Reviving Productivity Growth in Canada

Executive summary

Canada’s longstanding productivity challenges have become increasingly urgent amid significant structural shifts related to demographic ageing, the net-zero transition, digitalisation and artificial intelligence, and global trade realignment. This Review aims to provide concrete policy recommendations to support broadly shared productivity growth in Canada by taking a labour market perspective with an emphasis on worker-oriented policies in relation to skills, job mobility and structural change. Budget 2025 announces a range of measures related to product, housing and financial markets to revive productivity growth in Canada. However, to reap their full benefits, workers should be able to seize upon new opportunities. This requires employment and skills policies that support the adaptability of workers to structural transformation.

Make productivity growth a top policy priority

Economic growth in Canada has come to a standstill. Annual GDP per capita growth has declined from over 2.5% in the late nineties to close to zero in the most recent period from 2019-2023. As a result of the slowdown, GDP per capita is estimated to be more than one‑third lower today than what it would have been had economic growth continued to grow at its rate during the period 1995-2001. While other advanced economies, including the United States, also experienced a slowdown in economic growth, it was particularly pronounced in Canada.

The decline in economic growth mainly reflects a decline in labour productivity growth, but also slower progress in raising employment rates. While there remains scope for raising labour force participation among women and older workers, OECD simulations suggest that the benefits of rising labour force participation will not be enough to maintain GDP per capita growth constant given the expected decline in the share of workers in the total population due to population ageing. Consequently, to revive economic growth, labour productivity growth needs to be restored. This requires promoting a more efficient use of resources (e.g. innovation, technology adoption, economies of scale, job and skills matching) and supporting growth-enhancing investment (e.g. intangible assets, digital infrastructure).

Slower aggregate labour productivity growth reflects both slower growth within firms and slower job reallocation from less to more productive firms. Slower growth within firms is mainly driven by high productivity firms and firms in manufacturing. Its concentration among high productivity firms within sectors coincides with the decline in aggregate investment and is likely to have depressed opportunities for job mobility towards more productive firms. The slowdown in productivity growth was broad-based across sectors, but stronger in manufacturing than in services. Slower growth between firms is mainly driven by a declining contribution of job-to-job mobility to efficiency-enhancing job reallocation between firms. In large part, this is likely to reflect declining opportunities for job mobility to high productivity firms. However, to some extent, it can also be attributed to workforce ageing as older workers are less likely to change jobs and to transition to more productive firms. OECD estimates suggest that workforce ageing could account for about 10% of the decline in aggregate productivity growth between 2002-2007 and 2014-2019 in Canada through its impact on efficiency-enhancing job reallocation.

Slow growth also reflects challenges in adapting to structural change related to the net zero transition and the development of digital technologies. Canada’s economy relies more strongly on energy extraction than any other OECD country except Norway. These activities contribute significantly to national emissions but also exhibit high labour productivity, given their capital-intensive nature. Transitioning to net zero therefore requires reconciling its reliance on emissions-intensive sectors for productivity growth with the need for decarbonisation. At the same time, technological advances green technologies and artificial intelligence offer opportunities for stronger growth. Yet, the adoption of new technologies remains uneven across firms and sectors remains uneven, limiting their aggregate impact. The recent increase in temporary migration may have raised additional headwinds to productivity growth by supporting employment in lower value‑added activities. While this helped meet the growing demand for low-productivity services, partly driven by population ageing, it may also have weakened incentives to upgrade production processes and diverted resources from higher value‑added activities. Finally, ongoing trade tensions and supply-chain disruptions are increasingly weighing on investment and productivity. This underscores the importance of stable economic relations with the United States while further diversifying trade partnerships.

Improve the use of skills in the workplace

Skilled workers are essential for adopting new technologies, improving processes, and driving innovation. However, Canada’s high human capital has not fully translated into the expected productivity gains. To fully reap the benefits of human capital, Canada has to confront three key challenges.

• First, while educational attainment is high in Canada, leading to relatively strong information-processing skills, the efficiency of skill acquisition could be improved. Canadians spend more time in education than their peers in Japan, Sweden or the Netherlands, but often emerge with lower levels of core competencies. The efficiency of education could be improved by investing in teaching quality, restricting the use of digital devices for personal use in schools and enhancing the links between education and work through expanded apprenticeships and internships.

• Second, the economic payoff to skills remains relatively low: highly skilled workers in Canada earn less than their peers in other high productivity countries, including the United States. The lower returns to skill likely contribute to “brain drain,” with highly skilled Canadians moving to the United States in search of better-paid opportunities. Strengthening the demand for high skilled workers in Canada through for example investments in advanced technologies and innovation should help to address this issue.

