FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, April 28, 1999

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[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): First of all, let's call the meeting to order.

We'll start with Mr. Stanford. Welcome. You know how this operates. You have five to ten minutes to make your presentation, and after everyone has completed their presentations we will engage in a question and answer session.

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Mr. Jim Stanford (Economist, CAW Canada): Thank you very much, Mr. Chair, for the invitation to appear. And I do apologize in advance for having to sneak out. For child care reasons I have to get back to Halifax this evening, so I have to leave at 5 o'clock. And the child care issue is me taking care of someone else, not someone taking care of me, so I thought I should clarify that.

Of course the “P” word is on everyone's agenda, including ours as a union, the Canadian Auto Workers. It's incredibly rare that you would have agreement from economists on the right and the left and the middle about an issue, but productivity may be one of those issues. At least we do agree that productivity is very important. We agree that in light of some measurement difficulties it seems that Canada's productivity performance has not been great, although it may not have been as bad as it's sometimes made out to be; and that improving productivity, revitalizing productivity growth, is a precondition for rising living standards.

On the other hand, I'm also concerned at some of the policy issues and policy implications that are tossed out as being justified by concern over productivity that don't seem to have much connection to productivity at all; rather, people just hooking another set of issues that they wanted anyway onto the productivity bandwagon—in particular, the tax cut notion. I don't see any convincing economic argument that Canada's tax structure is in any way a significant barrier to productivity growth, and I don't see any convincing channel of influence through which tax cuts, particularly in the personal income tax area, would revitalize productivity growth.

I'm also concerned that the issue of productivity is being used in a way to justify still more belt tightening, more downsizing, more harsh measures that would undermine the current standard of living of Canadians. This is often emphasized in regard to things like corporate downsizing or other forms of cost cutting, and leaning and meaning, that are justified in terms of our need to increase productivity growth in the long run, even though they result in significant hardship for thousands of Canadians in the interim.

I think that productivity growth, correctly measured and correctly targeted, involves improving standards of living and improving growth, involves getting more of things, not getting less of things. I'm eminently skeptical of the notion that belt tightening is the way to go for productivity growth, especially if you look at Canada's corporate sector today. After the leaning and meaning that's occurred over the last decade, the productivity record of individual corporations, individual major players at the core of Canada's economy, has been nothing short of astounding. I'm very familiar with the record in the auto industry, in the railway industry, in the airline industry, and many other important sectors of Canada's economy where you will have seen a real labour productivity growth in the area of 50% or more over the last decade. And you would think that if you could only get the productivity gains of those corporations expanded onto the national level, we would be the leaders of productivity growth in the world.

The problem is that most of those corporations have attained the productivity growth purely through downsizing and cost cutting, which means that internal to the corporation you have a reasonably successful effort to improve productivity, in essence to downsize your way to profitability as a corporation; but when those laid-off individuals who are the casualties of the downsizing end up doing virtually nothing with their time afterwards, whether they take early retirement or whether they're involved in selling Amway or some other menial self-employment task, then their productivity has obviously fallen. Whatever they're doing now, it's less productive than what they were doing before they were laid off in the name of productivity growth.

That's the irony. You can downsize your way to profitability as a company, but you cannot downsize your way to prosperity as a country. That issue of how to take the people who have been downsized, and any other workers in the economy, and put them to work in productive ways is the positive way we should be looking at productivity growth; and we should look at the need to increase productivity growth as being an opportunity rather than an excuse for more belt tightening.

Personally, in my thinking, I would emphasize three particular economic factors as having contributed to our relatively poor productivity growth in recent years. One, which I think would be shared by many of the people on the panel today, would be the issue of macroeconomic stagnation. If you're thinking of productivity in terms of labour productivity, the whole idea of productivity growth is to make better use of something that's scarce, which is the time and energy of workers, but the incentive to do that is not there when labour is abundantly available all over the place. Where industries can pick up idle labour for low prices, then their incentive to really improve productivity is not necessarily strengthened.

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I think the demand conditions in Canada in the 1990s at the macroeconomic level have been absolutely abysmal. This is table 1 in your package. By virtually any indicator, aggregate demand conditions in Canada have been significantly worse than for the U.S. and for most of the other OECD countries by a range of measures: in terms of the level of real interest rates; in terms of the reduction in government program spending, which has been far deeper here than elsewhere; even in terms of the growth of real investment or the expansion of share prices in the financial sector.

Rising taxes in Canada, which have taken so much heat on productivity grounds, obviously have contributed to the problem on the demand side. And taxes have increased in Canada, but table 1 shows that in fact that is one of the areas where we performed as well or better than most other OECD countries. Taxes have increased by 1.4 points of GDP in Canada for all levels of government over the 1990s. That's actually slower than taxes have increased in the United States, and it's on par with the OECD average.

So where we differ from other OECD countries is not in our taxes, either in their level or in their increase; where we differ is in the profound weakness of the overall demand conditions in Canada this decade, which are the legacy, in my view, first, of a misguided policy of trying to wring inflation from the system early in the decade on the part of the former Bank of Canada governor, and then subsequently, in my view, of unduly fast cutbacks in program spending by all levels of government, including the federal government.

The second issue that I would put emphasis on is the issue of real capital accumulation, real investment by Canadian companies in machinery, equipment, non-residential structures and other tools. It is those tools that workers use in their day-to-day work that are the crucial ingredient for their improved productivity.

In Canada, despite our shift towards a more business-friendly climate, to taking measures that enhance the confidence of investors in Canada, our performance in terms of real capital accumulation has actually been quite negative during the 1980s and particularly during the 1990s.

Real investment, measured as a share of GDP, has declined by about five points if you compare the 1990s to the 1970s, and that's true both in growth terms—that is, the total new investment by companies—and in net terms after you've deducted the value of real capital that's lost to depreciation and wear and tear and so on. In fact, that net capital stock—that is, the stockpile of real capital after you've written off depreciation—has been growing so slowly in recent years that it has barely kept up with the expansion of our labour force.

Figure 3, which is up on the screen now and which is also indicated in your kit, shows the rise in the capital-labour ratio in Canada over time. This is an aggregate measure of how much equipment, how many tools, how much technology average workers have to supplement their labour effort over time, and during the 1990s the capital-labour ratio has not grown at all. In fact, it has declined slightly, indicating that companies are not investing at a fast enough pace to keep up with the labour force.

This will dramatically undermine the extent to which Canadian companies can capture the benefits of all the new technology we hear about day in and day out. We're said to live in a high-tech, post-industrial economy, but unless we're investing rapidly in the real equipment and real capital assets that workers need to aid their labour effort, then we as an economy are going to miss the benefits of that.

Finally, the third factor I would put an emphasis on is the shift towards small business employment, and in particular, self-employment in Canada's labour market, again through the 1980s, but particularly marked during the 1990s.

Figure 5 will indicate the overall expansion of self-employment in Canada's labour force as a share of the total. As you see, it's grown dramatically from about 14% at the beginning of this decade to 18% today.

Self-employment in Canada is twice as common as it is in the United States. On the one hand, you can say this is symptomatic of a sense of self-reliance and creativity on the part of Canadian workers, and that's obviously true. What could be more creative and flexible than finding your own job if you happen to have been laid off from a business or laid off from a government? But it is not, by any stretch, the most productive use of the labour power and creativity of Canadian workers in small businesses or self-employment.

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Wages and working conditions are significantly worse in the small business sector. Average labour productivity, if you measure it as value added per employee, in the own-account self-employed sector—that is, people who run their own business and don't have anyone working from them—is probably half the level of average labour productivity for paid employees.

On that basis, the shift in employment towards self-employment, the increase from 14% to 18% of the labour market in a sector that's half as productive as elsewhere—that alone will have reduced overall productivity in Canada by over 2% between 1990 and 1970. So you're getting close to something like a third or half of a percentage point of productivity lost per year solely because of the shift from paid employment to self-employment in our economy.

In my view, the rise of self-employment is, again, a symptom of a very weak labour market on demand grounds. Yes, many people do want to be their own bosses, but if you had the choice between running a small business for long hours and low pay or working in a paid job with better pay and good benefits, most Canadians would have taken that choice. That's why I would view strengthening conditions on the demand side through a shift in monetary policy and fiscal policy priorities as a crucial ingredient to improving productivity growth in both the short run and the long run.

The Chairman: Thank you very much, Mr. Stanford.

Mr. Jim Stanford: Thank you very much for your indulgence.

The Chairman: We will move to the question and answer session with you. Then we'll take a break and go and vote, and we'll come back. We'll extend the session from 6 p.m. to 6.30 p.m.

Mr. Epp.

Mr. Ken Epp (Elk Island, Ref.): Thank you.

I have just a few questions. I'm going to go in the reverse order of what you mentioned and hit your last point first.

You said the labour productivity of a person in self-employment is only half that of someone in paid employment. Intuitively, I feel this is not right, because I grew up on a farm and I know that with my dad owning the farm, and my brother and I being slaves to this farm owner, we worked very long hours and worked very hard, much more than he could get out of any paid employees.

My brother has recently tried some trucking, and his business grew really quickly because he was giving good business. But as that happened, he had to hire people, and in his words, he just couldn't keep good help, and so he downsized to the point where he and his son are doing it by themselves. They are the sole employees. They're self-employed. They're running their business, and they're very productive. They work hard and work efficiently, whereas with paid employees that wasn't the case.

What I'm asking is, what is your empirical evidence for your statement? Intuitively, to me it seems just the opposite.

Mr. Jim Stanford: When I say productivity is low, I'm not in any way insulting the hard work and long hours that self-employed people put in. They really do put in longer work hours than do most Canadians, and they do it for less pay.

What I'm saying is that the issue of productivity depends on more than just how hard you work and what your work ethic is. My concern is that too much of the productivity discussion gets zeroed in on the notion that paid workers don't have the right attitude, that we need to give them some more tough love policies to improve their work attitude.

The empirical data is there. In the own-account self-employment, which makes up about two-thirds of all self-employment now—those are people who don't hire anyone; they just work in their own company—average incomes are $20,000 a year. That would be something slightly over half the average income in the paid employment sector. Then if you look at the GDP data, the total profits of the unincorporated small business sector per member of that sector—that is, per self-employed person—are about $20,000 per year.

In contrast, the average labour productivity in the paid work sector—that would be GDP per worker—would be more like $50,000 a year.

Mr. Ken Epp: Okay. So you're measuring productivity in terms of dollars earned.

Mr. Jim Stanford: I'm measuring in terms of value added per worker. In my view, that measure—average labour productivity, value added per worker—is the best way to capture productivity in terms of its influence on living standards.

Mr. Ken Epp: So you're using it as an input cost then, basically.

Mr. Jim Stanford: Not necessarily.

Mr. Ken Epp: You are if you're using wages. Correct me if I'm wrong here, but my view is that wages are an input cost in most manufacturing cases. You can take two people and pay one twice as much, but their productivity in terms of what they produce is not necessarily doubled.

Mr. Jim Stanford: No, not necessarily, but on the assumption that those higher wages will be reflected in a higher-value product, which they must be if that shift is to be sustained, then the value added per worker would have to rise to reflect the higher wages as well.

Mr. Ken Epp: I don't want to put ideas into your head, but it seems to me that if there is a justification for your statement, then what it probably should be is that the person in the paid workforce goes to a larger place where there's more capital investment, and so he's able to multiply his or her efforts because of the capital investment and the machinery that's available to him to help him in his work. I think that would justify it.

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Mr. Jim Stanford: I think that's one of the points I was trying to make with my presentation.

Mr. Ken Epp: I have one more question, Mr. Chairman.

I want to talk a little bit about your statement on belt tightening. Are you confusing productivity with standard of living collectively in our country? It seems to me that belt tightening simply says we're going to continue to do what we're doing, maybe even improve it, but we're going to do it in a more efficient way. I think you, probably from your background, are equating that with laying off staff, which of course has the implications you state. There are many people whose standard of living goes down. But does that necessarily affect productivity? I question your statement.

Mr. Jim Stanford: I argue that it affects productivity if it's measured at the level of the economy as a whole, and that's true whether you're measuring it in terms of actual living standards, like income, or if you're measuring it in my preferred way, which would be value added per worker.

Take an example like Canadian National Railway. Since Canadian National Railway was privatized, real productivity, if you measure it in terms of freight tonnes hauled per worker, has increased by 50% in five years. That's an incredible record, and as a result, Paul Tellier gets invited to every productivity think-tank that happens. You are probably thinking of having him in here.

For the company, that's an incredible increase in productivity, and it has also underwritten an incredible increase in profitability and the market value of the company under its private owners. But what is the impact on productivity for the economy as a whole?

When you measure productivity, you're not measuring the productivity of individual companies; you're measuring the productivity of the economy as a whole. It all depends on what happens to the 10,000 people at CN Rail who have been laid off since the company went private. If we took those 10,000 people and did something useful with them, did something productive with them, then, yes, restructuring and the innovation that went into the labour-saving innovations at CN Rail would have paid off, because we've taken 10,000 people who weren't really needed to run that railway and we're doing something else with them instead.

