INDU Committee Meeting

STANDING COMMITTEE ON INDUSTRY

COMITÉ PERMANENT DE L'INDUSTRIE

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, November 2, 1999

• 0904

[English]

The Chair (Ms. Susan Whelan (Essex, Lib.)): I'm going to call the meeting to order pursuant to the committee's mandate under Standing Order 108(2), a study concerning productivity, innovation, and competitiveness.

I'm very pleased to once again welcome to the committee Dr. John Baldwin, the director of microeconomic analysis at Statistics Canada, and Dr. Serge Nadeau, the director general of the microeconomic analysis directorate, the Department of Industry.

Both gentlemen have a presentation to make to the committee. We'll go through the two presentations and then to questions.

We're going to begin with Dr. Baldwin.

Dr. John Baldwin (Director, Micro Economic Studies and Analysis Division, Statistics Canada): Thank you very much.

• 0905

I've come a cropper with technology here today; while we're talking about productivity and technology gains, one of the machine's lamps is out and I therefore can't give you a bilingual slide presentation.

The material, however, is all in your folders. If I could bring your attention to what I'm going to be covering, it might be easier for you to follow along.

In particular, there are two slide presentations, the black and white versions in the blue folder that was handed out to you. They were the slides that we were going to make reference to. I will be effectively following as text an article that was recently published in Statistics Canada's flagship publication, the Canadian Economic Observer. It's the feature article, called “Productivity Growth in Canada and the United States”. Those are the two documents you will need to follow.

Let me start by indicating that productivity is one of several key indicators of the health of an economy. It's only one, however, but I'm going to focus on that one today because that's what I was asked to do. It's a measure of the productive capability of an economy: how much output an economy produces relative to the resources that go into production.

Statistics Canada measures the growth in productivity that occurs over time. Changes in productivity capture our progress in improving our capability to produce output as we increase our inputs. Productivity growth captures the increase in our productive efficiency. Increases in productivity stem from improvements in knowledge and in production techniques, and these increases can occur because plants become larger or exploit scale economies or use higher quality labour or introduce better quality products. They can also arise from organizational changes in management or the way in which production is organized on the shop floor.

The most commonly used measure of productivity is labour productivity: the amount of output produced per worker or, as we measure it, the amount of output produced per hour of labour input. This particular measure is affected by the amount of capital that's provided to workers. Capital is simply the cumulated past investment made in machinery, equipment, and buildings. Plants that have more capital tend to have a higher output per hour worked.

Since it's important to know whether changes in labour productivity occur because of changes in the amount of capital used, as opposed to other factors, Statistics Canada and most other agencies around the world also produce what's referred to as a multifactor productivity measure. It bundles labour, capital, and intermediate inputs together into a single input measure and measures changes in output relative to changes in inputs. It's a more complex concept, but I find it relatively easy to explain if I simply say, think of yourself as a businessman, and if your output increases by 6% and all of your inputs increase by 5%—appropriately weighted, of course—we say there's a 1% increase, or the difference between six and five, in multifactor productivity.

In our first major slide, entitled, “Both labour and multifactor productivity in the business sector exhibit a slowdown after 1973”, you can see a bar chart showing you the level of labour productivity and multifactor productivity over the period 1966-1997, broken into sub-periods. Over the last three decades, 1973-1979, 1979-1988, and 1988-1997, multifactor productivity has been about the same in each of these decades.

Labour productivity growth has been about the same in the last two decades, but what's important to note is that during these last three decades or three periods, our rate of growth of productivity, whether it be labour or multifactor, has declined very considerably, compared to earlier periods. This is a phenomena that struck widely across OECD countries, and particularly in Canada and the United States, in North America.

With the next slide I want to emphasize that while we've had relatively constant rates of labour productivity over the last two decades, that does not mean the 1990s have been a rosy period. Some people, in listening to my presentation earlier, have noted that I seem to be implying, since productivity growth is about the same in the 1990s as it was in the 1980s, that the 1990s must be about as good as the 1980s. That's not true. The 1990s have been accompanied by many other factors in the economy that have to be taken into account when you evaluate how well we're doing. We've had increased unemployment, stagnation in income per worker, and increasing polarization of before-tax family incomes.

• 0910

If you turn to the next slide, entitled “Sources of growth in the Canadian business sector for different sub-periods”, it shows you the rate of growth, or real output, over the same sub-periods; the rates of growth in what we call labour and capital input; and finally, our measure of multifactor productivity. Our measure of multifactor productivity is the grey bar on the right-hand side of the four in each panel. You can see that over the last three periods, that light grey bar has about the same height. That is, our multifactor productivity—the rate at which we're growing our outputs relative to our inputs—is about the same.

If you look at the bar on the left-hand side of each one of those, the darker grey bar, which is the rate of growth of real output, you can see it has been continuously declining from the 1960s, and in the 1988 through 1997 period, it's lower than in the previous two decades. So you can have relatively constant productivity growth, but overall your economy can be doing much less well in terms of its rates of growth.

Let me now turn to Canada-U.S. comparisons of productivity growth rates, the topic on which I'm going to spend most of the time today.

Cross-country comparisons of productivity are invariably difficult. Output and input measures are not produced in the same way by different countries. Labour is sometimes measured in terms of number of people working or number of jobs, as opposed to number of hours worked. Adjustments to both of these can be made to reflect the quality of the workers in different situations. Capital can be measured differently: as gross capital or as gross capital net of depreciation—what some people refer to as used and useful capital.

In comparing across many disparate countries, it's very difficult to get a comparable measure in many circumstances. Fortunately the U.S. Bureau of Labor Statistics produces measures that are reasonably similar, though not identical, to the Canadian. We can make straightforward comparisons of labour productivity, and I will do so in a moment. Our comparisons of multifactor productivity are a little more difficult, but we can ask whether those comparisons change if we change our assumptions, and I will do that as well.

The figure in the Daily article on page 3.2—and it's figure 10 in your slide handout—compares business sector labour productivity in Canada and the United States over the period from 1961 through 1997. It's clear from this that Canada and the United States have followed relatively similar paths over long periods of time. We diverged from the American experience in the very late 1960s and early 1970s, prior to OPEC, but since that time we have followed them quite closely.

A comparison of multifactor productivity growth is slightly more problematic, because there are more differences in the assumptions made here. But if you turn to the next graph, figure 2 on page 3.3 or number 11 in your handout, you can see the rate of growth, and that's what this—

The Chair: Dr. Baldwin, you should know our handouts aren't numbered, so you're going to have to refer to the titles.

Dr. John Baldwin: Yes, I know. I'm sorry. They were numbered on our slide presentation.

The Chair: Yes, but you're going to have to refer to the title on the slide.

Dr. John Baldwin: It is entitled “Business Sector Multifactor Productivity: Canada New and U.S.A. New”, or figure 2 on page 3.3 of the article.

[Translation]

You will find that figure at page 3.3 of the “Feature Article” published in the Canadian Economic Observer.

[English]

Is everybody else where I am? I'm trying to go quickly, since I'm told I have 15 minutes.

You can see the multifactor productivity estimates—and these are growth rates over time, all indexed to 1961—show Canada diverging and doing better than the United States for the period post-1981. But the differences between Canada and the United States are relatively small. If we change the assumptions that are made by the two countries in order to bring them somewhat closer together, we produce estimates of productivity growth in Canada—as opposed to the United States—that approach one another even more closely. Those we've given you in figure 3, on page 3.3, or the next slide in your handout, entitled “Canada/U.S. Labour Productivity Ratio Compared to Canada/U.S. MFP”. These are simply the rates of growth of productivity in Canada relative to the rates of growth in the United States.

• 0915

The fact that this starts at 100 and moves above indicates that Canadian growth in the early part of the period was slightly higher than the American. It peaks in about 1981, and then it comes down ever so slightly by 1996, by about five percentage points. But the important thing to note is the size of these scales. We start at 100 and end up at about 106. After a very long period of time, almost forty years, there is essentially a five-percentage-point difference in the cumulative rate of growth in the two countries using this measure. So both our measures of labour productivity growth and multifactor productivity growth show a similar trend.

I should perhaps move off to one side at this stage and note that I'm only talking about rates of growth. There are alternate ways of looking at how we perform compared to the United States. We could talk about levels. We could talk about whether or not our output per worker is higher or lower than the United States. Our program is aimed at producing rates of growth, and that's what I'm discussing today. My colleague, Monsieur Nadeau, will discuss how we compare in Canada to the United States when we look at levels.

If I've just shown you that the Statistics Canada program shows relative similarity in the two countries over this period in terms of rates of growth, the next question I was constantly asked as I made this presentation earlier this spring was whether the period we're in now is an anomaly. Is there something different about today as opposed to 29, 50, or 80 years ago?

Figure 4, on page 3.4, or the next figure in your handout, which is called “Historical Growth Rates/Canada and the United States”, compares our growth in output per employee over a very long period of time. In fact, it goes almost back to Confederation, to 1870. The bar charts here show the annualized rate of growth in the United States and Canada in the simplest measure of productivity over this entire period.

You can see that in the 1961-1997 period, Canada, which is the bar on the right in the figure in the Canadian Economic Observer—and I've just noticed that it's the bar on the left in my slides—did slightly better over the 1961-1997 period, it was identical to the U.S. in the 1950-1960 period, and it was slightly higher for 1929-1950. Coming out of the First World War, we definitely fell behind in the boom period of the 1920s, and we were slightly behind in the 1870-1930 period. So over a very long period of time, the simplest measure of productivity that we can measure over long periods of time is almost identical in the two countries.

The last issue I want to address is one that was raised earlier this spring, when we were discussing what our productivity numbers showed. Prominent journalists argued that it was really not very sensible for us to claim that productivity growth in Canada had been about the same in the 1990s as in the 1980s, because everybody knew that standards of living had not increased as quickly in the 1990s as they had in the 1980s. Most people associate or equate productivity to a standard of living, and it's a standard of living measure measured as output per capita. The last section in this presentation deals with this conundrum.

