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Economist’s view:
Canada outperforms the U.S. in price competitiveness in the manufacturing sector

Canada’s unit labour cost (ULC) in manufacturing has improved considerably in recent years compared to the United States, according to data published by The Conference Board, an independent American organization that measures labour costs in the United States relative to other countries.

Unit Labour Cost Improvement, 2011-2015
(Relative to the U.S.)

Unit Labour Cost Improvement, 2011-2015

Source: Office of the Chief Economist, Global Affairs Canada
Data: The Conference Board

A well-known indicator of price competitiveness, the ULC measures the average price of labour for a unit of output, calculated as the ratio of total labour costs to real gross domestic product (GDP). A lower ULC contributes to improved economic competitiveness. In a highly globalized marketplace, a relatively lower ULC contributes to attracting and retaining manufacturing firms.

In the period from 2011 through 2015, Canada’s ULC in the manufacturing sector decreased by 8.9 percent while increasing by 3.5 percent in the U.S. during the same time period. In Canada this equates to a 12.3 percent improvement in ULC. There is one important caveat: most of Canada’s ULC improvement is linked to the depreciation of the Canadian dollar. The dollar reached a peak in mid-2011—at the height of the commodity boom—then rapidly declined against the U.S. dollar as commodity prices began to tumble.

However, when changes in productivity are factored in, there is a small but positive improvement in competitiveness for Canada. Productivity fell slightly in the U.S. by 0.1 percent, while Canada experienced a 2.8 percent increase in productivity during the same time period. Productivity—defined as the ability to produce more output through improvements in technology—is one of the most important determinants of long‑term growth.

Labour compensation per worker increased relatively more quickly in Canada than in the U.S. during the same period. Although this was a small change, it was significant enough to somewhat offset the improvement in ULC in Canada by -1.6 percent as labour costs in both countries increased: by 3.3 percent in the U.S. and 4.9 percent in Canada.

The Upshot

While the Canadian manufacturing sector has been out-performing the U.S. in terms of price competitiveness in recent years, most of the improvement in ULC over 2011-2015 was driven by the decline in the Canadian currency against the U.S. dollar. A continued growth in productivity remains crucial to improve the price competitiveness of the Canadian manufacturing sector.

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