But that's not what we've done. For the most part, we've taken those 10,000 people and had them sit at home, either on early retirement or pushed into some segment of the economy where they're trying to make a living, but a much poorer living than they were making as a railway worker.

That's why I say the individual actions of individual companies may enhance their own profitability and productivity, but that will not automatically translate into productivity growth for the economy as a whole unless we ensure that we do something useful with the people who are displaced as a result.

Mr. Ken Epp: In that case, I suppose the ultimate measure would be, in absolute terms, did they move more freight; did they move more passengers?

Mr. Jim Stanford: Ironically, CN Rail hasn't. Their total revenue and their total freight hauling has not changed. It's almost exactly equal now to what it was in 1994. So they've taken an existing business and leaned it, and that is the worst way to go for productivity growth. The better way is to take your existing resources and do more with them.

Mr. Ken Epp: You said Canada's tax structure is not a barrier to productivity. I hope I copied that down correctly.

How can you say that? When the government extracts money from businesses, it means that they have less money available for capital investment, which I would think must necessarily multiply the productivity potential for every employee in that business. For you to say that taxes of themselves are not a hazard or a barrier to productivity—exactly how do you explain that statement?

Mr. Jim Stanford: That was a general statement about the overall tax system in Canada not being out of line with the tax system in other countries. Yes, taxes in America are lower than here, but if you look at the cross-section of industrialized economies, Canada looks more like America in terms of its tax structure than it looks like the Europeans, for example, and generally I don't think our tax system is out of line.

On the other hand, sir, I do agree with your highlighting the corporate income tax as perhaps the tax that has the most negative impacts on productivity, for precisely the reasons you've mentioned—starving a company of the cashflow that it needs to reinvest. That's why I find it incredibly ironic that all the link between productivity and taxes in the current debate focuses in on the personal income tax side, the notion that high-income earners pay too much tax and that impacts on productivity. I disagree with that entirely. In fact, if we were concerned about productivity rather than redistributing the pie, we would focus in on the corporate income tax and think about tax measures that would enhance the cashflow available for real capital investment, which I've identified as one of the factors behind our productivity slowdown.

Mr. Ken Epp: Mr. Chairman, I can cede to others if they have some questions.

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The Chairman: I have a follow-up question in reference to the example you gave, of CN. By using 10,000 fewer workers and producing essentially the same amount of work, that company has in fact become more productive. Where is your concern? Your concern is about where those 10,000 people will end up.

I know you understand economic history. When we look back at the cotton gin and agriculture, the introduction of machinery in agriculture, what essentially happened is that the aggregate number of jobs actually increased. Aren't we going through the same thing now, through the information age and the transformation that is occurring in our economy?

Mr. Jim Stanford: I would say the potential is there in the new technology, and even in new management innovations. A lot of the changes at CN Rail were not technology per se; they would be organizational changes. The potential there is to use those forms of knowledge to enhance productivity, but whether they enhance productivity on the aggregate level or not depends on a couple of things, and one of them is what you do with the 10,000 people.

You might shrug and say that's a short-term problem, that eventually they'll get re-employed. I'm not convinced it's a short-term problem.

If you look at the downturn in the labour force participation rate in Canada during the 1990s, you see the exodus of hundreds of thousands of people from the labour force. So it's not just an issue of getting laid off from one job and then waiting around a year or two until you find something else productive to do. There are hundreds of thousands of Canadians who are not contributing to the economy, who want to be contributing to the economy, and laying off 10,000 more people from CN Rail in the interests of productivity doesn't solve that problem.

That's why we need something on the demand side to make sure the economy is pushing at its productive capacity, pushing at that frontier. Then we'll have something for those 10,000 workers to do, and then you'll see a payoff in terms of aggregate productivity measures.

The Chairman: Thank you.

Mr. Discepola.

Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.): Thank you, Chair.

I'm trying to educate myself in this whole process. Am I to understand that the job creation measures would be a measure of productivity? In other words, if I take initiatives by cutting the labour force, I will improve productivity? I believe you answered yes to that question of the chair. If I increase labour wages, do I improve productivity?

Mr. Jim Stanford: In terms of cutting the labour force, what I said there is that for an individual company, if you find ways to produce what you were producing before but with significantly fewer workers, then that company's productivity has clearly increased. I can give you 10 companies—

Mr. Nick Discepola: If I use per capita measurements as you've done in some of your graphs, obviously by reducing the labour force I will improve productivity as you measure it.

Mr. Jim Stanford: Is that by reducing the labour force from the economy as a whole or from individual companies?

Mr. Nick Discepola: I'm trying to understand how you measure it.

Mr. Jim Stanford: I would measure it for the economy as a whole in terms of value added per worker.

If I take someone from CN Rail and lay them off, productivity at CN Rail has increased, but productivity in per capita terms for the economy as a whole hasn't. CN Rail is producing no more than it used to. You have some people, now more productive, working at CN Rail, but you have a bunch of people who used to work at CN Rail who are doing nothing. Value-added for the economy hasn't grown. CN Rail's productivity has grown, but for the economy as a whole, because that worker is doing nothing, he or she is pulling down the productivity average for the whole economy.

Mr. Nick Discepola: So when we talk productivity, we should distinguish that we talk productivity for the country as a whole, then.

Mr. Jim Stanford: Exactly.

Mr. Nick Discepola: Are the job creation initiatives a measure of the lack of productivity or not? In other words, if I am an enterprise and I create jobs, is that enhancing Canadian productivity or is it not?

Mr. Jim Stanford: In general, you would expect it to add to Canadian productivity, especially if you're taking someone who was unemployed and now they're doing something. That's going to show up in GDP and value added per worker.

Mr. Nick Discepola: Then your statement on small business just floors me. Traditionally we know that the small business sector has been the creator of new jobs; 80% of the new jobs that are created are by the small business sector. So why would you make the statement that small business is unproductive, a drag on overall productivity in Canada? It floored me when I heard you say that.

Mr. Jim Stanford: The second half of my sentence, which I was about to make before you interjected, was to say it also depends on what the person is doing in that new job. If they're doing marginal, low-wage, rather menial tasks and their work is not supplemented by much capital equipment, then their productivity is going to be low. You can say their productivity is still higher than if they were doing nothing, and that's true. But on the other hand, if you compare two states with 100 people working, and in one of them you have 20 people working for small business, which has average productivity levels significantly lower, and in the other case you have 10 people working for small business, then the system with 10 people working in small business will have higher productivity.

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Let me point you towards table 2 at the back of the handout, which shows some data on productivity levels by sector. It compares four sectors that are dominated by small businesses with four sectors dominated by larger companies. The productivity measure is shown in the column called “GDP per Worker.” That would be value added per employee.

In the small business industry—things like retail trade, wholesale trade, accommodation, and food and beverage services—productivity levels are well below the Canadian average. More worrisome, in many of those industries productivity is actually falling, measured in terms of value added per worker, whereas in the industries traditionally dominated by larger, more capital-intensive companies, productivity levels are high and growing.

Mr. Nick Discepola: Are we going to be able to sustain high productivity as a nation if we...? My assessment of your situation is that we, as a nation, would have to selectively choose those types of employment sectors that are going to add high value; as a result, be selective and just forget the other areas. Can you survive as a nation if you just target one or two areas that are high-productivity areas?

Mr. Jim Stanford: I wouldn't say to forget the other areas, but I would be very cautious about policies that were actually aimed at subsidizing or promoting those other areas. Think of the range of subsidies that are available for small business in Canada today, things like the preferential tax treatment that small businesses get. In essence, those are subsidies for the small business industries, which tend to have lower productivity on average. I'd like to see subsidies directed to the areas expanding output in the areas where labour productivity is higher.

Mr. Nick Discepola: Thank you, Mr. Chairman.

We have a vote.

The Chairman: We'll suspend for approximately 15 to 20 minutes, and we'll be back. As I said earlier, we will extend the session to 6.30 p.m.

Mr. Stanford, on behalf of the committee, thank you very much for your input.

Mr. Jim Stanford: Thank you for your indulgence around my time schedule as well.

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The Chairman: I'd like to call the meeting to order and welcome everyone back. I understand there is a final question for Mr. Stanford.

Mr. Discepola, do you have a final question?

Mr. Nick Discepola: Yes. I thought he had left.

When it comes back to the question of laying off people, for example, you mentioned it can improve the overall productivity of the corporation, and in some cases, depending on what those displaced workers do, it may enhance the productivity of the country overall. But if a corporation doesn't undertake to lay off or downsize in certain cases, they may not be able to be competitive by retaining the workforce they are expected to retain. If they're not competitive, they won't be able to get contracts or expand. As a result, they won't be competitive and enhance the productivity of the country as a whole.

I'm just wondering why you took the position you did, and I'm asking you to comment on that, please.

Mr. Jim Stanford: A lot depends on what's happening to the size of the overall pie the company in question is servicing. To illustrate this, let me draw a comparison between the railway industry and the auto industry.

I was discussing CN Rail, where real productivity has increased 50% in the last five years but the size of the business has not changed. So the inevitable impact of the flip side of higher productivity means fewer people are employed. That dramatically undermines the extent to which those productivity benefits are channelled into the overall level of productivity growth in the economy.

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On the other side, you have the auto industry. The major auto assemblers in Canada have improved their real productivity by something close to the same amount. There has been a 35% to 40% increase in real output for workers, measured by various means, such as vehicle assembly per worker, number of hours required to assemble a vehicle, or value added per worker. There has been a 35% to 40% increase in productivity.

Real capital investment, which I mentioned in my presentation as being so important, was crucial in the auto industry. Over $10 billion of real capital has been invested in the auto industry in Canada, but the size of the pie the companies are serving has grown. Canada's total auto assembly and particularly exports of finished vehicles and parts have grown dramatically during the 1990s. So you haven't had the same link between rising labour productivity and downsizing and layoffs. In fact, you've had a slight increase in total employment in the auto assembly and the auto parts sectors together.

Mr. Nick Discepola: If I use that analogy, I'm more confused. If you take a look at your industry, which you know very well, you're saying if a company selectively decides to displace x thousands of workers, that affects productivity in a certain way; yet if I decide to invest in heavy capital-intensive types of investment, such as robotics, which is capital-intensive yet will also displace so many thousands of workers...you're confusing me again. So what factors do you really use to measure productivity?

Mr. Jim Stanford: The measurement issue, as you know, is a whole bag of worms, and I will not try to solve it. I think my argument is valid, whether you measure it in real terms like freight tonnes hauled per worker in the railway industry, cars assembled per worker in the auto industry, in value terms—things like value added per worker in either case.

The difference in the auto industry is if the auto industry had not grown its output at the same time as it was growing its productivity, you would have had as much downsizing as you had in the railway industry. But they expanded their output, helped to penetrate export markets, and the expansion of that output meant they didn't lay off people; they hired people. So not only did productivity grow, they actually drew new labour into an industry that had very high levels of rapidly growing productivity.

So the benefits of the auto industry's experience are several times more positive for Canada's economy as a whole than the benefits of the rail experience, where they increased productivity but didn't grow the business.

Mr. Nick Discepola: I guess I'm not really convinced and we'll have to get into the debate. But if this discussion had occurred in the late 1960s or early 1970s, when people were fearful of their jobs because computers were going to take over everything, maybe some of the statements you're making would have hit home. But we just need to know about and look at what's happened in the past 10 to 20 years in that industry. It has created so many other jobs that the fears people had in 1970s were not founded at all.

Mr. Jim Stanford: I agree with you.

Mr. Nick Discepola: That's also why I'm saying by using technology or displacing workers, you may increase productivity overall in the long term. That's where I'm having a hard time following some of your argument.

The Chairman: Thank you. A final question from Mr. Pillitteri.

Mr. Gary Pillitteri (Niagara Falls, Lib.): Thank you, Mr. Chairman.

Mr. Stanford, it's good to see you again. In the paper you gave us on productivity, on page 2 you say:

Free trade, price stability and balanced budgets all were supposed to enhance productivity growth and promote efficiency, but the payback remains elusive.

I don't quite understand what you mean by that, but let me go back. As a working person in the industry in the early 1960s, I remember that prior to the Auto Pact we were in a deficit with the United States—if we want to make a comparison with the United States—to the tune of some $10 billion. Wages were lower than those in the United States. Then came the Auto Pact, and we were still in a deficit, with the 60% component being produced in Canada versus the 60% component—whatever they used, back and forth. But there was a protection of 60% of components and parts.

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Then came free trade, and that scaled the protection of Canadian industry down to North America, which was only 50%. In all of this we had wage parity with the United States. Now, as a matter of fact, our wages within the auto industry are higher, on average, than in the United States. Yet we're able to compete and be better....

Today the closing of some plants has to do with politics and not productivity, if some plants happen to close in Canada rather than the United States. Yet today we benefit so much from free trade. For every two cars we produce, we export one to the United States. How can you say it still remains elusive? What better response do you want than the fact that Canada has a surplus of some $15 billion to $20 billion with the United States today, not only because of free trade but because of the auto industry? How can you put this down here?