Is it possible that you could indeed have a standard of living not growing as quickly as your productivity level? Essentially the answer is yes, it's quite possible. Standard of living as measured by output per capita is connected via an identity to a productivity measure. That identity is very simple. Output per capita, which is the standard of living most, or at least many people use—it's not the only one we could use—is equal to output per hours worked times the number of hours worked over the number of people in the economy. The two, output per capita and output per hours worked, should move closely together unless something happens to the third part of this equation, which is the number of hours worked per number of people in the economy.

• 0920

Figure 5, the figure in the text called “Reconciliation of real GDP per capita to labour productivity—Canada”, looks at and reconciles these two different measures. It actually does it in a more complex way than what I have just described verbally. Actually, real GDP per capita is equal to real output per worker or labour productivity times number of hours worked per job times number of jobs per population 15-plus times population of 15-plus to the total population. So your output per worker and output per capita can be going in different directions if all of those other components aren't increasing in the same way.

If you look at this particular graph, I can tell you that the left-hand sidebar, which is real GDP per capita, in effect is just equal to the sum of all of the other bars. You can see that in the 1979-1988 period, output per capita is growing more rapidly than labour productivity—output per capita being the left-hand bar, labour productivity the right—and the reverse occurs in the 1990s. Output per capita growth has fallen if you compare the left-hand side to the right-hand side. That very left-hand sidebar, real GDP per capita growth, is much less in the nineties, but productivity per worker or labour productivity is about the same. What's the reason for this difference? The ratio of jobs per population 15-plus has fallen dramatically. It was positive in the 1979-1988 period, but it is negative in the nineties.

Why did this occur? Well, it has to do with the macroeconomic climate that we've faced. In the 1980s, during the recession early in the decade, a lot of people lost their jobs and the number of people holding jobs relative to the total population fell, but over the rest of the decade it climbed back up. So overall, we were producing about as many hours worked or jobs relative to the population as we had before.

In the 1990s, in the recession, the number of people working compared to the population fell again, but instead of just falling for one year as it had in the 1980s, it fell for two and three years and then it did not recover for a long period of time. We just had very anemic growth. This is relatively important, because it means our standard of living didn't continue to grow when we measure our standing of living as output relative to everybody in the economy.

It's also relevant when we come to compare what's happening in Canada and the United States. While we had a relatively anemic job market in Canada over this period of time, the Americans didn't. They continued to employ about the same percentage of workers, and they continued to grow hours worked. As a result, their GDP per capita continued to increase at about the same rate as their hours worked.

What does that mean when we compare Canada to the United States in terms of the relative standard of living? It means we essentially peak out and do relatively badly in the 1990s and the Americans don't, not because our productivity growth rates slowed down compared to the Americans, but because the rate at which we are employing our population does.

I have two graphs—

The Chair: Just before you go on to the next graph, can I ask you just to identify which bar is which in here for the committee's sake, for reconciliation? The little boxes aren't clear.

[Translation]

Dr. John Baldwin: Pardon me?

[English]

The Chair: “Reconciliation of real GDP per capita”, the one you were just explaining on labour productivity for the last two business cycles. There are five bars. I got the left and the right, but could you identify the ones in the middle just to make sure we're clear.

Dr. John Baldwin: If we get that slide out, the colour does it. It is very difficult to see here, but if we put up slide 17, I'll go back over it.

The Chair: Is the order at the top just the same as across?

Dr. John Baldwin: Yes.

The Chair: Okay, that's fine. I just wanted clarification for the committee's sake.

Dr. John Baldwin: So the left-hand bar is the rate of growth for real GDP per capita. You can see it is much higher in the earlier period than in the later period. The right-hand bar is the rate of growth of labour productivity. It's actually about the same in the two periods.

If we look at the other components, they are about the same. The real change occurs in the ratio of jobs to the population 15-plus. It's actually growing in the 1979-1988 period, and it declines over the 1990s.

• 0925

So what happens when we compare Canada with the United States using these various measures? Well, here is labour productivity growth, which you've already seen. With regard to Canadian labour productivity growth, you can see that the blue curve continues to increase at about the same rate as the orange curve, which is American growth. It's essentially going up at the same rate over this latter period. But if we look at our per capita growth rate—that is, our output per capita in the 1990s—we can see that the Canadian line essentially “troughs” in the recession and is only regaining its previous 1988 levels now, whereas the American line continues to move upwards, much as its productivity measure did.

So over this period of time in the nineties, when we have done relatively poorly in terms of GDP per capita, it's primarily because we have employed less people relative to the population. Now, that may be either because people have chosen not to work, as I'm careful to note in the paper, or because they can't find work. We make no judgment as to whether this is as a result of inadequate demand or the changing nature of labour markets, with people taking earlier retirement. But you can see that the similarity in the two growth curves prior to the 1990s disappears almost completely in the 1990s.

That completes my presentation.

The Chair: Thank you very much, Dr. Baldwin.

I'm now going to turn to Dr. Serge Nadeau.

[Translation]

Dr. Serge Nadeau (Director, Micro Economic Analysis Directorate, Department of Industry): Good morning and thank you for having invited me to make another presentation on productivity.

[English]

My talk is divided into two parts. First, I will talk about the importance of raising productivity to improve our standard of living. Second, I will discuss the factors that influence productivity—in other words, the factors on which we should act if we want to improve productivity.

You will see that my talk is very complementary to John's. While John was focusing on growth rates, I'll focus on levels and on only labour productivity. As John mentioned, multifactor productivity is very difficult to measure. Depending on the assumptions we make, we get different results.

As well, if we want to make comparisons in terms of standard of living, there's a much more direct relationship between labour productivity and standard of living.

First, what is productivity? We can talk about very complicated formulas, but the idea is actually very simple. Here I have a very simple definition. Productivity is the measure of the efficiency with which people, capital, resources, and ideas are combined in the economy.

The key word here is “efficiency”. To make it clear, productivity is not about people working harder or longer hours. It's about people working smarter. It's about people working more efficiently.

Why are we interested in productivity? This question is one of the few on which all economists agree in terms of answers. Productivity is the key long-run determinant of a country's standard of living. This chart is striking in terms of the relationship between labour productivity and wages. The higher the productivity in a country, the higher are the wages in that country.

Now, as labour productivity increases, wages increase. The relationship is almost one to one.

• 0930

Where does Canada fit? It's pretty good. High productivity; high wages. But the issue here for many Canadians, I believe, is that Canada could do much better.

In fact, there is a consensus building on the productivity issue. Here I'll cite one of the most prominent Canadian economists, who said the following at a “prestigious C.D. Howe lecture”. He says:

Productivity growth has been the dominant source of the exponential rise in the standard of living in Canada and other industrial countries for the past two centuries. If Canadians cannot get their productivity moving, they can forget about the growth of real income per capita over horizons longer than five to ten years.

This again stresses the fact that productivity is the key determinant of the standard of living in the long run.

Again, I showed that there was a very close relationship between productivity and wages across countries. We can see that over time, too. As productivity goes up—this is in Canada—wages also go up. There's a very close relationship.

Mrs. Brenda Chamberlain (Guelph—Wellington, Lib.): Madam Chair, is that because of jobs? Can you explain why that is, rather than saying that's a fact. I don't doubt it, but why is it?

The Chair: I'll ask the committee not to interrupt the presentation, because if the presentation is going to be extended, it's going to be very extended, and we're going to have interruptions all through.

Mrs. Brenda Chamberlain: Okay.

The Chair: Dr. Nadeau, I have another question. Is this bilingual? I had asked Dr. Baldwin not to do it if you could do it in only one language. I see only one language showing up here, so I'm concerned.

Dr. Serge Nadeau: There are some slides in French along the way, so it's bilingual.

The Chair: Okay, thank you.

Dr. Serge Nadeau: In terms of standard of living, let's see what happened over the last 30 years. During the sixties the standard of living in Canada grew at about 3.3% a year on average. Over the last 10 years, however, it has grown at about a fifth of that rate, that is 0.7%.

Now, what does it mean? Well, concretely, it means that the standard of living was doubling about every 21 years. At that rate it takes 21 years for the standard of living to double, while now it takes more than 100 years.

What it means is that during the sixties one could expect that one's children would experience twice as good a standard of living in the sixties. Now it takes four generations to do that.

Maybe more a more concrete measure is about average family income. Over the last 20 years, average family income has increased by about $20 per year, and that's per family. Twenty dollars per year means about 40¢ or 50¢ a week. It's about the value of a coffee. This is what we have seen cited very often in newspapers.

In terms of after-tax family income, we have experienced a decrease of about $142 per year. Now, $142 may not be a lot, but over 20 years this is $2,800. This is about the value of a vacation for a typical family.

The point is that Canada, I believe, can do much better, and we can see that if we compare ourselves to the U.S.

Why do we want to compare ourselves with the U.S.? Well, there are several reasons for that. One of them is that this is our closest neighbour and it's a country to which most Canadians compare themselves to. Second, whether we like it or not, the U.S. is our major competitor, and it's the most dynamic economy in the world. So we are competing with them.

• 0935

Comparing ourselves with the U.S. does not mean we should adopt their policies. In fact, I don't think anyone would argue that gun laws increase the standard of living or productivity. The issue here, the point of this chart, is to show that the economic pie in the U.S. is much bigger than in Canada.

In fact it is much bigger. Here, as John mentions, when we try to make comparisons across countries it is very difficult because we need to deal with the exchange rate and so on. If we use what is called the purchasing power parity—in other words, 85 cents is the purchasing power of a Canadian dollar in the U.S., and this is probably more representative of what economists believe is...I wouldn't say the true value of the dollar, but a more representative value of the dollar—then the difference of income per capita between Canada and the U.S. is $7,500 per year per person.

