Why Canada’s Economy Is Just Fine

Ever since my days as a student of economics, I’ve been fascinated by how we measure things. How do we know whether we are producing more, earning higher incomes or increasing living standards? These are fundamental questions that economic statisticians need to answer. They not only inform how well we say the economy is doing, but also guide public policy. My interest in measuring the economy served me well over my career as a professional economist. One of my responsibilities as Ontario’s chief economist from 2015 to 2021 was overseeing the release of quarterly statistics on provincial GDP. 

For decades now, most economists have accepted the belief that Canada’s living standards are falling behind the United States—that Canadians are having a harder time meeting their everyday needs than Americans. The claim is built on statistics showing that Canada’s economic productivity, measured by real GDP per capita or hours worked, is growing slower than that of our neighbours to the south. According to the World Bank, real GDP per capita increased in the United States by 60 per cent between 1990 and 2022; in Canada, that growth was only 43 per cent. The resulting image is almost self-deprecating: we’re painted as a nation of overly polite, underachieving dullards, failing to keep pace with the flashy, ever-rising American standard of living.

Every day, Canadians hear from bank macroeconomists and policy pundits through the media that we’re suffering from a productivity crisis. When I hear this, I can’t help but chuckle. Can they really make such sweeping conclusions about Canadian living standards based on a single metric like GDP? Simon Kuznets, the pioneer behind this measure, cautioned the U.S. Congress in 1934 that “the welfare of a nation can scarcely be inferred from a measure of national income.” Yet this narrative has gained traction. It has become so pervasive that, in September, the federal Liberal government enlisted former Bank of Canada governor Mark Carney to advise Prime Minister Trudeau about near- and longer-term economic growth and productivity.

But here’s the thing: conventional wisdom is often wrong. As Canadian-born economist John Kenneth Galbraith famously pointed out, its power doesn’t stem from accuracy but from convenience. It supports the intellectual status quo and resists change. Galbraith warned that this comfort comes at a cost, especially in economics, where clinging to outdated ideas can prevent progress. The truth is that Canada’s economy is doing just fine. Comparing ourselves to one country based on one measure is providing a misleading assessment of our living standards.

We need to get one thing clear: GDP is an imperfect measure of productivity, despite its ubiquity in economic conversations. It especially falls short when comparing two nations with different structures and economic priorities. While GDP measures output, it misses many factors that contribute to quality of life. It turns out that when we look at other measures such as incomes, health, fairness and happiness, Canadians are doing pretty well compared to other countries.

Let’s widen the lens to include other advanced economies. Let’s also look at something other than production: income distribution. Turns out, Canada holds its own. We rank third in the G7 in terms of GDP per capita and are tied for second in income equality. Meanwhile, the U.S. might top the GDP charts, but its income inequality is the worst among G7 nations. We’re a country that values fairness, so this gap is worth considering before we label ourselves as falling behind. 

It doesn’t even make sense to focus so intently on comparing Canada to the U.S. based on GDP data. After all, judging a nation’s well-being based on a single economic statistic is akin to determining that I’m healthier than LeBron James because my BMI is slightly lower. Sure, I might win by that narrow measure, but in the broader sense, we all know who’s the better athlete.

A major flaw in GDP as a measure of economic productivity is how it fails to properly value public-sector output. While private sector outputs are easy to quantify through market transactions, public services—like health care and education—are trickier to value. Countries that rely more heavily on public services, like Canada, are penalized in GDP comparisons.

Consider health care. The U.S. spends 16.5 per cent of its larger per-capita GDP on health care, compared to Canada, which spends 11. 2 per cent. GDP data would suggest that Americans receive significantly better health care. Is that true? Not at all. The number of doctors and nurses per capita is comparable between the two countries. The U.S.’s greater reliance on private health care inflates its GDP figures compared to Canada. And when we look at outcomes like life expectancy and infant mortality, Canada comes out far ahead—despite our over-burdened and under-resourced system. According to the OECD, almost 89 per cent of people in Canada reported to be in good health. This was the highest score across all OECD countries, slightly ahead of the United States (88 per cent) and well above the average (68 per cent). Clearly, GDP doesn’t tell an accurate story of how health-care systems across countries perform.

Another aspect often overlooked in this debate is the growing value of Canada’s international exports, which aren’t factored into real GDP measures. Based on OECD data, Canada’s terms of trade have improved significantly over time, rising by 30.7 per cent between 1995 and 2022. Higher prices for Canada’s natural resource exports like oil mean that our incomes are outpacing GDP growth, because we’re trading on increasingly favourable terms. When you factor this in, Canada’s income growth is keeping pace to that of the United States. Presumably, so too are our living standards.

The wealth from these valuable exports has a perverse effect on how our productivity is measured. As Canada grows richer by selling natural resources, we also pour in more capital and labour to extract them. Think about the enormous investments in equipment and machinery needed in the oil sands. This kind of high input use drags down productivity scores because, even though we’re earning more, we are also using many more resources to pull that wealth from the ground. Research from McMaster University economists Oliver Loertscher and Pau Pujolas shows that if you remove the oil and gas sector from the equation, Canada’s total factor productivity has increased at a comparable pace as the United States. In other words, the supposed “productivity gap” might be more about how we measure than any actual underperformance on our part.

Let’s address the final and most insidious misconception: that higher productivity will neatly translate into better wages for the average Canadian worker. In theory, that’s how it should work. In practice, it hasn’t. Despite growth in labour productivity, wages for most Canadians have barely budged. For example, in the two decades leading up to the pandemic, labour productivity across Canada grew by 19.4 per cent, but real average weekly earnings climbed only 12.5 per cent, and median household income by 11.2 per cent. This gap is even starker in Ontario, where wages rose by a modest 7.5 per cent, while labour productivity jumped by 17.5 per cent. Even worse, median household incomes in Ontario have stagnated for decades even though productivity has risen. Why? Corporate profits and the highest-income earners have been taking an ever-larger slice of the economic pie. Today, corporate profits make up about 20 per cent of Canada’s GDP, nearly double their share between 1960 to 2000. And while the inflation-adjusted income of the top 10 per cent jumped 28 per cent between 1982 and 2022, this number is just 15 per cent for everyone else. The result is that many ordinary Canadians feel left out of the prosperity they’re told is coming from rising productivity. 

So, is the Canadian economy truly falling behind? The short answer is no. Our economy has its challenges, but the idea that we’re in a crisis—based solely on GDP comparisons with the U.S.—is simply a myth. We might not match the U.S. in sheer economic output, but we outperform them when we turn our attention to a broad range of measures of things that truly matter to everyday Canadians. Public policy should focus on measures that truly reflect our well-being, like real median income, fairness and quality of life. It’s not that GDP is irrelevant, but it shouldn’t be the only yardstick.

Instead of chasing after elusive American-style GDP growth, we’d do well to appreciate the strengths of our economy—and work to make it even better for everyone. The myth of a productivity crisis doesn’t reflect the reality of life in one of the richest, fairest countries in the world. And that’s something we shouldn’t lose sight of.