Mr. Jim Stanford: The auto industry in Canada has clearly benefited from trade, and trade and foreign investment are crucial to the existence of that industry. We wouldn't have that industry were it not for trade. Now we have an industry where we assemble more vehicles per capita in Canada than any other country in the world, but it's not free trade. The Auto Pact, which goes back to the mid-1960s, is the complete antithesis of free trade. It's an explicitly managed trade agreement, and the subsequent free trade deals with the U.S. and Mexico did not really alter the Auto Pact provisions for trade within North America.

I accept that trade and foreign investment have been incredibly beneficial in this industry. I reject that they have anything to do with free trade. For me, the Auto Pact, the experience it has had, and the benefits for productivity and investment and growth are a great argument in favour of a managed interventionist approach to trade.

Mr. Gary Pillitteri: You say free trade did not benefit it, but let's put it this way. Does the UAW want what you call a closed-door policy, saying “Yes, we can do it better in Canada. We don't have to worry about imports and so on”? If it were not for free trade opening more doors to the United States, I don't think it could have grown. But it did alter it some, from 60% down to 50% in North America; there's no doubt about it. But we are competitive in Canada, specifically because of free trade. We're able to compete more and be better at it—we are a nation able to compete.

The Chairman: I think that was a comment.

Thank you once again.

Mr. Jim Stanford: Thank you for your indulgence.

The Chairman: We'll now hear from Garnett Picot, director of business and labour market analysis, Statistics Canada.

Welcome.

Mr. Garnett Picot (Director, Business and Labour Market Analysis, Statistics Canada): Thank you very much. I'm happy to be here.

I'm going to talk about what labour market data and related research are telling us about the changing nature of work. This session relates the changing nature of work to productivity. I haven't done a lot of work in that area, so I'm not going to talk about that link. I mentioned that before to the people who organized this, but they thought it would be worth while to come and talk about the changing nature of work in general. So that's what I'm going to do.

During the 1990s, there were a lot of notions prevalent around the changing nature of work. There was a sense that increasing competition and technology were affecting the way firms managed their workforces. This was in turn thought to influence labour market outcomes in various ways, such as increased contingent work, with more contracting out, etc.; increased opportunities for the highly educated because of the rising technology; rising earnings inequality; and more job instability.

I want to briefly go through some of these points and see what we actually observed in the 1990s.

The first observation has already been made, and you've probably heard it many times. Through most of the 1990s we had fairly weak economic growth, which resulted in weak employment growth. If you look at the 1990s business cycle, employment grew at about 1% and GDP grew about 1.8%. If you compare that to the 1980s, we had twice the employment growth at 2%, and GDP grew at about 3%. So over most of the business cycle we've had a fairly weak employment growth, although it's been substantially stronger in the last couple of years.

Associated with that are some findings on job instability. There's been a very large concern about job instability and layoffs, at least to the middle 1990s where our data end. We could find no evidence of job instability and no evidence of increased probability of layoffs.

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Unfortunately, that's not necessarily a good-news story, because we found the hiring rate was much lower. So it wasn't—at least to the middle 1990s—that people were being laid off at a higher rate; it was that once laid off, they couldn't find another job. The hiring rate was suppressed. It looked like firms were adjusting to this slow employment growth more on the hiring side by depressing hiring rates, rather than by increasing layoffs.

Another sort of major outcome as far as the kinds of jobs created go—it has already been mentioned—was a shift to self-employment. There's no doubt about it, in the 1990s there was a major shift in the types of jobs created. About 57% of all new job creation was through self-employment between 1989 and 1998. That compares to about 16% in the 1980s, and about 4% in the United States. There was virtually no increase in self-employment in the United States over the same period.

If you look on the other side at full-time paid jobs, we did not create many full-time paid jobs in Canada through that period. Over the 1990s, about 18% of the jobs created were full-time paid jobs. Compare that to the 1980s, where about 57% were full-time paid jobs, and compare it to the U.S., where over 75% of all the jobs created in the 1990s were full-time paid jobs.

So in Canada, we created a lot of self-employment; in the U.S. they created a lot of paid jobs. There is a considerable debate about why this is, and we've heard some of it from Jim already. There are at least two hypotheses floating around and they probably both have some merit. I don't profess to know the answer to this; I don't think we know yet.

One is this notion of slow growth and the slack labour market. They couldn't find paid jobs, so people went out and created their own self-employment. There's some evidence to support that, but there's some evidence that runs counter to that as well.

Another hypothesis is the notion that firms have fundamentally changed the way they engage and manage labour. There is more contracting out, and this has resulted in self-employment, along with this rise in entrepreneurial spirit. Increased technology, which allows the self-employed to actually function, has resulted in the rise in self-employment. So there is this debate going on right now.

Another aspect of the changing nature of jobs that I think is worth highlighting is the shift to more highly skilled jobs. Again, looking at the kinds of jobs we've created in the 1990s, about 60% of them were in the professional and managerial area. There was virtually no growth in the blue-collar employment area. So the nature of jobs clearly changed—the kinds of jobs we were creating.

But at the same time—and this is a point that gets overlooked too often—the nature of workers changed as well, particularly in terms of their educational attainment. There was a tremendous increase in the quality of the workforce in Canada through the 1900s, particularly regarding education and experience.

The number of people with university degrees increased at about 4.5% a year—which is quite a high growth rate—through the 1990s, while the number of people with less than grade 10 actually fell, at 4.7% a year. Workers became much more highly educated.

So there was a change in the nature of jobs, as they were more highly skilled; and a change in the nature of workers, as they were more highly educated. On balance, it looks like that sort of supply balanced the demand. We saw little change in the relative wages of degree-holders, for instance. University degree-holders now do better than the high-school educated, just as they always have, but their relative wages haven't increased compared to the high-school educated.

The last point I want to make is on the labour market outcomes for young men and how that has changed. There has been, through both the 1980s and 1990s, a fall in earnings of young men in particular. There is some concern now that this fall may be a permanent decline. At first there was some discussion that perhaps this was a temporary decline in the earnings of young people, and as they acquired experience and grew older their wages would catch up to previous cohorts. But it looks like the evidence is suggesting that's not the case. So there may be a permanent downward shift in the earnings of young men in Canada.

On the other hand, we see substantial improvement in the outcomes for women across all age groups. So while women still earn less than men—that's clearly true—the gap is closing.

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I'd like to come back to education, which I think we're probably going to hear a lot more about here—the importance of education in all of this process.

There is one thing I don't think people think about enough in terms of what's happening in the labour market. It used to be that young men had a tremendous educational advantage over young women and older men. For instance, back in 1978 about 17% of men 25 to 34 years old had a degree. That compared to about 13% of women the same age, and only about 9% of older men, say 45 to 54 years old. So these young men had a tremendous educational advantage.

By 1998 that advantage had totally disappeared. In fact, there's a higher proportion of young women with degrees now than young men. So the relative educational advantage of women relative to men increased dramatically, and since we know that education is one of the main determinants of labour market outcomes, it may well be that explains part of this changing relative position of men and women. Women are catching up to men.

Those are some of the points I wanted to make. There's been a significant change in the nature of work through the 1990s. There are all sorts of competing explanations that have to do with technology, the weak labour market that we observed, slow economic growth, as well as this changing nature of employees, particularly their educational qualifications. I'll just leave it at that.

The Chairman: Thank you very much, Mr. Picot.

We'll now hear from Ms. Kathryn McMullen, research associate with the Canadian Policy Research Networks. Welcome.

Ms. Kathryn McMullen (Research Associate, Canadian Policy Research Networks): Thank you. There's a handout that's been distributed that gives a lot more detail, so I'll just touch on the highlights in the handout.

First you'll note that there is a wide range of factors that affect productivity. What I'm focusing on here today is business and workplace strategies and practices and how they affect productivity performance, with specific focus on human resource management practices, organizational change, and training.

Since the late 1970s, when we first saw the appearance of the microchip and the personal computer, we saw first a sort of thin spread of computer-based technologies across large numbers of businesses, and later they penetrated more deeply into businesses. Now they're affecting virtually all kinds of operations, business systems, and activities.

The question I raise today is whether information and communications technologies are simply being superimposed on existing business structures and business systems, or whether these new processes that are being introduced are resulting in changed job design and organizational structures in order to adapt to the needs of the new technologies and allow their full productive use.

The workplace issues traditionally have not received a lot of focus from economists until fairly recently. I report in my notes on new research in the 1990s based on new survey evidence. The bottom line coming out of that research is that most firms are not adopting high-performance human resource management strategies, and they tend not to manage human resources very strategically. Instead they focus more narrowly on cost cutting, downsizing, and retrenchment in the face of growing external pressures.

So what do I mean by high-performance workplace practices? These include things like flatter organizational hierarchies, more fluid job designs, team-based work structures, greater employee involvement, a lot more training, and in some cases variable pay systems—performance-based pay.

I'll report on the results of three different studies based on three different surveys that were done in the 1990s. One of these was a human resource practices survey, and that was an establishment survey done in the early 1990s. There we found that 70% of establishments continued to apply very traditional human resource management strategies, and they placed a very low strategic priority on human resources.

Another survey, again in the mid-1990s, was an establishment-based survey out of Statistics Canada—the workplace and employee survey. It collected a wide range of information on business practices. I focus here on the results we found with regard to organizational change. When I speak of organizational change I include downsizing, but beyond that, things like re-engineering—restructuring work processes—and a range of activities that we call functional flexibility, meaning changes in how work is done. These include changes in job design, multi-skilling of workers, and job rotation. There's another set of practices that could be introduced that focus more on numerical flexibility. Here it's a greater use of part-time and contract workers, more use of overtime, and more contracting out.

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The results of our analysis of those data was that the great majority of establishments introduce very little organizational change, or if they do, they focus on downsizing, but they don't look at the set of practices that together affect how productively resources are combined to produce output.

So the key question that arises out of all of this is what are the impacts of changes or innovation in human resource management and organizational structure in terms of performance? Do they have beneficial outcomes?

As you've probably heard from others with regard to productivity, it's very hard to measure. There's very little longitudinal data at the workplace level for us to be able to measure trends over time. A lot of the data that are collected are at the level of the firm, whereas my focus is on the workplace level. Again, it's very hard to relate changes in activities down to a more micro unit in the absence of data. Fourth, productivity outcomes are the result of combinations of factors, and it's very hard to isolate the impact of any one of those.

Given all those details on why it's hard to measure, of course, we went ahead and tried to measure the performance impacts of these changes. The research generally points to positive outcomes for firms that innovate on a number of fronts rather than just having technology superimposed. We find positive outcomes in terms of labour indicators, for example, reduced number of quits. The flip side of that is retention, and if you want to retain your skilled and experienced employees, that's an important factor. We find stronger performance in terms of efficiency outcomes—performance with regard to unit costs and productivity. We find stronger revenue growth.

Another work out of Statistics Canada also shows growth in market share, which is what we want to see coming out of productivity growth. We do find that happening for firms that don't just put in new technology, but adapt work systems and jobs in order to take advantage of that technology. Also, we find that they're more active in terms of product and process innovation, human resource management, and organizational change.

A third survey I give some details on in the handout is a survey that focused on one type of human resource management practice, which was training. This is the workplace training survey, also done in the mid-1990s, also an establishment-level survey. Again, we find the majority of firms do little or no training. Only a very small minority are what we would call learning organizations. We also find that firms that do have a lot of training show stronger performance trends in terms of the indicators I've just mentioned.

So we can place firms along what I call a performance continuum. You have a majority that continue to use very traditional management methods. They've a fairly simple view of what productivity is, which is fewer workers doing more work, and their emphasis is therefore on cost cutting and downsizing. That group is largely made up of small firms. Then we have a minority of firms that are what we call innovative or high-performance firms. They implement a range of innovations in technology, human resource management, and organizational structures. Human resource planning and development are integrated into their business strategies. This group was largely made up of large firms.

A key point to note in all of this is that where firms lie on this continuum is not deterministic as to sector or firm size. You can find some very innovative high-performance firms in traditional resource-based sectors as well as in the high-tech sectors. You can also find high-performance firms among the small-firm group, and traditional low-performance firms can be large firms as well. So it's not deterministic of whether you're a large or small firm.

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The key point here is to identify a set of behaviours that come together to be characteristic of what you could call learning organizations. These are organizations that embrace change, adapt to it, and give their employees the tools they need in terms of training and skill development.

I'll close by identifying some of the key characteristics of learning organizations. Paramount on this list is management. It's management attitudes; it's leadership; it's vision and having a positive attitude to change. That can drive a lot of what happens within companies. There is a willingness to innovate, and they innovate on many fronts, in terms of technology but also in terms of organizational change and human resource management.

There's a strategic focus on human resources, and that's reflected in a lot of investment in training. Beyond that, the training tends to be fairly broadly based. It's not specific to one single task, but it's learning as a whole. There's a strong commitment to employees and to their skill development and a recognition that this is what's going to drive better use of technology and more productive behaviour in the long run.