If we use the exchange rate that prevailed at one point of 67 cents, this is $17,000. This is probably much too much. It was in the newspaper, but it's exaggerated. This $7,500 means that Americans on average receive, in terms of earnings or services from the government, $7,500 more per year.

Why is it that the standard of living in the U.S., or income in the U.S., is so much higher than in Canada? John has looked at the increase in the gap during the 1990s and has found that it was mostly due to higher employment in the U.S. than in Canada. That's correct, but that's the widening of the gap. Here I'm looking at the level—in other words, the $7,500.

The reasons Canada has a lower standard of living than the U.S. are very simple. It's something on which all economists agree. Yes, in Canada there are not as many people working, and that explains about 4% of the gap. That explains about 4% of the gap over the 1989-1998 period, or $240 a year.

The rest, the whole thing, 96%, is due to lower labour productivity. Employment is important; of course increasing employment is important. But productivity explains the largest portion of the standard of living gap between Canada and the U.S. Again, this does not explain the widening of the gap during the 1990s; it explains the gap itself.

In terms of productivity, as John has mentioned, the productivity or total economy compared to the U.S. has remained about the same. Okay, we had a gap of about 15% at the beginning of the decade; it is still now about 15%.

In manufacturing, however, the gap has widened significantly. Now it's around 25%. We can say, well, we have had a gap for 80 years, so that's a fact of life. Actually many economists would say this is not a life sentence. This is something that we can do something about, and that other countries have done something about.

In fact, as we will see, Canada is the only country in the G-7 that has not closed its gap relative to the U.S. in terms of productivity. In 1976 Canada was second in terms of productivity level among the G-7 countries. In 1997 Canada was fifth. All other countries have converged to the U.S., are much closer to the U.S., and have overtaken Canada.

Now, what about regions? Some regions are more productive than others. Here what's interesting is that again it shows a relationship between productivity and standard of living. The richest regions in Canada are also the most productive. But the most interesting thing on this chart is that even our most productive regions in Canada are far behind the U.S.

• 0940

For example, I have here the New York, California, and U.S. average. In fact, on average, even our most productive regions are 10% or so less productive than the U.S. average. As I've said, these are not the most productive regions in the U.S. The most productive state is Alaska. Connecticut also is very productive. It's about 160. I could use more neighbouring states, like Michigan. I believe Michigan is at about 120, so it's about 15% more productive than Ontario. Why is that? The weather is not that different.

In terms of the industrial sectors, Canada is more productive than the U.S. in very few sectors. What's interesting is that these sectors are resource-based sectors: crude petroleum, primary metal, paper and allied, and lumber and wood. There is transportation, where we're doing quite well, and also stone, clay, and glass. In transportation equipment—that's the auto sector—we are more productive than the U.S. But the point here, what's interesting, is that, yes, the sectors in which we are doing better than the U.S. are natural-resource-based sectors, sectors in which we have a large endowment.

What's also interesting here is that if we look at the two fastest-growing sectors in North America—that is, machinery, electrical, and electronic equipment—these are what we call knowledge-based sectors, very fast-growing sectors, more dynamic sectors, and Canada's productivity is about half that of the U.S. Of course, that can vary from company to company. Nortel is very competitive. These are just averages. But the fact is that in these sectors overall, we are 50% less productive than the U.S.

You may be wondering why I make such a big fuss about productivity while you have read in newspapers that in fact Canada has increased its competitiveness over the last 10 years. The purpose of this chart is to show that, to reconcile these two views. What you will see is that our increase in competitiveness has come solely from the drop in the Canadian dollar. The drop in the Canadian dollar is good for exporters. But let's admit it. The drop in the Canadian dollar is, as some people would say, un appauvrissement collectif.

Let's go to this chart. As I've said, it's a bit complicated, but we'll see.

It is correct that Canada's competitiveness, at least measured in terms of unit labour costs, that is, how much it costs to produce one unit of output in the manufacturing sector, has increased significantly over the last 10 years. In fact, it has increased by almost 18%, but let's see where this increase in competitiveness comes from. Labour productivity in the U.S., as we saw earlier, grew faster than in Canada in manufacturing during this period. So from a labour productivity point of view, we lost about 8% in terms of competitiveness.

Now let's look at wages. Wages compensated a bit for that. Wages in Canada didn't grow as fast as in the U.S., and in fact on that front we gained 3.1%. So taking these two facts together, we had a 4.7% drop in competitiveness. The big gain came from the depreciation of the dollar, a 22.6% drop.

I'm not saying the drop in the dollar is due to lower productivity growth, and I'm not saying that lower productivity growth is due to the low dollar. I'm just saying this is what happened for the manufacturing sector in the aggregate.

What can we do to improve productivity performance, or rather, what are the factors that influence productivity, or why is it that our productivity performance has been lacklustre at best? Is it because Canada has several shortcomings? We're going to go through such shortcomings, but first let's look at the assets on which Canada can build to improve productivity, because we have such assets. In fact, on the deficit front, if we compare Canada to the U.S., Japan, and the European Union, we are second in terms of having the highest surplus; the U.S. is first. On inflation, again we're second; Japan is first. But we are first in terms of expected growth.

• 0945

The OECD predicts that we will have the fastest growth over 1999-2000. Our stock of knowledge workers is great and we form a lot of workers. We have the lowest labour costs. In network infrastructure and communications infrastructure we rank first, with the lowest R and D costs. And of course we have the highest quality of life. So we have several assets upon which Canada can build. On the other hand, as I mentioned, we also have quite a few shortcomings. One is that it appears that Canada's industrial structure is not as dynamic nor as flexible as that in the U.S.

Let's look again at the two fastest-growing industries in North America in the manufacturing sector: electronics and other electrical equipment and machinery. U.S. productivity in these two fastest-growing sectors has been about three to four times faster than in Canada. But even more important is that the U.S., because it is productive in these areas, has been able to double its share of these two sectors in their output while Canada has barely increased its share over the period. So these are the two fastest-growing sectors—productivity sectors—in the U.S., and they happen to be the two fastest-growing sectors in North America.

Now let's look at the two fastest productivity growth sectors in Canada. These are tobacco and refined petroleum and coal. These are not exactly the fastest growing. Natural resources are great and are important, and it's great that they've improved their productivity, but let's face it, these are not exactly the sectors of the future.

Another thing too is that while productivity increased in part because output was increasing, here we see the output share has barely moved. In fact, we can dig a bit further down and find that productivity here has come from shedding labour. Here productivity has been accompanied by a labour increase and here it has been accompanied by shedding labour. This is not exactly what we want in terms of productivity growth. Of course, productivity growth is good, and we would like productivity to grow faster; however, we would also like this to be accompanied by an increase in output.

Investment is also an area where Canada could do better. There is a very strong relationship between M and E investment—this is machinery and equipment investment—and productivity. Of course, machines make people more productive. Canada has low investment and also low productivity growth. In fact, compared to the OECD countries Canada, on average, has ranked about 20% below the OECD average and about 10% to 15% below that of the U.S. At this juncture our investment in M and E is about 30% below that of the U.S. or the OECD average. This is investment; this is not capital stock. So this is year after year after year.

Foreign direct investment is actually good for productivity. Why? Because we import know-how and we import innovation. What's happened though is that while the total amount of foreign direct investment in Canada has increased, our share of total North American investment has been decreasing. We are increasingly in competition with the U.S., and the U.S. has increased its share. To illustrate that indeed foreign investment is good, studies show that foreign-controlled firms are more productive than domestically controlled firms.

In fact, 100 here is the average productivity of foreign-controlled firms. What we see is that there is a 13% gap overall between the Canadian-controlled and the foreign-controlled firms. So on average, foreign-controlled firms in Canada are 13% more productive than Canadian-controlled ones. That makes a lot of sense. The firms that invest in other countries need to be competitive. They need to expand their markets, and therefore they are more productive.

Innovation is another factor that is extremely important. This may be the area where Canada fares the worst. There are several indicators of innovation. There is not only one indicator of innovation. You can look at input to innovation, which is R and D. You can look at output. In fact, John has done a lot of research in this area. To my knowledge, there is no indicator where Canada looks well in terms of innovation.

• 0950

If we look at R and D, Canada has the second lowest R and D expenditures as a percentage of GDP among the G-7.

If we look at patenting activity, what we see is that, in total, patenting activities in the U.S. are about three times higher than in Canada overall, but it's also across many sectors. It's even worse, for example, in computers and communications—very dynamic sectors—where the ratio is about four to one, and in electrical and electronics. Overall, we patent three times less, or maybe we are three times less innovative than the U.S., but it's four times in the most dynamic sectors. In fact it makes Manuel Trajtenberg, who is a primary economist at the Canadian Institute of Advanced Research, say that maybe Canada is missing the technology boat.

Also—and I think this comes from John's study—in terms of technology adoption, Canada does not compare well to the U.S. Large firms adopt as much technology as their U.S. counterparts do, but in the small firms it's only about 50%.

[Translation]

So, a skilled labour force is also extremely important for productivity. This graph provides a good example of the knowledge economy. The only jobs that have been created since 1990 have been jobs for post-secondary graduates. As a matter of fact, in the aggregate, only post-secondary graduates found jobs during the past ten years, which shows very clearly that we are in a knowledge economy.

As I mentioned earlier, Canada's performance has been very good as far as skilled workers are concerned. As a matter of fact, we come first in the rankings of the Global Competitiveness Report. We have the highest number of university enrollments. However, as far as training is concerned, we are only thirteenth in the rankings and we may be lagging in comparison to other countries.

About the taxation burden, we keep reading in the newspapers that the Canadian system is not beneficial to productivity. Of course, we hear a lot about that but we have seen that there are other factors to take into account. Obviously, the taxation system has an impact on productivity, but how does Canada compare to other countries?

The total fiscal burden in Canada is about 25 per cent higher than in the U.S. It is comparable to France, Italy and Germany but, let us not be mistaken, it is the U.S. that we are competing with.

