Statistics Canada reported Friday that labour productivity increased 0.1% in the second quarter of 2003 from the first quarter. Economists had expected the reading to come in unchanged.

The slight improvement continued the lethargic pace of labour productivity growth experienced in the past four quarters.

BMO Nesbitt Burns says Canada’s labour cost advantage has been severely degraded over the last year, allowing U.S. productivity to take the lead.

Nesbitt notes that Canadian economic output fell 0.5% last quarter, “but hours worked fell even more as businesses responded quickly to the slowdown associated with SARS, mad cow disease and the surging Canadian dollar”.

By contrast, U.S. productivity grew 1.8% last quarter. Nesbitt says that this report reinforces the divergent underlying trends in Canada and the U.S. “Growth in demand had been met by a smaller, more productive, workforce in the U.S., but by a larger workforce in Canada,” it says.

“As a result, U.S. labour productivity growth has far surpassed that of Canada for four straight quarters. From a year ago, the productivity of the U.S. business sector has grown by 4.4%, while in Canada, productivity has declined by 0.6%.”

Nesbitt adds that “The steep loss of competitiveness of Canadian labour is even more evident in year-over-year terms, where Canadian unit labour costs are up 2.5%, but have surged by 14.0% in U.S. dollar terms, versus a decline of 1.1% in the U.S. This big gap in labour costs is one reason U.S. profit growth has caught up to Canadian trends, and appears poised to move higher.”