Thank you.

The Chairman: Thank you very much, Ms. McMullen.

We'll now hear from Shirley Seward, CEO of the Canadian Labour Market and Productivity Centre. Welcome.

Ms. Shirley Seward (Chief Executive Officer, Canadian Labour Market and Productivity Centre): Thank you very much, Mr. Chairman, and thank you for this invitation to appear before the finance committee. It's always a pleasure.

Let me tell you a little bit about the Canadian Labour Market and Productivity Centre first, because I think that sets the stage for the perspective from which I'm going to be speaking.

We are a bipartite organization. In fact, we're the only bipartite organization at the national level that includes both business and labour. So what I have to say today represents some of the areas of common ground that have been reached by business and labour as well as their commitment jointly to try to introduce productivity improvements.

CLMPC has been very interested in productivity issues since its creation in 1984. Business and labour themselves are becoming increasingly interested in productivity. We undertake leadership surveys every two years, and in 1998 we found that 40% of business leaders across the country were very concerned about productivity, and 20% of labour leaders also expressed very great concern.

The concern can be regarded as greater still in both constituencies when productivity is considered not in isolation but as a means of achieving further benefits such as economic growth and development, job creation and job protection, income distribution and higher living standards.

But CLMPC as a bipartite organization has a special take on productivity. First of all, we focus on productivity in a micro-context, and these days I think we're lucky that we do, given all the disagreement about some of the macro-level measures. We believe the Canadian workplace is the hub of productivity performance, particularly in an economy that is rapidly changing and undergoing restructuring. We believe that's where things start, and that in fact trickles up to the top in terms of what it does to national productivity.

We recognize, of course, that the workplace does not operate in a vacuum, and that productivity is strongly influenced by external factors at the national and international levels. However, we feel that the contribution we can make as a business and labour organization is on issues that business and labour themselves can best influence at the workplace level, because if they're not prepared to do it, government alone certainly cannot improve our productivity performance. It's up to the people at the grassroots in the workplaces themselves.

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Our second take on productivity is that business and labour and the relationship between business and labour is absolutely pivotal to productivity.

It's very interesting that in the last few weeks the newspapers have been full of articles about strikes, where we stand compared to the G-7, what's wrong with our labour-management relations in Canada, and questions about whether there are just too many unions, and the point was made in a lot of this media coverage that this is very bad for our productivity. Well, in fact, even in saying that, we have to be quite realistic, because if you look at the complete amount of time that was lost to strikes, we have lost one-tenth of one percent of all time worked in the last decade.

In my perspective, that's not where the action is. When we're talking about the impact of management and labour relations on productivity, we're not talking about strikes. It's visible and dramatic, but it's a tiny piece of the action. What we're talking about is the day-to-day interaction between business and labour at the workplace level and the kinds of things that they do cooperatively.

So we believe this relationship at the workplace level is absolutely pivotal to obtaining productivity improvements, and it's a factor that is almost always neglected. We talk about the need for training, the need for investment, and the need for good technology, but how often do you hear people talking about the need for better labour-management relations at the workplace level to stimulate productivity? You hear that only when there are strikes.

So they are the major workplace actors. Management must make strategic choices about production, technology, and workplace organization in response to competitive pressures and market shifts. Employees and unions, on the other hand, provide input to employers that can help them make these strategic choices. Consequently, we believe it's the concentrated, creative, and long-term attention by both business and labour to these issues that provides the stimulus for productivity.

The CLMPC, in good company with the former speaker, from CPRN, has as an important part of our mandate documenting and promoting best practices associated with high-performance, high-productivity strategies at the workplace level. We have looked at a range of things that business and labour can do cooperatively at the workplace level in order to see whether it makes a difference, but we're stuck, because when we go to the workplaces and when we talk to labour and management people in those workplaces, they tell us that they are doing these things as an article of faith.

I'm not going to use “leap of faith”, because that has connotations of a long time ago, but they believe somehow, in an article of faith, that if you work closely together, if you cooperate, and if you implement best practices at the workplace level, that is somehow going to translate into higher productivity levels.

When you ask them if they can prove it, they say no. As researchers, many people have tried to document the relationship between these practices and higher performance and have done it quite well, but ask the business and labour people who actually have to put themselves on the line and go out on a limb and do things. What they're doing is acting on an article of faith.

After we saw that for quite a while in looking at workplaces across the country, our board of directors, which consists of business and labour leaders, asked us two questions.

First, does labour-management cooperation pay? Is it worth it? You don't think so when you see strikes, although you do think so, in a way, because you can see the disruption caused by strikes.

Secondly, do business and labour people actually think these progressive, interesting workplace changes really make a difference? We knew the business and labour people in the workplaces themselves didn't know the answers to this question, and frankly, when things get tough, both sides begin to question what on earth they're doing. The union says “Why are we cooperating when management has just laid off hundreds of people?” Management says “Why are we cooperating if the union won't cooperate when we ask them to change some of the job descriptions and be more flexible in their work arrangements?”

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So there were a lot of impediments along the way, and we became convinced the only way to convince labour and management at the workplace level that they should continue to do these things was if we could prove it to them. We sat down with a wide cross-section of business and labour leaders and some of the best academics in the country and asked them, “Can we develop a tool that we can take into workplaces and let labour and management themselves use, in order to see what the impact of closer cooperation is on productivity?”

The first thing we found out was that the definition of productivity was a real problem. If you asked just the business side how they would define performance at the workplace level, they'd say the obvious things. They would say cost reductions, profit levels and share prices—all those things we commonly think of. But if you asked the union side what they thought workplace performance meant, they would talk about things like the role of the union, the empowerment of workers, worker morale and absenteeism, and training provided to workers. So we had to come up with a tool that would convince both sides and also try to measure what was happening, so it would be meaningful to the everyday person who was making these decisions every single day at the workplace level.

We've begun to test it in workplaces and we have found, much to our surprise, that while we had originally seen it as a research tool because we wanted to measure the impact, being research-oriented and analytical, the business and labour people saw it in a very different way. They wanted to use it to monitor their own progress in their workplace, and to me that's where the action is. You have to give business and labour the tools, so they can see that their efforts to cooperate and raise productivity together are worth while.

So what is the role of government in all of this? So far we've just talked about what business and labour should do, and it must be a relief for members of Parliament to hear that for a change. But there's a facilitative role for government that is very important.

First, government has a really important role to play in taking some leadership and recognizing that it is in the workplace that the action begins, and business and labour are the key actors. Government is already playing a role, but it should play a stronger role in documenting best practices of workplace efforts, creative and constructive approaches to labour-management relations, and trying to help the rest of who are trying to do this promote it and get it out, so we can actually see some improvements at the workplace level.

Secondly, there's no question in my mind that government has to continue to place priority, and even more priority, on training and human resource development. The federal government in particular would benefit greatly from continuing to put money and their investments and their energy into bipartite approaches to training delivery, for example, through sectoral organizations directly to workplaces.

Finally, and this one will not surprise you, given the key role that we think labour-management cooperation plays in enhancing productivity, the government should increase its efforts to encourage labour-management dialogue at all levels of the economy. I think it is required more than ever.

Thank you very much, Mr. Chairman.

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The Chairman: Thank you, Ms. Seward.

Now we'll hear from Dr. Lars Osberg, an economist from Dalhousie University. Welcome.

Dr. Lars Osberg (Economist, Dalhousie University): Thanks very much. In coming out, I wondered whether this would be a productive enterprise or not, and whether you'd simply hear the same thing over and over again from a series of people. It turns out, in fact, a lot of the discussion has been quite complementary in a large number of ways.

I would like to focus my comments around three major themes. I'd like to start by distinguishing between productive capacity and the utilization of that capacity. That leads me to focus on the distinction between long-term secular trends in productivity and the cyclical influences of the business cycle or aggregate demand in the short term on productivity.

The second major point I want to emphasize is that a lot of the discussion on productivity trends brings together issues that are very short term in orientation with issues that are very long term in orientation. So I want to emphasize the long-term time scale that surrounds some structural policies in the labour market, and emphasize that a lot of the public decisions we will be talking about in this sort of committee and other forums are really decisions we make now for the labour market of 20 years from now. So we really have to think forward in our policy-making.

The third point is how do we adapt to and benefit from change? I want to stress that a combination of factors will determine whether we benefit from change or adapt to change. That can really be summarized under the three headings of social capital, human capital and physical capital.

In Jim Stanford's discussion in particular, what we're interested in is output per capita. We're interested in having as much output per Canadian citizen as we possibly can. But we can decompose output per capita into its two components of output per worker and the number of workers as a percentage of the population.

The basic point he was trying to emphasize is that it doesn't do us a lot of good when one term goes up if another term is simultaneously going down. The output per person is the product of output per worker and the number of workers per capita, so if we want to have rising living standards, and in some sense more output per person, we had better have some positive trends in both the major components.

Roughly speaking, we can think of output per worker as some measure of the productive capacity, on average, of the Canadian labour force; and we can think of workforce, as a percentage of the population, as some measure of the utilization of that capacity. If we think of the average skill level of the workforce, one thing we have to recognize is that the average skill level of the workforce is going to change fairly slowly over time, simply because most of the people in the workforce today were also there 10 years ago, were also there 20 years ago, and were probably there 30 years ago as well.

The number of school leavers in any given year is about 2.5% of the working age population. That doesn't mean the quality of education is unimportant; it just means it takes a long time to have its full impact. It's going to take approximately 20 years for school reform to affect half the labour force. There are substantial payoffs to structural reforms to the labour market, but those are payoffs we have to wait for a long time to observe, because they're payoffs in the long term.

The only problem with focusing it always on the long term is that we only get there through a succession of short terms. The long-term future comes to us one day at a time, so the only way we can get to that long term is through the short term. So there's definitely an interaction between short-term decision-making of government and the long-term outcome.

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If we focus first on the cyclical component, in the short term cyclical demand management policy matters enormously to the level of output of the economy.

Now, fiscal policy is less effective if we're in a small economy with a floating exchange rate, and in any event, the fiscal policy in recent years has been much constrained by the federal budget deficit.

Most people who look at the macro-economy would say that monetary policy, in other words interest rates, is the most powerful single tool we have to affect aggregate demand, with a lag of 18 to 20 months, but with a significant impact on the level of economic activity in the medium to short term.

So if we're thinking about the short term, what we can do over the next few years, perhaps even before the next election or before the election after that—something along that sort of time scale—then it seems to me the crucial issue, the most important single issue in the Canadian economy in the 1990s, has been a consistent failure by macroeconomic policy-makers—and I mean in Ottawa—to allow the economy to grow fast enough to use the existing capacity of the economy. So that has meant....

We've talked a number of times about the importance of aggregate demand to job growth, and a number of speakers have mentioned the very weak employment creation, averaged over the decade as a whole, that we've seen in the 1990s. The legacy has been an extremely high-unemployment labour market in the 1990s. That's what we've seen in the past. But it isn't like you have short-term pain for long-term gain. You have short-term pain and you have long-term pain too, because after a period of slow growth, we have a number of longer-run productivity impacts on the economy.

For one thing, if we're in a slow-growth economy with high interest rates, the profitability of investment is lower, and the stagnation of capital investment in the 1990s has already been mentioned. That means we're going to be coming out of the 1990s with a smaller and older capital stock than we would have had otherwise.

If we have a depressed labour market, the quit rate falls. There is less voluntary mobility between jobs; people tend to go for security, stay where they're safe. That means we have a less efficient labour market, because there's less sufficient matching. People haven't moved to where they're going to be most productive in the labour market.

People who are unemployed lose their skills after a while. Use it or lose it, I think, is a theme that you can say is as true of job skills as it is of physical fitness. It certainly turns up in the literacy data. So there's a depreciation of unused skills following long periods of unemployment, and that means we'll have less human capital available in future years. The premature withdrawal from the labour force of many discouraged workers, particularly workers close to retirement age, has already been noted.

Finally, we have what is euphemistically referred to as the scarring effect of long-term unemployment, the impact of a depressed labour market on social capital and the viability of families, and all the many social costs around the economy, which end up costing resources and impeding productivity in the longer term.

There's an important way in which cyclical demand management policies have an impact, not just in the short term but also in the long term, in bequeathing a lower, less productive stock of social, human, and physical capital.

I want to also talk a bit about the time scale for structural policies, because structural policies to improve the skills of the labour force pay off, but they pay off gradually as they affect an increasing percentage of the labour force.

Earlier, Garnett Picot mentioned the very rapid increase in the average education levels of the Canadian labour force, and that reflects a decision that was made by Canadian society in the 1960s and 1970s to invest heavily in post-secondary education. Now, initially those university and community college graduates of the 1960s and 1970s were a small percentage of the labour force, but as time goes on and more and more new graduates join them, they become an increasing fraction of the labour force.

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In the 1990s the Canadian labour force, particularly in its youth, compares very favourably internationally, and certainly Canadian youth are better educated than comparably aged American youth. The problem is, of course, whether their skills are being used, whether there's the demand there to create the jobs for those higher skills to be put to use.

