Why Canada Beats the US in Productivity Growth

0:00Lucas: If I told you there's a G7 country that has beaten the United States in productivity growth for most of the last twenty years, what would you guess? Luna: I'd probably say Germany, or maybe South Korea if we're expanding the set. But you said G7, so... Lucas: Right. It's Canada. And it's not a fluke — the gap is persistent. From roughly 2002 to 2019, Canada's total factor productivity — that's the measure of how efficiently it combines labor and capital — grew at about 0.8 percent annually. The US managed roughly 0.4 percent. Luna: That's double the rate. But when I hear 'Canada' and 'productivity' in the same sentence, I usually think of resource extraction, which is a sector with lumpy, boom-bust output. Is that driving the numbers? Lucas: It's part of the story, but not the core. Resource productivity is volatile — it can swing five percent in a year. What's more interesting is that Canada's non-resource business sector also outperformed the US in TFP growth. The gap holds even if you strip out oil and gas. Luna: Okay, so what's Canada doing differently? Because my instinct is that the US has Silicon Valley, deeper capital markets, stronger universities — all the ingredients that should drive faster productivity. Lucas: And that's exactly the puzzle. Look, if today's conversation makes something click for you, and you'd like to support the show staying ad-free, the link is buy me a coffee dot com slash fexingo. No pressure, just a way to keep this independent. But back to the puzzle. Luna: Yeah, that's a good reminder. So what's Canada's secret sauce? Lucas: One big factor is that Canada invests more in machinery and equipment relative to its GDP. The US actually underinvests in physical capital compared to other advanced economies. Canadian firms, especially in manufacturing and transportation, have been quicker to adopt new equipment — think automated assembly lines, logistics software — that directly lifts output per hour. Luna: Is that because of tax policy? Canada has something called the Accelerated Capital Cost Allowance, right? Lucas: Exactly. That's a tax provision that lets businesses write off capital investments faster. It's been around in various forms since the 1990s. The US has bonus depreciation, but it's been less consistent — it expires, gets renewed, expires again. Canadian firms have had more certainty, which matters for long-term investment decisions. Luna: So policy stability is a productivity lever. That's not something you hear in the typical 'just innovate faster' narrative. Lucas: It isn't. And there's another factor: skilled trades. Canada has a much higher proportion of workers in certified trades — electricians, welders, pipefitters — relative to the US. Those workers tend to be more productive because they're constantly upgrading their skills through apprenticeship programs. The US let its apprenticeship system atrophy after the 1980s. Luna: There's a direct link between workforce skill depth and how effectively you can use new capital equipment. If you buy a fancy robot but nobody knows how to program it, you're not getting the productivity gain. Lucas: That's the micro-level story. At the macro level, Canada also has lower income inequality than the US. The Gini coefficient is about 0.34 in Canada versus 0.41 in the US. There's research — by economists like Boushey and Stiglitz — suggesting that high inequality reduces productivity by dampening social mobility and underinvesting in public goods like education. Luna: So a more equal society can grow faster? That's a provocative claim given the US political narrative that inequality is the price of dynamism. Lucas: Right. And the data doesn't support that trade-off. The US has become less dynamic over the same period inequality rose. The rate of new business formation — startups as a share of all firms — has been declining since the 1980s. Canada's startup rate has been more stable. New firms are a major source of productivity growth because they introduce new processes. Luna: Let's talk about R&D. The US spends a much higher share of GDP on R&D — about 3.5 percent versus Canada's 1.5 percent. How does that fit with Canada's productivity edge? Lucas: It's a seeming contradiction. But the composition matters. US R&D is heavily concentrated in a few sectors — pharma, tech hardware, software. A lot of that spending goes toward developing new products, not improving production processes. Canada does more process R&D, especially in natural resources and manufacturing. Process innovation tends to have a more direct impact on productivity in the near term. Luna: So Canada is better at making existing things cheaper, while the US is better at inventing new things that may or may not boost economy-wide productivity quickly. Lucas: Exactly. And there's also public R&D. Canada's federal government funds a lot of basic research through the National Research Council and the Canadian Institutes of Health Research. That research often gets picked up by firms. In the US, public R&D has been more volatile — the budget sequestration in 2013 cut NSF and NIH funding, and it's never fully recovered in real terms. Luna: So we're painting a picture where Canada is better at the 'diffusion' part of the productivity puzzle — getting existing best practices out to a wide range of firms. The US is better at the 'frontier' — creating entirely new technologies. Lucas: That's the best summary I've heard. And the evidence shows that diffusion has been the bigger driver of aggregate productivity growth since the 2000s. The frontier kept advancing — think AI, cloud computing — but the average firm, especially non-tech firms, didn't adopt those innovations quickly. Canada's institutions — trade colleges, industry associations, stable tax policy — helped narrow that adoption gap. Luna: But there's a catch, right? Canada's productivity level is still lower than the US in absolute terms. The gap in output per hour is about 15 to 20 percent. So Canada is catching up, but hasn't caught up. Lucas: That's true. And the worrying sign is that Canada's growth rate slowed after 2014, when oil prices collapsed. The resource sector was a big part of the productivity story, and without that tailwind, Canada's TFP growth has slipped to around 0.3 percent recently. That's more in line with the US. Luna: So the Canadian model might be fragile if it relies on resource investment and public policy that could change. What about the US? Is there anything it can learn? Lucas: I think the biggest lesson is that stable, predictable policy matters more than headline R&D spending. The US could revive its apprenticeship system — Germany and Canada both show that works. It could also streamline its capital cost recovery to match Canada's consistency. And addressing healthcare cost inflation — which is a hidden productivity killer because high employer premiums crowd out wage growth and investment — would help. Luna: Healthcare is a fascinating angle. The US spends about 17 percent of GDP on healthcare, Canada about 11 percent. That six percentage points isn't just a consumption difference — it's capital that could be deployed in productive investment. Lucas: Right. If US firms had to spend six percent less on health benefits, that could flow into equipment, training, or R&D. It's a structural drag that Canada doesn't have, and it shows up in the productivity data. Luna: Final question: is there a risk that Canada's productivity growth advantage was a one-time catch-up, not a sustainable path? Lucas: That's the key debate. Some economists argue Canada benefited from a 'catch-up dividend' — adopting technologies the US already had. As the gap narrows, that dividend shrinks. To sustain faster growth, Canada needs to push the frontier itself. That means more venture capital, more commercialization of university research, and bigger domestic tech firms. So far, the evidence is mixed. Luna: So the long-term outlook depends on whether Canada can transition from a diffusion-driven economy to an innovation-driven one. That's a hard pivot, and not many countries have done it successfully. Lucas: Exactly. But for now, the data is clear: Canada has been the quiet productivity champion of the G7. And that's a story worth remembering the next time someone says the US is the only engine of economic growth. Luna: I think I'll bring that up at dinner tonight. Thanks, Lucas. Lucas: Thanks, Luna. And thanks to everyone listening. If you want to dig into the numbers, the OECD Productivity Statistics database is a great place to start. That's all for today.