• Last but not least, overqualification is widespread. Canada has one of the highest rates of over-qualification in the OECD, with many workers employed in jobs that do not require their level of education. This is particularly common among graduates from humanities and foreign-born individuals. OECD research suggests that about 15% of the productivity gap between Canada and the top 3 countries with the lowest degree of mismatch can be explained by labour market mismatch. Career guidance can play an important role in reducing skill mismatches.

Participation in career guidance remains low in Canada, despite its potential to support students in making educational choices better aligned with labour market demand and to help workers adapt to technological change and move into higher-wage occupations and firms. In 2022, around half of 15‑year‑old Canadians had spoken with a career advisor, which is similar to the OECD average, but behind countries like Finland, Denmark, and Sweden, where nearly 90% of students had such exchanges. Among adults, in 2020/21, only one in five had consulted a career guidance advisor in the previous five years – the lowest rate among countries covered in the OECD Survey of Career Guidance for Adults. Moreover, career guidance in Canada was often oriented toward immediate job placement, with less emphasis on supporting individuals’ long-term career advancement and personal growth.

Canada ranks much better in terms of adult learning participation than career guidance, yet many Canadians who experienced a change in the workplace did not receive the training needed to adapt. A relatively low share of courses facilitates development of ICT skills – particularly important for the adoption of AI – or prepares workers for transitions into technology-intensive sectors or high-productivity roles. In 2023, only 19% of businesses in Canada reported providing ICT training to their employees, significantly below the top-performing countries, where the share was above 35%. Access to training is also uneven: the gap in training participation between older and younger workers in Canada is the largest among OECD countries. Employees in small firms are also far less likely to take part.

Remove barriers to mobility and support displaced workers

The declining contribution of job reallocation to aggregate productivity growth mainly reflects a reduction in opportunities for job mobility, driven by weak investment and slower productivity growth among high-productivity firms. Promoting job opportunities in high productivity firms should be a key policy priority. This requires addressing structural impediments to competition and increasing investment in innovation, machinery and equipment as well as infrastructure. Most of these measures fall outside the realm of employment and skills policies. However, promoting job opportunities in high productivity activities may make structural barriers to job mobility more visible. Indeed, it is possible that the potential benefits of increased competition and investment are not fully realised if barriers to job mobility are not effectively addressed.

The current momentum for policy action should be seized to tackle barriers to voluntary job mobility. Strict occupational licensing rules, the inappropriate use of non-compete agreements, the limited recognition of foreign qualifications, as well as the costs of housing in urban regions can discourage workers from changing employers or sectors. Addressing these obstacles would strengthen the ability of workers to transition smoothly between firms and sectors. Occupational licencing regimes need to be reformed to reduce unnecessary obstacles to switching employers. This could involve improving the mutual recognition of professional licenses across provinces, making regulations less restrictive and privileging standards that focus on service quality rather than the qualifications of professionals. More attention should also be paid to the inappropriate use of non-compete agreements and their potentially detrimental effects on job mobility. To inform the debate, an evaluation of the recent ban on non-competes in Ontario is needed. Efforts to improve housing affordability through Build Canada Homes could be strengthened by long-term planning to expand the supply of affordable rental housing in high-demand areas and better align housing policy with labour-market objectives, supporting productivity-enhancing job transitions.

For workers who are displaced, timely and well-designed measures are essential to help them re‑enter the labour market. While these would primarily serve social objectives, they are crucial to sustain broad-based public support for a policy agenda focussed on reviving productivity growth and decarbonisation. Displaced workers in high productivity activities such as energy extraction and industries reliant on US imports tend to suffer larger earnings losses than comparable workers who are displaced from other industries. To strengthen support for displaced workers, Canada could consider complementing unemployment insurance with temporary and targeted wage support (wage insurance); promote the use of early interventions in the case of individual dismissal and explore innovative ways to enhance the cost-effectiveness of active labour market policies (e.g. statistical profiling). Work-sharing special measures can further help to prevent job displacement, but they should be designed carefully to avoid hindering necessary structural change.

Enhance the integration of migrants

Migration has traditionally been a key driver of employment and productivity growth in Canada but has come under pressure in recent years. In 2022, more than one in five people in Canada were foreign born, one of the highest shares in the OECD, while migration inflows in Canada continued to exceed those of comparable OECD countries. The strong post-pandemic increase in temporary migration reflects a response to acute labour shortages. This may have exerted downward pressure on aggregate productivity growth. Such concerns are not new. Even prior to the recent rise in temporary migration, many migrants began their careers in low value‑added jobs, and overqualification among those with foreign degrees was pronounced. While this may in part reflect international differences in programme quality and training content, there is also a need to reduce overqualification and enhance the contribution of migrants to productivity. This requires a better alignment of immigration, employment and licensing systems and reducing barriers to credential recognition.