Canadian fourth quarter labour productivity came in significantly higher than expected, notes TD Economics in a special report. That said, Canada’s productivity woes remain a fundamental concern, it adds.

Canadian labour productivity was poised to end 2006 with a truly dismal quarter, TD says. “With real GDP growth rising by an anaemic annualized rate of 1.4% and hours worked leaping by 3.3%, the growth rate of productivity looked hard-pressed to reach positive territory. “Hence the simultaneous jaw-drop and head-scratch that accompanied Statistics Canada’s release that reported a 1% increase in fourth quarter business-sector productivity,” it says.

“The monkey-wrench thrown into analysts’ initial expectation was that instead of growing by 3.3%, hours worked actually rose by a significantly more subdued 0.7% in the quarter,” TD reports. “This divergence was not a clerical error but rather the result of a flaw in the methodology used in the Labour Force Survey to calculate hours worked.”

Statistics Canada is in the process of updating their measurement techniques, it says, but this experience casts an unfortunate shadow over a key piece of economic data. However, it adds, “In no way should this upside surprise alleviate any concern about the health of Canada’s labour productivity. For 2006 as a whole, labour productivity managed to increase by just 1.2% – marginally worse than the tepid 1.4% annual average growth rate observed since the turn of the millennium.”

TD says that the shortcoming in the calculation of hours worked in the LFS can be traced to the treatment of statutory holidays, and the fact that the current seasonal adjustment procedure does a poor job of capturing the effect of statutory holidays. “Fortunately, Statistics Canada has begun work on implementing new statistical techniques that better adjust for statutory holidays, but the completion date remains unknown,” it says.

“While a 1% increase in labour productivity is better than an outright decline, Canada’s productivity performance remains miserable,” it adds. “While Canada’s goods producing sector continues to adjust to the changing face of the global manufacturing industry and the sustained increase in the price of commodities, the weakness on the services side is a larger concern. While less-productive new entrants into the labour market may be partly responsible for suppressing growth, this sector will deserve close observation as it plays an increasingly important role in Canada’s overall economic makeup in the coming years.”