Some economists claim that the most important factor as far as productivity is concerned is the corporate taxation burden. In manufacturing, we find that the Canadian taxation system is rather competitive with the U.S. Our taxation burden is about 10 per cent higher but that is still comparable. It is in the service sector that the situation is very serious. In that sector, the Canadian taxation burden is the highest of the G-7 countries and it is roughly 50 per cent higher than in the U.S. The problem is that it is the service sector that has the highest economic growth at the present time and we can expect that this will remain so in the future.

Another very important factor of productivity is trade. When we trade with other countries, we are obliged to become more competitive. Of course, Canada is a trading country and is in fact the most open country in the world. However, we are not a country of exporters. Close to 25 per cent of our Canadian exports come from only five corporations. The rest comes from other companies but we find that close to 50 per cent of all our exports come from only 50 exporters. The five big Canadian exporters are the three automobile companies, IBM and the Canadian Wheat Board.

• 0955

[English]

Another possible reason for poor productivity performance is management. Canada has the the fourth best microeconomic environment in the world, according to the World Economic Forum. The microeconomic business environment here means competition laws, regulations, and so on. But in terms of company operations and strategy, we are ranked 12th, while the U.S., our major competitor, is ranked first.

Industry Canada is embarking on a big study on this: What is the reason for this? Why is it that Canada's management does not seem to be as dynamic as in other countries?

What about the public? What is the reaction of the public? What's the view of the public about productivity? These results have surprised us quite a bit. What we see here is that productivity resonates quite well with the general public. It's a very arcane subject. Where would it rank? It turns out to rank fifth among the priority that.... Well, if one were PM for a day, which would be the guiding principles for government activities?

Finally, to conclude my talk, I have showed you that productivity is influenced by several factors. Therefore, from a productivity point of view, there is no simple solution, and basically we need to address this issue on several fronts—in particular, the microeconomic business environment. What we need is low inflation and good fiscal management.

To summarize, what we need is to be open to trade and more exporters and more countries and more sectors that export.

We also need more investment in machinery and equipment, and more FDI.

We need a more dynamic industrial structure.

In human capital, we need to continue investing in education, in people.

Management strategies and priorities—we need management that is more dynamic perhaps than what we have now.

In innovation, of course, we need more R and D, more diffusion, and more adoption of new technologies.

Finally, in terms of marketplace frameworks, we need a competitive tax policy and regulations benchmarked against the best in the world.

Thank you. This concludes my talk.

The Chair: Thank you very much, Dr. Nadeau. I want to thank both Dr. Baldwin and Dr. Nadeau for very thorough presentations.

We're going to begin with questions. Mr. Penson.

Mr. Charlie Penson (Peace River, Ref.): Thank you, Madam Chair.

Thank you both for your presentations.

There's a strange phenomenon where you can actually see the Canada-U.S. border on the 49th parallel, and it's strange that people would be able to see that. In infrared photography showing farmland in North Dakota and Montana versus Saskatchewan and Alberta, you can actually see the Canada-U.S. border. How is that? It's government policy. Government policy in the U.S. supports large subsidies, so they farm their grain right up to the border. On the Canadian side, the subsidies aren't as high and it's grassland. The infrared picks it up and you can see the Canada-U.S. border.

I suggest to you both that this grim picture that's being painted today is largely for the same reason: government policy.

When our committee on international trade did a study of why small and medium-sized companies are not in the export business, as Mr. Nadeau has identified here, they came back and said there's a very high cost to doing business in Canada; we need to get taxes down, payroll taxes down. The cost of regulation is very high in Canada. Interprovincial trade barriers—one company came to us and said they had recently moved from Ontario to Michigan. It's now easier to do business with the Canadian provinces from Michigan than it is from Ontario. It seems to me that it's pretty self-evident what the problem is there.

I do want to ask a question. Mr. Nadeau, you went fairly quickly over the relationship of the Canadian dollar versus our productivity. Exporters are also importers, to a large extent, especially when they're importing components from the United States and then exporting again to the United States. Also, investment in new equipment and new technologies a lot of times comes from the United States—the actual equipment.

• 1000

Can you just give us a little bit larger sketch of the relationship of the low Canadian dollar and how that affects us? I don't think we really had time to understand that very well.

Dr. Serge Nadeau: This is a very good point. The low dollar may be good for exporters because it makes them much more competitive. On the other hand, I talked about a collective appauvrissement. It makes the nation poorer overall, in particular because we need to import goods from the U.S. In fact, most of our machinery equipment investment comes from the U.S. What it means here if we look at the dollar, and the rule of thumb, very roughly, is that to buy machinery from the U.S. is 25% more expensive than it was 10 years ago.

I'm not saying the Bank of Canada should intervene to affect the value of the dollar. I'm just saying that's a fact. When we say the low dollar is very good for exporters, we should keep in mind that there are other costs associated with that, in particular for exporters, but also for the general Canadian public, in the sense that it's much more expensive to buy goods from other countries.

Going back to the dollar, I'm not in a position to speak of where the value of the dollar should be, because it's really the Bank of Canada. On the other hand, your point is very well taken. Too low a dollar makes investment much more expensive and can affect productivity in the long run.

The Chair: Dr. Baldwin, do you have anything to add to that?

Mr. Charlie Penson: Can I just ask a short question of Dr. Baldwin?

The Chair: Go ahead.

Mr. Charlie Penson: There seems to be a little bit of a contradiction in terms of how big a factor employment rates play in this whole equation. Dr. Baldwin, you talked about the employment rates being quite a bit lower in Canada than in the United States. Mr. Nadeau said it only really counts for about 4% of our productivity, in any case, the labour component of that. Can you just help us out a little bit to understand that better?

Dr. John Baldwin: Yes, of course. As Mr. Nadeau pointed out, the two presentations are really focusing on two different aspects of performance. The Statistics Canada program focuses on the rates of growth, this thing called productivity. How much are we improving over time? Serge's presentation has very much focused on where are we relative to the United States. We talk about this as differences between growth and levels. I think both are important. We simply have a program that focuses on growth because it's easier for us to do. That doesn't mean the other is impossible to do, and Serge has done a good job of it.

When I talked about the effect of the labour climate on these measures, I was talking about comparing what's happening to changes in rates of growth between the eighties and the nineties. Serge is talking about simply looking at the level and asking, if we have a difference between the output per capita in the United States and the output per capita in Canada, how much of that is due at any one point in time to the fact that they employ more people relative to their population than we do? There's no contradiction. I agree completely with Serge on this.

If you look at levels, most of the level difference has to do with level productivity differences as opposed to level differences in terms of employability. But if you look at where we're going, then most of the reason for our deterioration in the nineties has to do with employment problems rather than deterioration in relative employment growth.

I was reminded of a conference that was held in Toronto earlier this year. At least one session was entitled “Are our manufacturers lazy?”, in the sense of whether or not they are managing to increasingly increase their productivity in this decade as opposed to previous ones. My answer is no, they're doing just about as well as they used to. There's something else out there—labour markets, overall demand, changes in social structure—that has changed the rate at which we employ people. I hope that answers your question.

• 1005

The Chair: Thank you very much, Mr. Penson.

Mr. Lastewka.

Mr. Walt Lastewka (St. Catharines, Lib.): Thank you, Madam Chair.

There are a couple of questions that I always have when I get into discussions about productivity. For the exporters, you mentioned that five exporters do 25% of our business and so forth. Does the automotive sector, being so high in Canada, take away from us understanding the sectors better? Do you have graphs showing the automotive sector taken out? I didn't see the automotive sector; I take it that it's just lumped in under manufacturing in both of your slides. Is that correct?

Dr. Serge Nadeau: Do you mean in terms of productivity?

Mr. Walt Lastewka: Yes.

Dr. Serge Nadeau: On page 9 there is a breakdown of productivity by sector, where transportation is looked at on its own.

Mr. Walt Lastewka: So transportation means all automotive types of—

Dr. Serge Nadeau: Yes, that's right, like parts and all that. It shows that the automotive sector in Canada is in fact quite productive. It's about as productive as the U.S. sector, and maybe it can be argued that it's more productive than that of the U.S.

Mr. Walt Lastewka: Both of you talked a bit about the standard of living. My concern is that the standard of living is averaged out and we have these two extremes. Do we have similar extremes in Canada and in the U.S., where we have the people with a very high standard of living versus the people with a very low standard of living? I see items like, U.S., 40 million people, no health care, losing houses, losing their worth, but then you come and tell us that they have a better standard of living, so good luck to those 40 million.

The Chair: Dr. Baldwin.

Dr. John Baldwin: In a presentation such as this, it's always difficult to present all the data one would like to. When we talk about averages, we're talking about a particular statistic that statisticians and others are wont to use on most occasions; people understand it. Sometimes it's not the most appropriate one or the only one that we could look at.

There's an interesting article by one of my fellow directors in the research operation at Statistics Canada, Michael Wolfson. You might invite Michael here at some stage to talk about it. He compares, not GDP per capita, the total output per worker; rather, he looks at wages per person out of some of the microdatabases and asks, if you compare the average, what happens? And what happens if you compare the median?

The median is that point in the entire distribution that divides everybody equally, 50% below and 50% above. When you have extreme skewness in the measure you're looking at—and economic variables usually are skewed, incomes are skewed, because there is a very small number of wealthy and a lot of people who aren't as wealthy—medians can sometimes give you a better idea of differences in populations.

Michael finds that when he uses the medians, he indeed he comes up with Canada looking better relative to the United States. The gap doesn't disappear. The gap, indeed, still widens over the last 20 years, but it is true that in the U.S. numbers there is much more concentration of wealth than there is in Canada. You also get big differences if you do this before tax as opposed to after tax and if transfer income is taken into account. Canada has a more generous transfer system.

So you're quite right. The ones we're looking at today can give you a different picture than alternate measures can. In these situations where one is trying to evaluate relative standards or quality of life—I detect discussions have moved somewhat from productivity to quality of life in the last three months—there are a lot of measures you look at or would want to look at in ascertaining quality of life. Income distribution is one of them.