Similarly, we're going to be making a number of structural policy choices in Canada over the next few years, and they'll pay off in about another 20 years or so. The problem we have in making those decisions is that when we look at economic data, they're inevitably gathered from the past.

We have very rapid change in labour market institutions in technology, so if we want to assess the decisions we make for the future, we are in some sense going to want to forecast what the labour market of the future will need, not necessarily what the labour market of the past made use of.

I think in doing that sort of thing there is some point at looking at best practice firms, just as an idea of where we would hope the labour market of the future is going to go. Reference has already been made to high-performance workplaces and their characteristics.

High-performance workplaces are characterized by a number of dimensions: decentralized decision-making, flat hierarchy, team production, flexible specialization, and a multi-skilled, multi-tasked workforce working a very tough production environment, usually in a just-in-time sort of mode. Demands for quality have increased tremendously in these outfits. A zero defect aim is taken very seriously. And in many cases it's an output that is customized to the needs of the customer and it changes very rapidly in terms of very rapid product cycles.

From the point of view of the labour force, one thing that is important about that is that very high-level skills are needed, not just in the sense of individual education and cognitive skills, but also in the sense of interpersonal skills. Social skills are very important for people to be able to work effectively in these team environments. These sorts of workplaces also rely very heavily on having an absolutely dependable, high-quality infrastructure, in both the physical and the social sense.

Reference has already been made to the fact that these high-performance workplaces are now a minority of the Canadian business enterprises. So in some sense, these enterprises can now get the labour force they need by selecting from a queue of available workers.

I think one way of approaching their issues is by making a distinction between what I would call the hard technology and the soft technology of business operations. Economists tend to focus on price and hard technology. Economists tend to say, well, if you have a bunch of capital equipment in a room and you have a bunch of skilled workers in a room, the idea is to produce at the lowest possible price.

Now, if you go over to business schools, they'll tell you, well, gee, just putting those workers and that capital equipment in the room by themselves doesn't do very much if you can't organize them and motivate them. And if you want to go out and actually sell the product, you'd better have something called “quality” out there to make people want to buy, because you don't actually want to sell at the lowest possible price. You would prefer to sell at the highest possible price. And if you're going to do that, you had better have some reasonable idea of quality.

Now, what exactly is the notion of quality? “Quality” is the most ambiguous of terms. In many cases it really doesn't matter what I think good quality is; what matters is what the customer thinks good quality is, and each customer is slightly different. If you want to actually meet the needs of a variegated clientele, each of whom has a slightly different idea about what quality is, you had better have a well-organized and highly motivated workforce in order to solve the customer's definition of what high-quality production is.

The best-practice firms tend to see this as a four-cornered choice, where they have to develop not only the best capital equipment and training programs, but also the best organization and motivation methods to convince customers that they're supplying high quality and to be able to charge them a nice high price and thereby be profitable.

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I want to talk about this interdependence of soft and hard technologies—the importance of both quality and price—because the problem for Canada isn't just one of having a few high-performance workplaces. We have a few high-performance workplaces right now. What we would like to have is a complex of high-performance workplaces. We'd like to have more than a few. We'd like to have a complex of high-performance workplaces, and we'd like it to be the case that they have enough demand for highly skilled labour that they can't get by picking from a queue, so that we have to increase the number of people who have those skills in the basic population.

To make that work, I'd emphasize the three major dimensions of social, human, and physical capital.

Social capital is a key determinant of individual skills, and it's a key determinant of the efficiency with which individual firms can relate to one another and can deal with both their suppliers and their workforce. Industrial relations climate comes under that heading, but more in general, you can think of the whole set of social institutions whose disintegration is very costly. If firms have to hire a lot of security guards to prevent their workers from ripping them off, that goes into employment but it doesn't go into productivity. If we allow Canada's social capital to disintegrate, we're going to have a much more high-cost industrial environment for firms, and we're going to have a much less productive workforce.

At the individual level, of course, education and training are crucial. And I'll just remind the people who have control over the purse strings that a quality education does actually cost money. Canada invested heavily in post-secondary education in the 1960s and 1970s, but it's been cutting that investment significantly in the 1990s. The research role of universities is particularly important in enabling them to perform the function of capturing the rate of technology improvement that goes on around the world. There's a significant disinvestment that's happened in Canada in the last few years in terms of human capital, and we'll see the cost of that over the next few decades.

When we come to physical capital, which tends to get a lot of press, I think the one thing we have to emphasize when we talk about the tax load on physical capital is that it's not so much the taxes people pay but what they pay for what they get. If you can generate a high-productivity environment for firms in which they can pay those taxes and make profits, then it's the tax productivity comparison for capital that's crucial to attracting foreign direct investment to the Canadian economy.

In closing, I'll just recap the three major themes.

First, we can only get to the long run through the short run, so aggregate demand and a strong labour market are absolutely crucial to realizing the potential of the Canadian economy.

Second, we're making decisions now that'll have their payoffs 10, 20, and 30 years from now, and we have to be careful that we're not undermining the human capital and the social capital on which Canada's productivity depends.

Third, if we're going to really have a system of highly productive enterprises, we have to pay attention to one of the key rules from these high-performance workplaces, which is that if you don't have some idea of equity within the workplace, it's not going to work in a productive and cooperative way. That's true at the individual enterprise level and the social level.

The Chairman: Thank you very much, Dr. Osberg.

Now we'll hear from Dr. Arthur Carty, president of the National Research Council. Welcome.

[Translation]

Dr. Arthur J. Carty (President, National Research Council Canada): Thank you very much, Mr. Chairman and members of the committee, for the opportunity to address you this afternoon.

[English]

I'd like to begin by thanking the finance committee for their support in our efforts to secure increased funding for our innovation initiatives last year. I'd like to just quote from a chapter in your report called “Building a Knowledge-Based Economy”: “The Committee recommends that the government enhance its financial support for federal government science, in particular the work of the NRC.”

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Although we weren't quite as successful as we'd like to have been in the February budget, we in fact did receive a small increase to our A base, and that was sufficient to arrest the declines we'd seen in the past. Of course we had proposed a number of major innovation initiatives for the 21st century, which we haven't as yet been able to invest in.

I'm here today to talk to you about the linkages between research and development, innovation, productivity and prosperity, and I would like to leave you with two specific examples from the many we have at NRC of how R and D and innovation can actually enhance productivity and create jobs in a couple of companies. Michael Porter is on record as saying that innovation is the central issue in economic prosperity, and I believe many economists believe that. Certainly at NRC we believe that innovation, and research and development, are drivers of productivity.

My message today, the one I want to leave you with, is that NRC is an innovative organization. In fact, our business is innovation; and that's all the way from creative research and development, which is essentially at the root of innovation, to helping small innovative companies in the marketplace. We do have a very distinctive and influential role, and I hope I can show you what that is. In fact, to explain it we do need to look at all of the key factors in innovation—in particular the role of research and development, and in Canada the specific role of government R and D, the role of the National Research Council. In that innovation process, we need to look at the specific strategic investments that need to be made to increase innovation and ultimately economic growth and productivity.

Last week Minister Manley went on record in a speech to the Canadian Institute of Advanced Research, saying:

Innovation is not something you “fix.” It is something you must invest in continually. And investing in innovation is a key requirement in improving Canada's productivity.

We believe that by focusing on innovation, we'll increase not only the amount we produce but the value of that product.

First of all, let's have a look at how the innovation process works in Canada, because we have a structure in our country that is very different from that of all of our major trading partners. In a holistic sense, innovation is the process by which ideas and concepts are created, developed and successfully taken to the marketplace; but it isn't linear. The days of the linear innovation chain are gone. We no longer believe that the lineal model of progressing from basic research to applied research to development is functional. As Erik Bloch, a former director of the National Science Foundation, has said, the innovation process is actually a complex series of feedback loops. The linear model is fairy tale. In fact, the creation and the application of new knowledge is an interactive process, and the people creating the knowledge need very much to interact with those who are producing the products and getting them into the marketplace. Both, of course, benefit from that dialogue.

However, it is true, nevertheless, to say that our capacity to add value to what we produce depends on our access to knowledge, to scientific research and the underpinning infrastructure that supports innovation in all sectors. Over the last four years, and particularly the last three budgets, the federal government has made a number of strategic investments in the creation of scientific knowledge and largely in the innovative capacity of Canadians.

However, the OECD has said for quite a number of years that we have an innovation gap. We're great at creating ideas and concepts. We're much less effective in transferring those ideas into products for the marketplace and generating, of course, applications. At NRC we address that innovation gap right up front. We focus not just on the creation of knowledge but on turning it, via technology transfer, into real world applications, and we hope we facilitate the dialogue between the creators of knowledge and those who apply it.

The Canadian economy, and particularly Canadian industry, has a very peculiar structure. We have many branch plant companies in Canada that do not do any research and development. We have a very large resource sector, and although we are very much in the transition to a knowledge-based economy and we have very many small innovative SMEs, small businesses, nevertheless we have very few research-intensive R and D companies that carry out medium- to long-term research, where the research can in effect interact with the people who are developing products and services. And this really is an inhibition to innovation.

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We have a number of multinational enterprises, such as Nortel, Pratt & Whitney, and Merck Frosst, and in fact three of those companies account for 44% of the R and D in Canada. Some 21% of the total exports is done by five large firms in Canada, and when you take the multinational enterprises out of the picture, business-funded R and D investment is really very far below that of our principal competitors.

So the rationale here is that because of this industrial structure and these gaps, the strategic research gap and the innovation gap, there is a very crucial role for government in developing industrial clusters. I point out that we do have a lot of success in Canada in developing industrial clusters. We have the example of the agricultural biotechnology cluster in Saskatoon, perhaps a most unlikely place for innovation, but there it is, one of the best centres for agricultural biotechnology in North America. We also have information and telecommunications technology here in the national capital region. These are clusters that are very effective and they have developed, in part, as a result of a significant publicly funded research and development effort and innovation; and of course NRC has been heavily involved in that.

We also have in Canada a very well developed world-class innovation infrastructure. You can see investment in knowledge, for example, through the granting councils and through the new Canada Foundation for Innovation. And on the other side, we have investment in assisting industry through such means as the SRED tax credit, Technology Partnerships Canada, as well as the new pre-commercialization assistance program that our industrial research assistance program, IRAP, is involved in.

There is a significant gap between these two sides. You might ask what does NRC do to fill this innovation gap? We are a very important component of the backbone of Canada's innovation infrastructure. I think you can see the spectrum of innovation activities that we're involved in on page 3 of the hard copy. We manage national facilities; we're Canada's link to international science and technology; we perform research and development; and most importantly, we translate that research and development into products by encouraging innovation through the application of those ideas and those concepts.

Through tools such as the Canadian Technology Network, the industrial research assistance program, the Canada Institute for Scientific and Technical Information, our labs, and our efforts across the country in local and regional innovation, we believe that NRC is the most dynamic and diverse public instrument that the government has available for investing in innovation.

It's crucial, of course, that there be a way of interacting with the dynamic, innovative small companies. We do that. We work in partnership very much with both small and large companies. We build the bridges between the universities and the enterprises, and thus we help move products from basic research into the marketplace.

I think it's important also to recognize that while R and D and innovation will help the high-tech sector, there's a big role to play in adding value to the resource sector of our economy. That is by bringing to resource companies and encouraging their investment in new technologies that will make them more profitable. As you know, NRC invests in a limited number of sectors that we believe are very important to wealth creation in Canada, all the way from aerospace, through construction to biotechnology. Our vision is to be a leader in developing Canada's economy through knowledge, through innovation, and through science and technology.

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Now I'd like to give you a couple of examples to show you how R and D and innovation can enhance productivity and create jobs, because I think these illustrate the role we play and the function we have. These both involve strategic R and D and they involve getting new technology into the marketplace. One involves improving the efficiency and productivity of a major airline and the other is an example of community innovation at work.

Airlines spend hundreds of millions of dollars annually on repair and maintenance of aircraft and their engines. NRC, Air Canada, and General Electric Aircraft Engines have been working together to develop what we call an integrated diagnostic system, IDS. This is a ground-based intelligence system that allows technicians on the ground to monitor aircraft in flight.

For Air Canada the benefits of IDS are enormous. On their A-320 fleet alone, the ability to predict the probability and severity of problems, allowing them to better plan the use of resources, to save on inventory, and to decrease operational costs and increase efficiency, not to mention minimizing delays and improving safety, adds up to many millions of dollars. And as Robert Ferland of Air Canada has said, Air Canada is extremely excited to be associated with IDS. It “meets present and future technology demands for our industry that no one else has yet been able to achieve”. There's an example of how working together to innovate, bringing new technology to companies that can use it, is very effective.

