 1981-2000 period. Productivity research has largely focused o