Mr. Walt Lastewka: It's for that reason that I had hoped you would have a couple of slides in here: just to make sure people are aware of the average and the median reflection of the standard of living, because it does really distort it, I think.

The Chair: Dr. Nadeau, do you wish to comment?

• 1010

Dr. Serge Nadeau: Yes. I took care in pointing out that this is a measure of the size of the economic pie. There are two issues: the size of the economic pie and how it can be distributed. In the U.S.—you're absolutely right—it's not distributed as evenly as it is in Canada, but the fact is that the size of the economic pie in the U.S. is much bigger.

Many economists, at least, believe it doesn't mean that to have a pie as large as that in Canada we need to have the same social policies as the U.S. These are not mutually exclusive. I agree with you that we can use other measures of quality of life, but here it was, let's say, from an income point of view. For the size of the economic pie, this is the measure most often used.

The Chair: Thank you, Mr. Lastewka.

[Translation]

Mr. Dubé, please.

Mr. Antoine Dubé (Lévis-et-Chutes-de-la-Chaudière, BQ): On page 9, you refer to shipbuilding. Is that part of the construction sector or of the transportation equipment sector?

Dr. Serge Nadeau: Transportation equipment.

Mr. Antoine Dubé: Thank you.

When one talks about productivity, many people think immediately about the number of days lost to strikes, sick leave, etc. I see that you did not deal with that in your presentation. Have you taken that into account somewhere?

Dr. Serge Nadeau: Canadian statistics are based upon the number of hours worked and do not take into account the number of days lost to strikes. Here, we have taken that into account. That factor has been included.

Mr. Antoine Dubé: I have read in many articles that, in Quebec in particular, the number of hours lost to strikes has somewhat increased during the past decade. Would that explain part of our gap with the U.S.?

Dr. Serge Nadeau: There are other figures indicating that the number of hours lost to strikes has increased not in the private sector but mainly in the public sector. Here, we have not dealt with the public sector, except in comparisons for the total economy. In our presentation, we have dealt mainly with the private sector, and in particular with the manufacturing sector, where the situation is not that bad, according to the figures.

Obviously, a country where there are many strikes would not be very attractive to foreign investors. However, I don't think that one can claim that low productivity is due to strikes.

Mr. Antoine Dubé: I am pleased that you made a link between the rate of productivity of a country and the capacity to pay good wages, because we often hear the opposite. In the case of shipbuilding, for example, management tells unions that the company will be less competitive if wages are too high, but you said that it is not true. You said that if everything goes well, if the company has good equipment, carries out R & D and is productive and competitive, it will be able to pay good wages.

Dr. Serge Nadeau: Yes, but the relationship is between productivity and wages. Of course, when firms are more productive, they can pay better wages. However, they have to be more productive before paying better wages.

Mr. Antoine Dubé: I'm just back from an economic mission in Eastern Europe, with Mr. Normand. We went to see three countries.

You spoke about the G-7, for which your data may be more reliable, but, in some countries, comparisons are difficult because most of the economic activity is underground. Do you take the underground economy into account in those comparisons?

Dr. Serge Nadeau: The comparisons I have shown are with the OECD and the G-7 countries. I do not believe that the underground economy is important for the figures I have given you. However, it might be a relevant factor in the case of Russia or of other countries.

Mr. Antoine Dubé: Thank you.

• 1015

[English]

The Chair: Thank you very much, Mr. Dubé.

Mr. Murray, please.

Mr. Ian Murray (Lanark—Carleton, Lib.): Thank you, Madam Chairman.

I think my question is for Dr. Nadeau, but I throw it open to either of our witnesses. We've often blamed our branch plant economy for the low level of industrial R and D in Canada, and with the free trade environment we've seen a lot of manufacturing operations of U.S.-owned companies being pulled back into the United States. I'd like to know if you see any reason to expect that we could improve our level of industrial R and D by increasing the amount of foreign direct investment in Canada. Again, what would be the government's role? We've seen in the pharmaceutical industry, for example, a quid pro quo, if you will, for better patent protection, and along with that a promise by those companies to perform more R and D in Canada. Do you think we'll always be seen by foreign companies as essentially an adjunct to the U.S. market because we're so close to the U.S., and therefore there will be no requirement to have major R and D activities in Canada?

Dr. John Baldwin: I'll answer that, because we've done a fair amount of work in the last three months on the R and D intensity of foreign as opposed to domestic plants and also on the innovative activities of the two different populations. I can't comment on whether changing the nature of Canada at the present time would also have a big impact on future innovation or future R and D.

I grew up in a period of time when, effectively, we believed we were a branch plant economy. That phraseology was meant to imply that in some sense foreign firms operating in Canada were truncated. They didn't have a wide range of facilities. They did all of their R and D abroad, and, more importantly, they did less here than even domestic firms.

Certainly the data over the last 15 years suggest that's not correct. We have an innovation survey from 1993 that suggests that foreign firms are more likely to do R and D in this country than domestic firms. When we break down domestic firms into those that are multinationals or foreign oriented, we find very little difference between that group and the foreign group. But the foreign group is still slightly ahead in terms of their tendency to have an R and D facility and to do R and D on an ongoing basis in a separate department—all of those things that are in some sense more R and D intensive. They also report that they're introducing innovations more frequently than the domestic group of firms. So for all intents and purposes that survey shows that the notion that multinationals were in fact truncated and operated only branch plants here is incorrect today. It may have been fine 30 years ago when we were terribly worried about that.

Those surveys simply tell us something about whether they do something. They don't tell us how intensely they do it. But there is at least one study using Statistics Canada data, which was published in Research Policy, that found that of those firms doing R and D, the intensity of R and D as measured by the expenditure on R and D over sales is as high for foreign firms as it is for domestic firms.

Who in all of this analysis looks like they're dullards or lazy or needing to pull up their socks? It's the Canadian firms that neither export nor have foreign operations. They have very low R and D intensity. They have a low probability of doing it. If we come back to productivity measures, their productivity tends to be lower than others, and it's not growing as rapidly. We have another study that looks at the rate of growth of labour productivity in multinational firms or plants in Canada relative to domestic, and they are growing more rapidly. So the foreign sector indeed is not the laggard.

Mr. Ian Murray: Does that mean it comes down to the vision of Canadian management? We talked earlier about management in Canada versus the U.S. Is that where you'd lay the blame?

Dr. John Baldwin: Serge was talking about that more than I was. I'm not an expert in that area.

Dr. Serge Nadeau: I don't think I'm an expert in that area either, although I talked about it.

• 1020

As I mentioned, this is one reason that has been suggested. It is in fact part of our research program to investigate why Canadian firms don't appear to be as innovative or to invest as much; it may relate to management, but we don't have proof of that.

Mr. Ian Murray: Or are we just satisfied with less, that it's good enough rather than trying to be the best?

Dr. John Baldwin: Professor Daly at York has a presentation on problems with Canadian management relative to foreign management that you might want to hear. There are other people who have looked at this more carefully than I have.

Dr. Serge Nadeau: There is also Roger Martin, dean at the University of Toronto, whose theory is that Canadian management is involved in replication strategy as opposed to innovation strategy, that it's better at replication and reducing costs than it is at being innovative.

Those are their views. They need further research, but yes, you may want to invite them here.

The Chair: Thank you very much, Mr. Murray.

Mr. Schmidt.

Mr. Werner Schmidt (Kelowna, Ref.): Thank you, Madam Chair.

Thank you, gentlemen, for appearing.

I think this has been a most interesting presentation. I have so many questions that I'm not sure which one I should ask first, but now I would like to ask you the very simple one that follows right off this one, which is about the productivity of a small firm versus a large firm. Have you done any research in that regard?

Dr. Serge Nadeau: John is really the expert on this.

The Chair: Dr. Baldwin.

Dr. John Baldwin: First of all, in this country it's very difficult to get good measures of the more sophisticated measure of productivity, multifactor productivity, which takes into account all inputs.

I qualify what I'm going to say with that statement because we know on the basis of our surveys that small and large firms differ in many dimensions. They differ in terms of the technologies they utilize. A large firm is not just a small firm multiplied up across all factors of production. It is therefore extremely difficult to measure the overall efficiency of small versus large, which is why you want multifactor productivity measures.

We can measure labour or output per worker, and we know that small firms are less productive than large firms on that measure alone because they produce less per person. But there's a good reason for that: they're less capital intensive. They do not employ the same amount of capital per person. Small firms have a different production process. They start small and gradually evolve over time to look more like large firms.

Therefore, we know something about the difference between large and small firms when it comes to labour productivity, but I'm always very cautious in then suggesting that it tells us something about efficiency, something beyond simply the measure we have, which is labour productivity. Labour productivity can be different because of differences in efficiency, but it can also be different because you just use a very different capital-labour ratio in large firms as opposed to small ones.

Mr. Werner Schmidt: Yes, which really makes it almost impossible to do the comparison, as you just pointed out. The thing that comes out of this is that about 85% of our new jobs are apparently being created by small firms. Also, a lot of our new ideas come out of our small firms.

Dr. John Baldwin: Yes.

Mr. Werner Schmidt: So there seems to be a real conundrum here as to just which policy the government should embark on: to encourage small firms to get going or to have greater benefit to larger firms to make sure the productivity level of the worker goes up.

Dr. John Baldwin: I agree. It's a difficult conundrum, but I'll pass the policy to the policy expert.

The Chair: Dr. Nadeau.

Dr. Serge Nadeau: As you said, this is a conundrum in terms of policy. Of course, from a government's point of view, what we would want, I guess, is to grow small firms as fast as we can. I don't know if we need to make a choice between the large firms and the small firms, because many of the policies apply to both. Following these studies, I guess something on which everyone can agree is that we should try to grow them as fast as we can.

The Chair: Dr. Baldwin.