The second example is totally different. It's a small maritime company called Acadian Sea Plants, in Dartmouth, Nova Scotia, which has been working closely with our Institute for Marine Biosciences. They've used NRC's expertise and proprietary biotechnology to develop high-quality edible seaweeds for the Japanese and Southeast Asian markets. The company now has a major share of the global market for edible seaweeds. Those are now sold in 35 countries. Acadian Sea Plants now employs more than 50 people in cultivation and harvesting, not counting their permanent employees, who amount to over 100. It's an excellent example of how close community innovation, the interaction of an R and D establishment with a local company to promote innovation, has worked to effectively grow an aquaculture industry in Nova Scotia.

I've tried to tell you that we have the capacity to do a lot more—a capacity in our people and our programs—but I would be foolish if I didn't mention that we need some new funding. We were very grateful for the increase, but it was small and we have initiatives that I think you can feel for: a national fuel cell program, a gas turbine environmental centre, an aerospace manufacturing facility, an optoelectronics prototyping facility, and a scientific knowledge network. We really believe these are things that Canada has to do for the millennium. We need to look now at where we should make strategic investments of that sort.

I leave you with a quote from the Auditor General's report: “Without vigorous action, the government's science and technology capability could be seriously compromised”. That's very recent.

Thank you very much for listening.

The Chairman: Thank you very much, Dr. Carty, for your presentation.

In reference to further funding, you'll have to come back for pre-budget consultation.

We'll now hear from Mr. Scott Murray, director, culture, tourism and the Centre for Education Statistics, Statistics Canada. Welcome.

Mr. Scott Murray (Director, Culture, Tourism and the Centre for Education Statistics, Statistics Canada): Thank you.

Now for something completely different. I'm going to try to speak to the thorny problem of the brain drain. It's loosely tied to the productivity issue because the basic hypothesis is that the loss of workers, temporary and permanent, to the U.S. poses some threat or puts some restriction on our ability to achieve economic growth, to achieve high rates of technological innovation and adaptation, and to achieve productivity growth itself.

I'm going to start, however, by defining the problem, because one of the problems in the public debate is that it confounds what we believe to be five different issues. So we'll try to break those out and lay out what the empirical data say about each.

The first issue has to do with whether in terms of absolute numbers we're losing enough workers to the U.S. in key occupations to make a difference.

• 1745

The second is a variation on that theme. Even though we may not be losing large numbers of workers in absolute terms, it's the best and the brightest we're losing. So you can imagine that it might involve a very small number of people but still have a measurable economic impact.

The third piece in the puzzle has to do with the graduating cohort coming out of the post-secondary system and coming into the labour market with the newest and, hopefully, the best skills. So the question is, are we losing enough of those, a significant fraction of them, that we should worry economically?

The fourth piece is that even though we might not be losing a significant fraction of those, are we in fact losing the best and the brightest, the ones who will be the most capable of innovation and adaptation?

Then there are some residual concerns. One seems to imply that the immigrants we bring in so carefully through the point system are somehow inferior to the outflow. So we'll try to deal with that.

The last issue has to do with the NAFTA-enabled increase in temporary workers to the U.S.

I will try to ignore my natural instinct to use a lot of numbers and just tell you what I think the facts are.

First, historical context is important. The average number of people we're losing to the U.S. is actually at an all-time low in the post-war period. It has fallen substantially since the war and now sits at 21,000 people moving permanently to the U.S. in the 1990 to 1996 period. So as a percentage of the total population, the total workforce, it's tiny. Against that, permanent immigrants to Canada numbered some 230,000. So our immigrant-to-emigrant ratio is at its all-time high, 10.6, so we get about 10 immigrants coming in for every worker we lose to the U.S.

Expressing those in terms of the stock of workers that are available in the occupations that are most affected—and we talk about nurses, physicians, computer scientists, engineers, and managerial workers—it's instructive to look at one of the tables in the handout that shows those stocks. They range from one in a thousand for managerial workers, up to five in a thousand for nurses and doctors. So you would have to wait a very long time for the stock to be used up if that were the only demographic affecting that pool of workers.

Expressed in terms of the graduating stock, the new workers coming in, they're a little bigger but not by much. So you can say that in absolute terms there's not really a big deal.

By way of summary at the aggregate level, are we experiencing a brain drain to the U.S.? The answer is unquestionably yes, over a range of occupations affecting the health industries the most, which almost certainly is the direct result of a lack of opportunity for those workers in Canada. Our basic thesis is that the drain is more than offset by a concomitant inflow of immigrants from the rest of the world, and that begs the question about whether those immigrants are equally qualified. So in the exchange, are we losing?

Looking at the data again, just to put it in perspective, when you look at the flow of university graduates, our best estimate, and a conservative one, is that at most we're losing 8,500 university graduates per annum to the U.S. We're gaining 33,000 from other parts of the world, leaving us with a net annual balance in favour of Canada of 24,500. Those immigrants coming in can't be compared directly with the people we're losing to the U.S., but comparing them with the entire native-born Canadian population, the immigrants are 1.6 times as likely to hold a bachelor's degree, and they're 3 times as likely to hold a masters, Ph.D. or medical degree. So they are very highly qualified.

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If we use computer scientists as a benchmark for the high-tech industry, in the period 1991 to 1996 employment in that sector grew by some 38,000. We brought in about 11,800 immigrants in that sector, and so immigrants accounted for fully 31% of the employment growth, far in excess of their representation in the inflow. If they're less capable, the market isn't reflecting that. Their lifetime earnings are the same as for Canadians, or actually a little better. Although they earn a little bit less in the first 10 years, we attribute that to the integration process.

So at the macro level, there's no big public policy issue.

When we turn to the best and the brightest, we have to be a lot more equivocal. The media is full of anecdotal evidence about the loss of these folks, the best and the brightest, from lots of different professions. We have some data from the U.S. that suggest it's not such a big problem. Only 15% of them are earning more than $50,000 U.S., and that percentage does not appear to be growing. So if they are the rocket scientists we're losing, they're not being paid as rocket scientists.

We're trying to use the tax data to look at the income before departure of the people who file their last tax return and go to the U.S. That'll give us an indication of whether we are losing the stars. But we don't have reliable data yet.

We turn now to the graduating cohort. Again, the evidence becomes a little less convincing. We have to be a little more equivocal. In absolute terms, from a recent cohort of post-secondary graduates, we find that less than 2% of them are found to be living and working in the U.S. Of those, fully 10% went to get more education, and 40% of the total—not just of the ones who went for education—indicate they're going to come back. So you think that in time, if their intentions are realized, we'll get a lot of them back. Most of them use the NAFTA provisions to get down to the U.S., and if we again look on balance, they're almost completely offset by the inflow of foreign students who are educated in Canada and then decide to stay.

We'll turn to the next component, which is whether or not we are losing the best and the brightest of the post-secondary graduates. Here it becomes a little scarier. We have very preliminary evidence from a survey that looked this year at the post-secondary grads found to be living and working in the U.S. It found that they are very much overrepresented at the master's and doctoral levels, so they are the highest qualified. They tend to be in the top quintile of performance, that is, they're A students. So there's some worry, and we'll continue to survey these people on a regular basis now to find out whether it's a trend or a blip in recruitment.

The last thing we have to deal with, I think, is the flow of temporary workers. I heard Arthur make a plea for money. This is where we could probably do the same, but I won't. We have terrible data on the flow of temporary workers. In this regard we rely on the administrative records of the Immigration and Naturalization Service, and they're in a mess. They're not good because they count border crossings, not people, and they reflect mostly administrative changes. To illustrate this, every time a hockey player travels across the border they get counted, so an awful lot of the flow is hockey teams going back and forth. Nurses who used to be required to renew every year now have to renew every six months, so it looks as if the flow of nurses has doubled just because of a change in administrative policy in the U.S.

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We have no estimates of the conversion rates from temporary to permanent and no idea of the economic impact of these workers. If they're working for Canadian firms or working for Canadian subsidiaries or coming back with knowledge and experience and a host of other things that might be, there's not a big economic problem, but if they're staying there and learning, and their revenue streams and the tax streams that are associated with those stay in the U.S., then there might be a problem.

Again, by way of summary, we think loss of temporary workers is offset by a net annual inflow of 24,500 university-trained immigrants. The total, between permanent and temporary, is about 15,000 to 20,000 people leaving, of which only 8,000 to 10,000 are likely to be university grads.

The macro summary is, is there a brain drain? Yes. Is it an economic problem at the macro level? We think not. Are we losing the best and the brightest? It could be; we'll come back in another year and tell you for sure.

Thank you.

The Chairman: So do you want us to delay our hearings?

Mr. Scott Murray: Have another vote.

The Chairman: That would not be very productive.

Thank you very much, Mr. Murray.

Now, for our final presentation, we'll hear from Dr. Jonathan Kesselman, an economist from the University of British Columbia.

Welcome.

Dr. Jonathan Kesselman (Economist, University of British Columbia): Thank you.

I've sent in advance a paper that I'd like to review briefly here with the committee, and I believe it is being made available to any interested members. The paper is entitled Policies to Stem the Brain Drain—Without Americanizing Canada—that is, of course, if there is a brain drain.

My study explores the relationships among three topics: brain drain, productivity, and public policy. My discussion will consider both the levers and, equally important, the goals of policy.

It is clear why we would want to devise policies to improve the economy's productivity level or growth rates, since productivity is the very basis of Canadians' real living standards. It is less obvious why we should be concerned about brain drain per se. If skilled workers choose to leave Canada to pursue what they perceive to be better opportunities in the U.S. or elsewhere, why should that matter?

At a minimum, brain drain is a telltale that our economy is not generating enough jobs or enough well-paid jobs. That in itself is an important concern that must be addressed, but that would be true regardless of the existence of brain drain. I would argue that any brain drain should be a matter of policy concern on account of the positive economic, fiscal, and civic benefits that departing skilled workers take with them.

For example, emigrating workers have above-average earnings. Our public treasuries therefore lose their fiscal surplus—that is, the excess of their taxes paid over public services they use. That is a cost to all residents who remain in Canada, and you can think of other economic external benefits and civic benefits that we lose with these emigrants.

Though brain drain may matter for those reasons, by and large our public polices cannot and should not target brain drain directly. Instead, our policies must target the underlying conditions, such as productivity growth and full employment, that may cause any brain drain. The existence of brain drain from Canada would not, in general, call for any policies that would not be sensible on their own for the health of the Canadian economy and the well-being of Canadians. At most, the existence of brain drain might affect to a modest extent precisely how far some of these polices were pursued, a point I will illustrate later.

One real danger here is that the brain drain issue will be captured by ideologues to promote simplistic policy solutions. Some proposed policy responses may in fact lead us in the wrong direction, and they could turn what now appears to be maybe an ominous brain trickle out of Canada into a genuine flood.

Before going further, I should ask whether Canada is already suffering a significant brain drain, and if not, why not? Fortunately, my colleague Scott Murray has covered this topic in the preceding presentation, and much more competently than I could have. As he showed, brain drain does not appear to be a large phenomenon for Canada currently, although there are perhaps some troubling signs that we may be losing some of our most able and productive workers, but not in large numbers.

• 1800

The real puzzle is why there is not already much more brain drain from Canada to the U.S., given discrepancies in wages and taxes and the like. How we solve this puzzle is crucial to our approach to public policies related to both brain drain and productivity.

An economic framework to explain international migration can be based on the so-called Tiebout model developed back in the 1950s. This model was formulated to explain local levels of taxation and public services within a national economy and the migration of voter workers across localities. Individuals will vote with their feet to attain the desired mix of taxes and services, and localities will offer different tax and service levels based on their residents' tastes.

The Tiebout model can also be applied to an international setting such as Canada-U.S. migration. In this context, Canada can sustain a higher tax level than the U.S. so long as these taxes finance a higher level of public services valued by Canadians. Hence, many workers may freely choose to remain in a country that devotes more of its national output to public consumption as against private consumption.

In fact, Canada could offer its residents attractions vis-à-vis the U.S. through a wide range of superior social, civic, and cultural attributes. Examples might include lower crime, better personal safety, civility and racial tolerance, security against market risks, universal health care, better liveability of central cities, less destitution, and so forth.

Many of these Canadian outcomes are the result of public sector activities and programs, which need to be financed through higher taxes. If skilled workers were motivated only by their net of tax pay, our policies might seek to restrain any brain drain simply by following the U.S. example of much lower tax rates, but given the implied reduction in Canadian public services and a worsening of Canadian social and civic conditions, this could be a losing strategy. If Canada were going to become a clone of the U.S., why wouldn't mobile skilled Canadian workers depart to capture the private financial gains immediately? Since this policy response would undermine key aspects of Canadian society, it also illustrates the pitfalls of targeting our public policies on brain drain per se.

In reality, most workers, even Canadians, do care very much about their real take-home pay as well as public services and social conditions. Hence, if Canadian productivity and real wage growth, particularly for highly skilled workers, continue to lag the U.S., brain drain will become a growing phenomenon no matter how superior Canada may be in other respects.

Moreover, it is easy to overstate the relevance of such non-economic factors to potential emigrants. Most of our émigrés go to jobs in the U.S. that provide health coverage with faster access to perhaps even better medical services than they have in Canada, even through we do have universal medicare here. Most of these émigrés will move to suburban neighbourhoods or gated communities in the U.S. where they will avoid the high crime rates of central urban areas.

If Canadian policy is to forestall future growth of brain drain and, much more vitally, to promote the well-being of the great majority of Canadians who remain here, then productivity, wage growth, and full employment must be top priorities for public policy. But the pursuit of these critical goals and the choice of appropriate policies must always be balanced against any associated costs in the social and civic dimensions.

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I'd like to cite several concrete examples of policies appropriate for augmenting productivity and living standards and, secondarily and only secondarily, retarding brain drain. The full paper offers a number of other policy illustrations.

One general area where Canadian policies at federal and provincial levels have been deficient for decades is the attempt to prop up failing firms and declining industries and declining regions. Devising such provisions, whether through overt programs or more concealed provisions such as many embedded in the employment insurance program, has been virtually a preoccupation of governments, regardless of the party.

While one can appreciate the political pressures for such relief, these policies have not only kept real resources in sectors of the economy with low productivity, but the taxes and public debt used to finance those programs have also acted to stifle the growth of more productive firms and sectors. These policies illustrate the tension between Canadian values of compassion for adversely affected workers and the need to promote their adaptation to changing economic circumstances.

I'd next like to offer a couple of policy examples in my area of expertise, which is taxation. This will also set the ground for a presentation on tax policies and productivity that I'll be making in tomorrow's round table session.

Tax levels could influence brain drain both in the short run, by reducing take-home pay in Canada, and in the long run, by slowing the rate of productivity growth and therefore before-tax wages and salaries. Yet contrary to common wisdom, careful statistical analysis of cross-country data does not find any systematic effect of the size of government or overall tax levels on the rate of economic growth. In fact, many of the heavily taxed countries of continental Europe have generated better long-run productivity growth than the low-taxed U.S.

An explanation for that outcome is that European countries have a tax mix much more heavily reliant on payroll and consumption taxes, and less reliant on taxes on income, particularly capital income, than either the U.S. or Canada. A number of theoretical economic studies have found that a consumption-based or labour-income-based tax is much more conducive to the growth of productivity and real living standards than taxes based on total income or capital income. Tomorrow I will describe how this approach can be pursued within Canadian personal tax by reforming its base as part of a productivity strategy.

Because of our time, I will just thumbnail the other tax policy example, and I guess I can refer to it in tomorrow's session. This relates to rates of personal income tax. Here there is mounting evidence that high marginal rates of tax are an issue, affecting economic efficiency, affecting many aspects of productive behaviour. But those would need to be addressed regardless of the existence of brain drain.

Our most recent federal budget did take a small step in that direction, in a small measure, by eliminating the general surtax from high incomes. The existence of brain drain would, at most, cause us to move only slightly further in our rates of tax cuts than we might otherwise do.

I think those examples illustrate the more general point. The brain drain phenomenon, if it exists, carries few unambiguous or new implications for public policy. Almost all policies that could stem brain drain would be equally desirable even if brain drain were not present. These policies would address Canada's very real need to spur productivity and real living standards for all residents, not just potential émigrés, and they would do so in ways that would respect the cultural, social, and civic fabric that differentiates Canada from the U.S. These distinctive features are also critical, albeit underrated, aspects of Canada's competitive advantage in stemming any brain drain.

Thank you.

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The Chairman: Thank you.

We'll now go to a question and answer session. I'm going to ask the members to be very brief and to the point, starting with Mr. Epp.

Mr. Ken Epp: Thank you very much.

Thank you all for your presentations and for your patience while we went to vote.

I found the presentations very interesting and I suppose enlightening. I have a few questions, and I'm going to go way back to Mr. Picot. It almost seems like another day when he was making his presentation.

You said right near the beginning of your presentation that weak economic growth leads to weak employment growth. Do you equate that then also to the next page, which says that leads to weak productivity growth?

Mr. Garnett Picot: I'm going to in a sense skirt this question. I haven't really focused on productivity growth in my research, so I'm not sure I'm the best person to answer that question, to tell you the truth. I mean, I can think of plausible explanations, but I'm not sure that frankly I would want to answer that question.

Mr. Ken Epp: Okay.

We're here basically to try to determine what we can do as a government—and I use the “we” in a very generic way there—to improve productivity. Productivity I suppose we recognize as a means of attaining a higher standard of living, providing a good environment for our citizens. You talked quite a bit about jobs and employment and so on. I'm sure you equate the availability of employment and of well-paying jobs to a standard of living, which is of course a result of our total productivity in the country. You indicated, though, that there was a slow growth and a lack of innovation, a lack of proper motivation within the labour market to actually make this happen. What should we do as government to enhance that—or is there anything we can do?

Mr. Garnett Picot: If the answer to that were clear, we wouldn't have had the 1990s that we did, I think.

A lack of innovation and motivation—I'm not sure I said those things. I'd like to go back to Lars Osberg's comments about the role of employment in GDP per capita, or wealth creation.

One of the issues with the 1990s was that even though we did have productivity levels, according to Statistics Canada's numbers, that were comparable to the 1980s, the difference in terms of wealth creation was that we weren't creating as many jobs. So for those who were employed, we were creating as much wealth per worker, but with a lower employment population ratio in the aggregate, wealth wasn't being created at the same rate. So even though we had the same productivity growth in the 1990s as in the 1980s, the slow employment growth meant that our wealth generation actually slowed down substantially. So clearly employment creation from a wealth creation point of view is important.

What can we do? You know, we at Statistics Canada really don't focus on the policy issues. I'm not really sure that I'm the best person to ask that question.

Mr. Ken Epp: Okay. We'll let you off the hook on that.

Mr. Garnett Picot: I'm sure some of my colleagues would love to tackle that question.

Mr. Ken Epp: Yes. Maybe some of the others would like to respond.

Dr. Lars Osberg: Since I don't work for Statistics Canada, I'm not constrained about commenting on policy issues.

I think the key issue in living standards is not just, as was just stated, the output per worker, but how many workers are out there working. In that sense, there's no substitute in the short run, in the two-year, four-year time horizon, for a sufficient level of aggregate demand for goods and services, because the demand for labour is a derived demand from the demands for goods and services, and if you don't have the demand for goods and services you're simply not going to create the jobs and you're not going to create the wealth.

• 1815

Key to the economic history of the 1990s has been our successful pursuit of a very low inflation rate at the expense of other policy objectives. So a high interest rate policy, both in the early 1990s and successively, has constrained aggregate demand growth very substantially in Canada and meant that we have not, in the 1990s in Canada, reached our productive capacity.

I would argue that there are second-order effects: that if we have a long period of very slow growth, we don't have the same rate of capital investment, we don't have the same efficiency of the labour force, we have the depreciation of unused skills and the like. And those affect future output growth and future productivity per employee. But the fundamental short-run fact is the very low rate of growth of paid employment.

Mr. Ken Epp: Now that I have your attention, Dr. Osberg, I would like to ask you exactly about that. You indicated quite clearly that our economic activity is cyclical in nature and that changes we make may have a time lag of some twenty years before they come into play, even though there may be some short-term effects immediately. Did I get that right?

Dr. Lars Osberg: I was trying to make a somewhat different point. I was trying to say that there are some issues that matter very much within the next four-year to five-year timeframe, and there are some issues that will have pay-offs in the fifteen to twenty-year timeframe. I was referring to the first set of issues around the next two to four or five-year short-term to medium-term timeframe as cyclical influences.

Now, that's the term we use in the 1990s. Back in the 1970s, when I went to school, we called them aggregate demand management issues. Those can have major impacts within the two to four to five-year time horizon. Of course the only way you get to twenty years is going through a succession of two-year time horizons. So if it's the case that you have very much of a focus on maintaining price stability—zero inflation above all other policy objectives—and every year, year after year, you hold back on aggregate demand, then you never will realize the long-term potential of the Canadian economy. You only get to the long term through a succession of short terms. The short term is where I was focusing on the impact of aggregate demand management policies.

Mr. Ken Epp: I have just one more question in this regard, and that is with respect to education. I think Mr. Murray was talking about this also—that our workers who are coming into this country are more than adequately, according to him, replacing the skilled workers from Canada who are leaving. I'm just wondering whether you have any hard data or any facts to share with respect to our own educational system. Are we perhaps winners by sending our educated young people to the States and getting all of these immigrants in who seem to have a higher degree of skill and a higher degree of education on the average, at least in terms of those who are getting the jobs?

Dr. Lars Osberg: Well, those are, I would think, two somewhat separate issues.

Certainly the Canadians who leave are Canadians in whom our Canadian society has invested a great deal. People who come are in some sense a net gift from the rest of the world to Canadian society, because not only do they bring their talents, they also bring the education that was engaged in elsewhere. In that sense, we do lose when Canadians go abroad. We lose that investment embodied in them. We could in some sense hope both to keep people from leaving and to attract people from outside.

Mr. Ken Epp: I think several of you talked about infrastructure. Undoubtedly infrastructure has a fairly substantial role to play in our overall productivity. We have—I guess you used the word—capital: there's human capital; there's social capital; there's physical capital, which I suppose would be a combination of our natural resources and then the machinery we have available to us or that we can build. I don't know who's the best qualified to answer this, but I've thought that perhaps we have allowed our infrastructure in this country to crumble, and that's one of the reasons why we're having a decrease in our productivity. Is that your perception as well, or am I on the wrong track?

• 1820

Dr. Lars Osberg: There is exactly some evidence on the importance of public sector infrastructure investment. It has been studied more in the U.S. than in Canada. The U.S. has of course been concerned with declining rates of productivity increase for some time. A recent article in The American Economic Review noted that one possible major reason for the declining rates of growth of U.S. productivity compared to other countries in the world has been their abysmal record of reinvestment in public sector infrastructure. So I think that's absolutely correct, yes.

The Chairman: Dr. Carty.

Dr. Arthur Carty: May I just add one extra aspect of that? I really believe that in terms of the high-quality people who are leaving Canada to go to the United States, the erosion of our research infrastructure is a very important consideration. If in fact we do not have facilities and laboratories that are sufficiently at the state of the art to actually keep the best here, they'll leave so they can follow their research careers elsewhere. That's a significant consideration.

The Chairman: One more question, Mr. Epp.

Mr. Ken Epp: A last question then to Dr. Carty.

I've puzzled over the role of research and development, and undoubtedly innovation is a key to being more productive. I'm thinking of a number of different areas, but one comes to my mind because of my childhood growing up on a farm. My dad and his two boys farmed ten quarters of land, and I guess the average yield was about twenty bushels per acre. Now my brother and his two boys farm closer to fifty quarters of land, and they're getting forty bushels per acre. So obviously per person the productivity has gone up fantastically. A lot of that is due to research; it's due to innovation and bigger and better machinery and all of those things.

Who should be funding the research? I know that in your organization you look a great deal to government funding of research and development and direct funding. Is that the best way of doing that, or would we perhaps get more productivity if we allowed private firms, businesses, manufacturers a better tax regime and whatever we can do as a federal government to promote them in their research activities?

Dr. Arthur Carty: I'd answer that by saying there is a full spectrum of research activity, from the basic research, which is largely the domain of the universities and to a certain extent NRC, to the development end, which is largely the domain of the private sector and industry. The problem in Canada is that we have a gulf, a gap between those two.

I think it is perfectly reasonable to assume—and I think this is true in most countries in the world—that the research base has to be funded largely by the public sector, because the private sector thinks relatively short term and they're not prepared to invest in that long-term R and D. So that has to be largely the university sector and to a smaller extent government labs. On the other hand, development work is quite inappropriate for the university sector.

In the middle, in Canada we have this peculiar structure with very few large companies that will invest in the medium- to long-term strategic research. There's a market failure, if you like, that Canada has a specific industrial structure in which there is a dramatic need to invest in the middle to build the bridges between the research base and the development. There really isn't any other way to say it.

Mr. Ken Epp: Thank you. I appreciate your comments.

As I defer to my colleagues, I must also apologize for the fact that I'm not going to be here to hear your statements for the others because I now have another meeting I have to be at in about five minutes, so I'm going to have to leave.

The Chairman: Thank you, Mr. Epp.

Dr. Kesselman.

Dr. Jonathan Kesselman: Thank you. I have just a few follow-ups to the last question.

• 1825

Canada currently has a tax regime for business sector R and D that is extremely generous by international standards. Despite that, our rate of private sector R and D activity is very low; it's roughly half, as a percentage of GDP, that of the United States. So it's not clear to me whether there will be any solutions in the tax system for that. Perhaps it's a bit of a puzzle. It could be matter of management culture. It could be partly related to the branch economy—the subsidiary nature of a number of our industries. It could be related in part to the still comparatively high role of primary resource industries. We can't rule out attitudinal and cultural things that are very difficult to change, although perhaps our business schools are working on this over time.

The Chairman: Thank you.

Mr. Herron.

Mr. John Herron (Fundy—Royal, PC): Thank you, Mr. Chairman.