Dr. John Baldwin: In some areas, the impediments to growth...I'd like to emphasize Serge's point, that is, one is looking for a dynamic economy in which both small and large firms are doing well. In the innovation and technology surveys we've conducted, we've asked questions about where impediments might lie and have tried to ascertain whether the two populations appear to suffer from different problems when it comes to growth, to solving management problems, or to implementing new technologies.

• 1025

To use this example, in one of the innovation surveys we found that both large and small firms had indicated that the skill or the labour market side is equally difficult for them. So the largest percentage of both groups tell us that this is the problem compared to everything else, and they both think it's a relatively major problem. So if one is looking for an area in which both groups appear to believe there are real problems they face, there is no difference between the two groups.

In other areas, there happen to be. Large firms do not tell us with the same frequency that they have problems when it comes to accessing information on new technologies. After all, large firms are organized essentially to ingest information, diffuse it, digest it, the whole bit.

Small firms tell us in much larger numbers that technology acquisition, information on new technologies, is a real problem. And of course government has policies and programs in that area.

So you can distinguish differences between the large and the small group in that way.

The Chair: Last question, Mr. Schmidt.

Mr. Werner Schmidt: Taking it one step further, is there any connection between the proportionate number of small businesses versus large businesses in the United States and their level of productivity vis-à-vis that ratio in Canada?

Dr. John Baldwin: Statistics Canada and Industry Canada actually have a joint study on at the moment to see whether that's the case.

Mr. Werner Schmidt: So we don't know at this point?

Dr. John Baldwin: No, but we hope to soon.

The Chair: Thank you, Mr. Schmidt.

Mr. Cannis.

Mr. John Cannis (Scarborough Centre, Lib.): I have a big question for Mr. Nadeau and a small question for Mr. Baldwin.

Mr. Nadeau, on your graph when you talked about foreign companies and how they've become more productive, you indicated on page 12 that it's because of labour adjustments. Is it because foreign companies come in and reduce their staff and are able at the end of the day to show a better bottom line and refine their other staff in comparison to Canadians? That was the first question.

The second is, I wonder how you correlate...you indicated, for example, on page 16 that we are number one in knowledge workers. We rank number one in the index. But then you said how in the United States they are much further ahead. Yet we spend more money; we're 13th as opposed to the U.S. being 15th. So how do we correlate the fact that the U.S. is 15th in training? We invest more in training and yet again we have less productivity. Are we losing these people? What is happening?

The quick question I have for Mr. Baldwin, and I'll combine and end off, Madam Chair, is on one of your graphs, a reconciliation of world GDP per capita on labour productivity for the last two or...you've got here “Ratio: Pop. 15+ to total population”. Am I to understand you're including 15-year-olds? Is that how I'm reading it? If that's the case—

Dr. John Baldwin: It's 15 plus. Sixteen-year-olds and up.

Mr. John Cannis: If that's the case, are we being fair and realistic in including a 15-year-old person in this equation, who should be in school? If we are including them, what do they bring to the forum, what training and what education, if we indeed are saying it's high-quality skills that are going to permit us to compete?

Dr. John Baldwin: My point is one of clarification. Many of the labour market economists at Statistics Canada, when they try to come up with a number on those people in the population who might reasonably be expected to be able to work, utilize that ratio. I agree that it could be changed to 20 plus. At that stage, it's hard to know whether it should be 15, 16, 17, 18. The way in which the numbers are calculated allow that breakdown rather than another breakdown that is probably somewhat less inappropriate, which is 20 plus. At that stage, between 15 and 20, there are a good number of people in the labour market.

I have asked the staff whether or not it makes much difference to these numbers, and the answer is no.

The Chair: Dr. Nadeau.

Dr. Serge Nadeau: I'll start with the training. On page 16, this is only a business rating, the part where we're ranked 13, so that does not include university education, except if it's university funded. It's only university training. So we can imagine the situation where we have the highest university enrolment but also are not as good in terms of training.

• 1030

Why is it that even if we have this big university enrolment and completion rate, we're not as productive as the U.S.? There are two reasons for that. One is that our stock is not as high as the U.S. in terms of people with degrees, and also there's the mix. For example, in terms of people with engineering degrees in the U.S., it's about twice as high, I believe, as in Canada—50% as high as that in Canada. So we are lagging there. We're catching up, but we have a lag.

Another factor, of course, is that skilled workers are extremely important. But there are several other factors besides having skilled workers. We need more investment. That's why, from a policy point of view, you cannot be focused on only one aspect of the factors influencing productivity.

In terms of the other question you asked, first I would like to clarify that it's not related to page 12. Unfortunately in the copy I distributed today I didn't have time to include the chart about foreign control. It was on the screen. On page 12 here, for example the tobacco and refined petroleum and coal products, the higher productivity there comes from labour cuts, but we don't know if it comes from the fact that they are foreign controlled or some other reasons, more investment or whatnot.

To go back to the substance of your questions, we don't have any evidence that foreign-controlled firms are more productive than Canadian-controlled because they are shedding labour. We don't have any evidence of that.

The Chair: Dr. Nadeau, we'd like to get a copy of that chart, if we could, the one you presented but wasn't part of the package. If we could ask you to do that after the meeting....

Dr. Serge Nadeau: Okay.

The Chair: Now I'll move to Mr. Penson and Mr. Pickard.

Mr. Charlie Penson: I think, Mr. Nadeau, you talked about investment and Canada's share of direct foreign investment dropping quite a bit over the years. In fact, we don't rate very well in terms of the OECD. In fact, in terms of direct foreign investment by Canadians, there's now more money going into investment outside of Canada than there is direct foreign investment in Canada. There's a sea change that's happened in the last couple of years.

It bothers me that the investment climate must not be good enough for Canadians to even invest at home. I know there are new opportunities in other countries they want to take advantage of as well, but I think it's a factor that the investment climate here isn't good enough that we would invest at home.

But there are other areas that have done very well in attracting new investments, such as the “new south” in the United States. I holidayed in Mississippi a couple of years ago, and they are doing very well there. What has happened in that area that's attracted new investment that we can learn from here? Are there any models they've used that are conducive to attracting new investment? Have you examples of other areas that have done better with attracting direct foreign investment that Canada should look at?

Dr. Serge Nadeau: My answer to this will be disappointing. We haven't done any studies on the reasons why, for example, Mississippi or the new south is doing so well. But this is definitely an area where we could do an interesting case study.

The type of study we do on foreign direct investment is much more general rather than very focused, but maybe it would be a very good approach to focus on certain regions that have done extremely well and try to learn from them.

Mr. Charlie Penson: The reason for my question obviously is, what can we do better? What is hurting Canada in terms of attracting investment? The percentage of our investment continues to fall, and I gather from the presentations of both of you gentlemen that foreign investment—foreign investment in particular—usually comes with high innovation, high technology. That's one of the reasons they're investing in other countries. They do very well.

Canadian firms, I gather, that are in the export business have also made those kinds of investments in technology and innovation. But the bottom line is that we are falling behind in terms of investment, and I'm looking for some help here in finding out why and what we can do better. What would you identify in policy that we can change to do better in attracting the kind of investment that leads to innovation and new technology?

• 1035

Dr. Serge Nadeau: There are several factors that influence foreign direct investment. There is the availability of skills, where Canada is doing relatively well. There are existing markets. Canada is also doing relatively well in other areas.

The issue is that it's difficult to pinpoint particular reasons. The U.S. has enjoyed tremendous growth over the last—

Mr. Charlie Penson: You're an economist. This is a big part of what you do, isn't it? You must have some kind of reasons why Canada is falling behind in terms of our percentage of direct foreign investment. Surely there must be some information out there that suggests.... Do you not interview companies and executives as to why they're not investing in Canada?

Dr. Serge Nadeau: The reason I'm a bit... You can see from my body language that I'm trying to be very careful in what I say. It's because we don't have much evidence. Several reasons have been proposed. There is the general uncertainty. There's also the size of the market; Canada's market is smaller than the U.S. There is maybe the tax burden that is higher in Canada than in the U.S. But I cannot, and I don't think any economist around town can, pinpoint and say it's because of this, because of that, that accounts for our lower investment. But several factors have been suggested.

Mr. Charlie Penson: Dr. Baldwin, would you care to tackle this?

Dr. John Baldwin: I have no information on which policies are not working. I'm sorry.

The Chair: Thank you very much, Mr. Penson.

Mr. Pickard.

Mr. Jerry Pickard (Chatham—Kent Essex, Lib.): Thank you, Madam Chairman.

Gentlemen, I find there are two areas I would like to ask questions in. One very simply is in the information that was presented this morning under standard of living. The Canada wage scale per worker was approximately 20% less than a U.S. worker, yet on the same scale you have the quality of life in Canada above that in the U.S. To me, dollars do a hell of a lot to generate the quality of life in a family. That seems to me a problem that I'm not able to grasp really clearly.

The second question I would ask is, when we get all kinds of statistics, background information, there's got to be a finalization of information, and that is recommendations and directions that you see more adequate or that would enhance Canada's ability to compete, Canada's ability to increase productivity, and Canada's ability to enhance the lifestyle of people in the country. I'm looking for some direction, some thoughts you may have on what government policy should be dealt with in order to enhance our ability to do better as a nation.

Dr. Serge Nadeau: On your first question, quality of life, we need to realize that the UN used three indicators to assess quality of life. One is income. They use, technically speaking, a logarithmic scale, so past $10,000 a year the additional gains are marginal. They use school enrolment, where Canada is doing very well. They also use life expectancy, where Canada is doing very well. So these are the three indicators.

Of course, there's a debate. For many Canadians, $10,000 a year would not be enough, but that's what the UN is using. The quality of life indicator from the UN is useful, but it's the lowest common denominator that can be applied to all countries, and we need to understand it very well to really assess its value.

In terms of policy recommendations, that I would leave to my minister. Here we have examined factors that can influence productivity, but I cannot comment on specific policy recommendations.

The Chair: Mr. Pickard.

• 1040

Mr. Jerry Pickard: I was wondering if Dr. Baldwin would have any comments, because I see that all the ducks are in a row on this chart. We have the supposed advantage, but what do we need to do at this point in time? I'm not asking you to do anything beyond speculate on some of the changes you could see as making us more competitive. I really think that is, in part, your job.

Dr. Serge Nadeau: What I can answer is that from a government point of view we need to act on many fronts. For example, the last chart in my presentation shows all the fronts on which something could be done. We need more trade, but I don't know what specific policy I would recommend on that. We also need more investment. We need more corporate dynamism. I believe there are nine bubbles showing the areas in which we need to do something.

What I can tell you, though, is that on the innovation front—specifically talking about productivity here—what is troublesome is the degree of innovativeness in the Canadian economy. Whatever indicators you look at, Canada is not doing well when it comes to innovation. Maybe Dr. Baldwin knows of more indicators that I don't know about, but I haven't yet seen any indicators that say Canada is doing well on the innovation front. In the knowledge-based economy, though, let's face it, that's where growth is going to come from in the future.

In terms of growth in the U.S., they are doing that well, and that's because they are growing faster in the fastest growing and most dynamic sectors: electronics and machinery. Biotech may be in the future, but we don't know about that. This is speculative, but the fact is it accounts for a lot of the greater dynamism in other economies than Canada's. That's what I believe.

The Chair: Is that it, Mr. Pickard?

Go ahead, Dr. Baldwin.

Dr. John Baldwin: You asked for comments. Certainly, as a statistician I have no opinions on policy in this area. But on the issue of how you might look at quality of life, wages are an important component. That said, I don't feel they are the only component or I wouldn't be living in this country, nor would most of the economists who were around the table at the finance committee when we were discussing this issue earlier this spring.

I still can recall a question being put to the group, a question asking them whether it would be nice if taxes were lower. They all grinned and said “Yes, of course.” But I happen to know that two-thirds of this group could go across the border at any one time and easily earn twice as much; yet they choose to remain here.

The SRI put out a study that looked at the extent to which there is a difference between the lifestyles of Americans and Canadians after you take into account the expenditures on health and education that are made for us in the public domain and the expenditures that are therefore saved.

I like to tell the story that I call my dead uncle story. When I was living in Cambridge, Massachusetts, I remember that the dog across the street used to mirror what was happening in the house across the street. One day he got very happy and very excited. Instead of barking at us, he actually came over and got petted. Later that day, I saw one of the kids and I asked him how things were. I said they must be pretty good. He excitedly said that his uncle had died. I said he must have been a nasty uncle. He said his uncle was a very nice uncle, but that they could now go to private school because he had left the kids enough money. That was a very important thing in their standard of living. The high school they went to looked like a nice one, but they didn't think it was a very good school. I don't have to worry about that in this country, nor do others.

I think those issues are important, and there are people trying to put together a wider list of numbers that gives us an overall view. Either Oregon or the State of Washington worries about the quality of living on the west coast, and they have put together a fairly large set of numbers that people think are important when it comes to evaluating quality of life.

So I think those things can be done, and as a statistician I think this is one of those things one should try to do in order to get a better impression, an overview of how well one is doing.

The Chair: Dr. Nadeau, do you have a final comment?

Dr. Serge Nadeau: Yes. The only thing I would like to add is that high wages and high quality of life are not exclusive. I don't think it means anyone believes that to achieve a higher standard of living in Canada we need to give up our quality of life.

• 1045

Also, just as food for thought, there's a final thing I want to say. Dale Orr of WEFA showed figures that show the U.S. is spending more on the poor than Canada is. These are new figures, but I think this is something we need to take into account: if the pie is bigger, there's more to distribute.

The Chair: Thank you, Mr. Pickard.

I have several more people who want to ask questions, so I'll ask you to be a little quicker.

Mr. Schmidt.

Mr. Werner Schmidt: I'll ask a very simple question then. What is the difference between productivity and labour market performance?

Dr. Serge Nadeau: These two things are different. Productivity is basically how productive people are when they work. Labour market performance is more in terms of how many people are employed.

Mr. Werner Schmidt: Which should we be more concerned about, the growth rates or the levels of performance?

Dr. Serge Nadeau: That depends. From our point of view, what determines the level of standard of living is the level...it's not our point of view but a fact that the level of the standard of living depends on the level of productivity and of course on the level of employment.

We need to keep things in mind. We make comparisons that we have a growth rate that is as fast as that of the U.S. Well, great, but among the G-7, the U.S. has had the second lowest growth rate. Okay, but we want to be at the bottom. Other countries have converged toward the U.S. in terms of productivity.

So sure, we can talk about the level and explain the difference in our standard of living. Of course, if we want to increase our level, we need to increase our growth rate. What I'm saying here is that while our growth rate has been comparable to that of the U.S. over the last 100 years, it doesn't mean it's a sentence for life. Other countries have closed the gap. Canada has not, for whatever reasons.

The Chair: Mr. Schmidt.

Mr. Werner Schmidt: I sure hope you can come up with the answer as to why.

Dr. Serge Nadeau: Some prospective reasons are innovation, investment, and lack of dynamism. Those are possible reasons.

Mr. Werner Schmidt: It has something to do with sector identification as well. Clearly we're doing very well in tobacco. We're not doing very well in electrical and manufacturing. So where's the problem?

Dr. Serge Nadeau: That's the thing. Sometimes it has been posited that it is because of lack of dynamism in the Canadian economy.

Mr. Werner Schmidt: I don't think so. The economy is people, finally. People have identified one sector and not another.

Dr. Serge Nadeau: But why is it that people don't identify fast-growing sectors?

Mr. Werner Schmidt: I think it goes back to a point Mr. Murray made. Is it management, that they can't see...?

Dr. Serge Nadeau: Risk-taking? That's a possibility. Again, that's what we're investigating. That's the theory of Roger Martin, from the University of Toronto, that it is management, that Canadian managers are better at replicating than at innovating. They are not risk-takers. Innovation involves taking risks.

Mr. Werner Schmidt: It sure does.

Dr. Serge Nadeau: But again, this is a theory. As I said, we are embarking on a research project to see if this is indeed the case. I could not conclude that it is indeed the reason.

The Chair: Thank you Mr. Schmidt.

Madame Jennings, please.

[Translation]

Ms. Marlene Jennings (Notre-Dame-de-Grâce—Lachine, Lib.): Thank you, Madam Chair. You said that it is very difficult to compare productivity and other factors between small, medium and large firms because their processes are extremely different. However, are there any comparisons between Canadian and American SMEs in the fields of business creation, growth from a small firm to a medium and then a large firm? If people have found significant differences, are there any studies for the various sectors of industry that could provide us with some explanations?

• 1050

Dr. John Baldwin: Some people have compared figures about business creation. We have found that the rate of creation of small firms is roughly the same in both countries. We are as effective as the U.S. as far as that is concerned. Some people have also tried to look at the evolution of new businesses over the years. The results of such studies are more difficult to analyze but I believe that the rate of growth is higher in the U.S. than in Canada.

[English]

It's just common sense. We know that ultimately the Americans have much larger firms. Over time, American firms always evolve into larger firms.

[Translation]

Do we know why? No. Perhaps this can be attributed to the size of the market or to the sources of capital, but we do not know. Many people are looking at these matters at the present time.

Ms. Marlene Jennings: So far, nobody has been able to explain that.

Dr. John Baldwin: No.

Ms. Marlene Jennings: I have a brief question for Dr. Nadeau. You said that one of the reasons used by other experts to justify the lack of foreign investment, or the decrease, is general uncertainty. What did you mean exactly?

Dr. Serge Nadeau: We were talking a while ago about strikes. Outsiders sometimes look only at general figures. It is true that there are more strikes in Canada but many other factors also have to be taken into account, as I said. The size of the market is probably very significant. Of course, we have NAFTA but we still have a border between Canada and the U.S. That may be one of the reasons why the U.S. are increasing their share of the investment market.

Ms. Marlene Jennings: Would political uncertainty be a component of that general uncertainty?

Dr. Serge Nadeau: Possibly, but it does not seem to be a significant issue, according to some studies. Now, many people talk about that but it is not something that we have detailed knowledge of.

Ms. Marlene Jennings: Thank you.

[English]

The Chair: Thank you.

Madam Chamberlain, please.

Mrs. Brenda Chamberlain: Thank you, Madam Chair.

I want to talk a little bit about page 16 and follow up where Mr. Cannis left off. With regard to the bullet that says “But on-the-job training is essential and Canada is weak in this area”, about 12 years ago the University of Guelph did a study in this area. This was one of the things they identified and talked about a lot.

I'm going to make a few comments. Then my question to you at the end will be simply, in your opinion, how important is job training in this scenario of taxation, the ability to trade, corporate dynamism, all the things we're talking about?

How important is the job training to the committee? I want to put this on record. I think it's too bad, Madam Chair, that the opposition members aren't here, because I think this is a very important issue right now. We're talking about generating work for Canadians and being very competitive. Having no opposition member present is bothersome to me.

When we talk about on-the-job training, as I say, that was identified a number of years ago in a study. I think there are a number of things. One is, should the employers train? Should they do this? I don't know if you two gentlemen have an opinion on that or can speak to that. Having said that, obviously some employers really do train the employees and work them on through and specialize them. But some companies are very poor at this, and we all know that.

• 1055

When we talk about policy directions for our government, there used to be a program, which the Tories suspended, that was directly tied to corporations receiving a tax deduction on certain equipment they would buy that would have a component of training. From my understanding after talking to employers, that was a very important thing with them. It was very helpful to them. It stimulated them to do just this very thing, train their employees, and of course refurbish and get new equipment. That was taken away. That is something the industry committee might want to do, go back and look at that.

Also, we've talked a lot about the EI fund and where it's at and how much is in it. Is that a place a portion of EI funding should be going, toward giving training? I don't know what split it might be, whether the EI would pick up a third and the employer would pick up two-thirds. But, again, if we're talking about real policy directions, that is a very real thing we could be investigating. Certainly, EI money was meant for training, which I think in some aspects we've cut back on.

I'd just like a general comment on all of that, if you could, gentlemen.

Dr. John Baldwin: I'll start, and you can go on about policy. I like this division of labour. So does the chief statistician.

Statistics Canada has conducted a number of studies on the incidence of job training. We've conducted these as part of larger surveys that are generally investigating the types of strategies being pursued by small, medium, and large firms. As a factual matter, it appears that a considerable number of these firms are engaged in on-the-job training, both formal and informal, well above 50% when we do our surveys.

We've actually finished a report for Industry Canada's skills panel that summarized all of this work. It's really quite extensive. Much of this job training is associated with the use of new technologies and innovation. It's extremely widespread. When both innovation and job training are associated in small firms, coming back to the issue that was referred to earlier, small firms tend to grow more quickly and do better. If they go out and do training on their own, they tend not to succeed. It's training in the context of the new economy that seems to matter, and it is extremely extensive.

Do we know much about the problems firms face in this area? We know less about those problems from these surveys, but in a more recent exercise we asked firms whether they had problems with the financing of different types of investments, that is, R and D investments, new technology investments, and training investments. We were curious as to whether they would answer the third question. They have the same problem in the training as they do with R and D, that is, it has to be funded out of internal funds. You cannot raise that capital on markets or from outsiders. So whether you do it in some sense depends on whether you're already successful, because you have to have those internal funds.

So we do know that a fair amount of job training is going on, that it's involved with the new economy, that those firms that do it appear to be more successful, that it's associated with R and D investments, and that those types of investments are generally difficult to finance because they're risky and it's difficult for outsiders to evaluate.

The subject of policy is yours.

The Chair: Dr. Nadeau.

Dr. Serge Nadeau: From a policy point of view, we haven't done specific research on what are the constraints on training because this is not really part of Industry Canada's mandate. I think Human Resources Development has done research in this area as to what are the impediments to training and so on and so forth, and they may have studied specific policy proposals.

The Chair: Thank you. Thank you, Madam Chamberlain.

I have time for two brief questions from Mr. Lastewka and Mr. Murray. Mr. Lastewka.

• 1100

Mr. Walt Lastewka: My question is to Mr. Baldwin. It is with regard to his remark concerning foreign firms doing more R and D in Canada. Do you have something that breaks that down by the drug industry, the steel industry, the electronics industry, and the transportation industry?

Dr. John Baldwin: No, I don't.

Mr. Walt Lastewka: So it's just taken as—

Dr. John Baldwin: This was a general study that was trying to take into account general behaviour.

Mr. Walt Lastewka: I know in the transportation industry the amount of R and D done in Canada by those firms is very little compared to what's done in the U.S., and I wonder, is this data all skewed one way because of sectors?

Dr. John Baldwin: That's a good question. That's something we should look at as we proceed.

Mr. Walt Lastewka: There was one firm that announced they were going to do $20 million worth of R and D. That is not even 1% of what the parent firm does in the U.S. If we got our 10%, it would be $200 million a year.

Dr. John Baldwin: Yes.

The Chair: Thank you, Mr. Lastewka.

Mr. Murray.

Mr. Ian Murray: Thank you, Madam Chairman. I have one quick question.

We've seen an increase in the last decade or more of large companies having supplier development programs. We've also seen a lot of companies becoming ISO certified to certain levels. Have you looked at, and I would not be surprised if you haven't, whether there's a difference between Canadian and American companies when it comes to supplier development programs? Those can be quite beneficial to small and medium-sized companies.

Dr. Serge Nadeau: We have not done that at Industry Canada. That's not something we're interested in.

Mr. Ian Murray: Okay.

Dr. Baldwin.

Dr. John Baldwin: We have the data to look at it, but at the present time it has not been something we've looked at.

Mr. Ian Murray: Okay, thanks.

The Chair: Thank you, Mr. Murray.

Dr. Nadeau, I want to get a point of clarification from your chart 9. Both Mr. Dubé and Mr. Lastewka asked about the transportation sector. Is it possible to break down the productivity in the different areas of transportation? Very specifically, this committee wants to look at shipbuilding as part of it. To lump in shipbuilding, automotive, rail, and air and show that we're higher than the U.S.—I have difficulties with that because I don't believe it's the same in each of those sectors.

Dr. Serge Nadeau: We can try. I don't know how reliable it would be to do the estimates, because of course there are very few shipbuilders in Canada.

The Chair: That's why I mean to say beating the U.S., saying that productivity is that high...I find that puts us in kind of a quandary here.

Dr. Baldwin.

Dr. John Baldwin: I have one other point, but not on that issue.

The Chair: Okay. If you could try, Dr. Nadeau, we'd appreciate it.

Dr. Serge Nadeau: I'll try. At the same time that I send you the charts on the productivity of foreign-controlled firms, I will write something that says whether or not we have been successful, and if we have been successful, then we will give you the figures.

The Chair: On chart 4, where you show the gap between Canada and the United States, I guess the assumption is made as well that prices in Canada are higher than in the United States, or prices are lower in the United States.

Dr. Serge Nadeau: The purchasing power parity figures are to control for the price levels. It says basically that while a Canadian dollar is worth 67 cents or so on the market, you could buy 85 cents worth of goods if you had a U.S. dollar in Canada. The bottom line is that it takes into account the difference in prices.

The Chair: Okay.

Dr. John Baldwin: It actually measures the relative price of the goods as opposed to using the exchange rate. It's a direct way. Statistics Canada has a program in which they gather U.S. prices and Canadian prices and they ask, what is the real difference? It turns out to be quite different from the exchange rate.

The Chair: All right.

Dr. Baldwin, you had a final point.

Dr. John Baldwin: Serge asked me a question earlier. I don't disagree with most of what he gave today, or any of it, but he asked whether I knew of any evidence that suggests Canada doesn't have an innovation gap. I have to respond to that. I don't know of a lot of evidence, but I wouldn't want to leave us with the impression that all Canadians are dumb. Sometimes it gets close to that. This is scanty evidence. People haven't begun to collect it.

The issue of innovation and differences in innovation gaps is one that has been raised only recently, but you can start to look at citations indices from universities—after all, we've put a lot of money into our science programs in universities—and you can begin to ask whether the things that Canadian university scientists are doing are cited around the world at the same rate as other countries, and the evidence there is not discouraging. We don't do better than everybody else in the world, but we certainly don't do worse.

• 1105

You can also ask a question as to whether or not the output of those we have at work in the innovation system looks somewhat similar to the rest of the world. How can you do that? You can take a look at patents that are being issued in U.S. markets and divide it, not by the Canadian population but by the number of R and D workers in Canada, so you get a patents number per R and D worker in Canada. And that falls right in the middle of the rest of the world.

So those people who we have working in the R and D system look relatively smart and relatively productive. Our scientists thus appear to be as equally productive as those in other countries, but we have fewer scientists, fewer R and D workers in that particular area. So in that sense you can get a slightly different picture of competencies in the country, and sometimes you tend to think about other ways of solving problems. But I leave that to you.

The Chair: Actually, Dr. Baldwin, I'm glad you raised that because the other chart I wanted to ask Dr. Nadeau about was the patents per million population.

When you look at the population in Canada versus the population in the United States—and the way you described that chart you made it sound like Canada is not doing very well. Actually, I think Canada is doing very well in comparison to the number of people who live here versus the number of people who live there, and maybe we're targeting different sectors. Maybe you want to comment, Dr. Nadeau.

Dr. Serge Nadeau: This one takes into account population size. In fact, it's per million. What this says is that in terms of total number of patents, for example, in an area where we have three times less on the chart, three times less patents than the U.S.... If I didn't control for population it would be thirty times.

The Chair: Okay.

Dr. Serge Nadeau: To add to what John said, of course, let's be very clear here. In fact, I don't think I would be in this job if I thought Canadians were not innovative because they were dumber than other countries. The fact, as John mentioned, is that we don't have as many scientists as other countries and we are not as involved in innovation as other countries, and it's not because Canadian scientists are not as good.

The Chair: I missed that in your chart, Dr. Nadeau, and maybe the question I'd like to ask is this. There is a large difference in patent legislation between Canada and the United States. Could this account for some of that as well?

Dr. Serge Nadeau: It could, and it's something people are looking at actually. They're looking at whether the larger degree of patenting in the U.S. is partly because the patent laws in the U.S. are different, but I don't think it would account for all that.

The Chair: But it could account for part of it.

Dr. Baldwin.

Dr. John Baldwin: One of the ways in which academics study this is to go off to look at third markets, and that's what I just referred to. You look at patents in the United States by other than Americans because you only go and take out those patents if it's a fairly important new discovery, because you have to pay a fair amount of money to do that. Then you can deal with this difference in legislation. In the United States the legislation is the same for everybody. If people from Holland and Switzerland and Germany and Canada are all coming over and taking out patents in that market, as they tend to do because it's the biggest and wealthiest market in the world, you could then begin to compare relative effectiveness across countries. That's where I said Canadians don't look as if they're doing too badly.

But we don't have a lot of people doing that because we don't have a lot of R and D workers. So our R and D workers are quite effective.

I come back to this productivity difference. When I went off to this conference and people referred to lazy Canadian manufacturers—it is an appellation that I don't think is appropriate. I think you have to begin to ask why the differences are there.

The Chair: Thank you.

I want to thank both of you for being here this morning. It's been a very interesting discussion and we appreciate your presentations and all the work that goes into putting them forward. We look forward to our study continuing, and obviously this will be a base for it. Thank you very much.

I remind members that we do have a further meeting on this issue this afternoon at 3.30 p.m. with Dr. Carty from the National Research Council.

The meeting is now adjourned.