I wonder if you could pick up on one comment you made, Dr. Carty. I found it very interesting when you stated that three companies, Merck Frosst, Nortel and Pratt & Whitney, accounted for 44% of the private sector R and D in the country. Is that the statistic you used?

Dr. Arthur Carty: Yes. I think it's important to recognize that Nortel invests $3.1 billion Canadian in research and development, and the next company invests $400 million. There is an enormous difference between them and the rest of the industrial sector in terms of R and D investments.

Mr. John Herron: When we look at the overall tax regime in the country from an income tax perspective, companies such as Nortel have recently flagged that if they can't keep their people, they may have to look at where their plants are located. That would make a significant dent in the cluster effect you touched on in terms of the R and D nucleus that exists in certain industries, as you pointed out, in Saskatchewan and here in Ottawa.

Do you have any comments on the tax regime in terms of maintaining people so the companies who invest in R and D remain here?

Dr. Arthur Carty: As a colleague here has said, the tax credit system in Canada for companies is one of the best in the world. So I don't think one can criticize that. There may be some minor modifications.

Mr. John Herron: I meant personal income tax.

Dr. Arthur Carty: Personal income tax is certainly a factor when there are market forces at play in the information technology telecommunications sector. For example, there are clearly market forces that will draw highly skilled workers from Ottawa to the United States. Nevertheless, there are still companies that are locating here in the national capital region because of our intellectual resources. The fact that we have a very high-quality workforce and this networking of companies—the high-tech community, if you like—is actually a draw. So companies are locating here. Nortel itself has decided to invest very heavily in Ottawa over the last two years, so I don't think as yet it's a negative situation.

Mr. John Herron: I found some of the debate that took place in terms of the issue of brain drain/brain gain very frustrating in terms of the comments that were made. Dr. Osberg touched on something I would really concur with. The fact is that we made a very significant investment in the future of those 8,500 persons who are going stateside. They are for the most part highly educated individuals who represent some of our best and brightest. We should be very grateful to have the 33,000 educated, university degree-holding immigrants who actually make a valuable contribution to our economy and our economic base. It's sort of a balancing act. I'd rather have that extra 25% of degrees out participating in a very aggressive way within our own economy.

If we're debating the issue of how many we're losing versus how many we're maintaining, I'd rather flag the issue of how many are we losing, period. Otherwise, those individuals would be making a very productive contribution to the economy.

• 1830

Ms. Shirley Seward: I have to wear another hat to answer this question, because in my prior life I was in international development and immigration.

I think this whole discussion of the brain drain is not taking into consideration a much longer-term perspective in that Canada has been a recipient of a brain loss primarily from developing countries but also from European countries for decades and decades. We essentially fuelled our economy in the 1940s, 1950s, and 1960s by importing skilled workers we didn't have here. So in talking about a brain drain now, it strikes me that we should be a little bit humble about what we're saying, because it's the first time we have had a concern after 50 years of in fact siphoning off some of the best talent that exists around the world as we needed it. It was done very often at the expense of investing in our own training infrastructure in Canada, because we knew we could bring people in to do those jobs.

So I hope that in this discussion of brain drain we take a longer-term perspective of what Canada in fact has been doing in this area.

Dr. Lars Osberg: Although I think we would definitely be better off if we could keep those people here, I think we also have to be clear about why they're leaving. I think the idea that it's due to a few percentage points on the income tax is just not supported.

I think what's far more important to the emigration certainly of our recent graduates and our very young people has been the simple lack of jobs in Canada, the very low vacancy rate we've seen in Canada over the 1990s compared with a very low unemployment rate in the United States. So it's the availability of jobs and the issue of aggregate demand we have to come back to if we're going to try to explain the emigration of a small number—let's be clear—of recent university graduates.

The Chairman: Mr. Murray.

Mr. Scott Murray: I'd like to reinforce that survey data suggest that a lot of the kids who are going, even though it's a small number, are going for opportunity, not for income. They're working in cutting-edge places where they wouldn't get that kind of exposure or interest in Canada. So for me the issue is why the aggregate demand in Canada doesn't create those jobs.

This wasn't in our presentation, but I've heard it in a lot of the discussions I've had with people who are mad at me for resisting the idea of a brain drain. In academia and the health sector those markets are very regulated, so the managers in those industries—if we think of them as industries—have their hands tied in terms of offering inducements to the best and the brightest to stay. They can't jack up their wage rates or offer them good labs. We're hearing a lot of that. We don't have survey data to rationalize it, but I hear it enough to believe it.

The Chairman: There's greater labour mobility internationally. It's a global reality. If they have a better R and D centre, isn't it natural that an individual would gravitate toward it?

Mr. Scott Murray: I can't imagine what kinds of inducements you could put in place to keep it from happening.

Ms. Shirley Seward: The reality is that we have been on the positive end of that for decades, and we still are on the positive end of it, because we have so much more to offer in terms of growth, employment prospects, and infrastructure than most other countries in the world. We're talking about a giant who sits beside us, and I think no matter what we do, they will always have opportunities that are not possible in an economy of our size.

So let's not hit ourselves over the head about it. Let's accept the reality of international migration flows and recognize that we've in fact been a major beneficiary, more so than most countries in the world.

The Chairman: Mr. Herron, do you have a final question?

Mr. John Herron: I was going to say I have two more comments, but I'll try to dovetail them into one.

I'd argue that some of the people who are leaving aren't leaving necessarily, as Dr. Osberg has touched on, because of a lack of jobs. Some of the people who are leaving, such as we're seeing from the University of Waterloo in their IT department, are leaving more so for the opportunity equation in that regard.

• 1835

There was one comment made in Mr. Murray's presentation with respect to how heavily we invested in post-secondary education in the 1960s and 1970s. I remember studying that under ancient history before I was elected to Parliament, and we have a large demographic shift coming down the road. I want to know what kind of statistics we've actually looked at. We need those 8,500 bodies in here, as well as some of our best and brightest.

If we continue to lose our best and our brightest, in conjunction with the fact the baby boomer generation is about to cash in en masse in terms of starting to retire, will we have the educated skill sets and the most productive skill sets to fill the critical positions, in order to look after our overall general economy? I'm fearful that if we lose our best and our brightest en masse, it will have negative implications for our economy well into the future. That's the futuristic view I'd take a look at.

During the election campaign I met a woman in my riding who was about 22 or 23 years old and had just finished her engineering degree. I asked her what she planned to do. She was a chemical engineer. She said she was heading stateside. When I asked her why, she said, “Well, Mom and Dad used to tell me I should stay here in Canada because of quality of life. Now, if I go to the U.S. I'll have more opportunities. I'll pay less tax. I won't have to pay for Mom and Dad's spending binge for the last 30 years in terms of the national debt. If I'm in the U.S., I can live in one of those gated communities and buy quality of life.” It's a very cynical comment, but it's the exact story that was said to me. It really floored me when I heard it.

I would still argue that the tax regime and the opportunity in certain sectors are major components of why we're losing those bodies.

Thank you, Mr. Chair.

The Chairman: Are there any further questions? Go ahead.

Mr. Nick Discepola: Thank you, Mr. Chair. I know time is of the essence, therefore I'll go directly to my question to Ms. McMullen.

You touched on something that's intriguing. I come from the high-tech sector, where we used to go to work in the computer field dressed up as business people in suits, etc. During the 1970s and 1980s, the trend was to be more free-spirited and allow computer specialists to grow beards, and they were presentable. My philosophy is that you lock them up in a closed room and open the door and rattle their chains every so often, and they come out very productive.

You stated that not many firms manage human resources strategically. I think you're right. I believe, in the case of Bill Gates, part of his success came from allowing computer scientists to be more free-spirited. He gave them all the opportunities. He engaged employees in participating in the profits of the company, etc. Other companies sort of take the attitude, “I'm the boss, so do as I say. If you don't like it, find yourself another job.”

So I'm wondering what came first, the chicken or the egg. Do you think Bill Gates did it because he knew he could maximize his productivity, or do you think he allowed them to do it because it was the smart thing to do? Why aren't other organizations following suit, for example?

Ms. Kathryn McMullen: If I knew how Bill Gates did it.... I have a son who would like to be Bill Gates, so if I can answer this, maybe I'll be one of the rich retirees.

I think it's all part of this idea of atmosphere. It happens at a workplace level, a company level and even a national level. Again, from what you read in the paper, why are some of the best and brightest people drawn to the U.S.? It is the sense of opportunity. It's the sense of optimism. There's a boom. They have labs and they're given freedom to think and experiment. When I think of a learning organization, it's a broad-based kind of learning.

That can also work at a company level. Why aren't more companies doing it? We call them traditional—that's the label we give them. It's an older way of thinking. In a sense, part of this has to do with the whole sort of trend and cycle in terms of technology. Technology was just superimposed on a lot of organizations, and it takes time for them to learn that doing things the old way with a new tool isn't going to accomplish as much as doing things in a way that complements that new tool. So I think it's partly a learning process.

• 1840

Mr. Nick Discepola: Would you encourage organizations, and how should they go about readapting? Is it part of the psyche of North American business thinking? I look at Europe, for example, and they have a different approach to business. You don't see the three-piece suit any more in Europe. People go around in ordinary clothes, even shorts during the summer. They've adapted more. I also see some other organizations taking the role where they involve their employees through innovative profit-sharing initiatives, for example.

I'm just wondering, do we have to change our mindset in North America? Or is it going to take another semi-industrial revolution before we get to the point where organizations are going to involve their employees in very innovative ideas?

Ms. Kathryn McMullen: In a sense, we are in the midst of another industrial organization, and that's part of the learning process. I think part of the reason it's so difficult to say what governments should do is that a lot of it does have to do with management.

In some ways—this is the problem with the whole productivity issue—I think it links back to some of what Lars Osberg has raised, the slow economic climate and the lack of enthusiasm, in the sense of the “hunkering down in a bunker” mentality that says, if I just keep cutting costs, things will get better. You have to somehow get over that hump. I don't think it's an easy fix. I mean, how do you change managerial attitudes and make them open to change, enthusiastic, and creating opportunity? Those are very difficult sets of issues. It's not obvious what can be done.

The Chairman: How many of these challenges do you face as a result of the generational differences that exist in management styles? If we can look at technology, for example, you can rest assured that my children are going to be more technologically adept than I am, or that most of us here are. Aren't we going through that transition period, a paradigm shift, that is going to require a bit of readjustment?

Ms. Kathryn McMullen: Yes, I think that's basically what the answer is. Certainly the facility of the kids who are coming through the system in using the technologies is great. Being able to do that beats being on an old-style production line where you're not going to get the benefits of those technologies. I do think we'll need to see changes in organizational structures and how we basically harness the brain power and the skills of people who are coming out with this ability to use the technology.

The Chairman: This is the final question, Mr. Pillitteri.

Mr. Gary Pillitteri: Thank you, Mr. Chairman.

Maybe this would have been more appropriate for Jim Stanford.

We're talking about productivity, and it seems to me that everything is bunched together. Everyone is just piling it together. Has anyone done any studies of the Magna style of, let's say, components and profit sharing, which go hand in hand, compared to the European models? In Canada that came about years ago, and not much has really evolved from it. Instead of having it all bunched together in productivity, has anyone done any studies on that one sector? Maybe that is a project that should be done.

A voice: We need funding for it.

Ms. Kathryn McMullen: We're with CPRN and we could use funding too.

Mr. Gary Pillitteri: That's one part, just to see the comparison and how much productivity would actually go up.

Another part we can talk about is the brain drain. It's strictly because of income tax. Has anyone looked at the cost factor, where the high rate kicks in and what it costs? It's only the top 5% of Canadians who are part of that brain drain, not the rest of them. The rest are very comparable or even lower.

Dr. Lars Osberg: Just to come back to this notion of team production as in the Magna model, we've talked a lot about the changing nature of work, the nature of the workplace, and the shift from the old-style assembly line operation. I'd just like to point out that we also had a shift...along with that old-style production line, we had an old-style education system. We used to have an old education system where you sat in rows, you kept quiet, and you just did what the teacher told you to do. The education system has in fact changed a lot to encouraging group work, encouraging the development of research skills, and encouraging a lot more flexibility within the classroom and a lot more development of team skills and social skills that were completely unknown back in the 1950s.

• 1845

So in that sense, the educational system has shifted quite a bit toward supplying the types of skills that these high-performance workplaces end up needing. But they've done it in a kind of independent way. In that sense, we want to be careful to make sure we don't reform some of these positive developments out of the educational system, because it has in fact made major improvements.

The Chairman: Thank you, Mr. Pillitteri.

We have another meeting to go to after this one, but on behalf of the committee, I'd certainly like to thank you very much for your contribution to the process.

I must tell you these are our first two days, and this is going to be a really challenging study. People come at it from different points of view. Words have different meanings to different people, particularly the actual word “productivity”. I can tell you it's going to be a challenge to present a context to the Canadian people that is understandable, that can be appreciated.

There is no question that the committee members understand the importance of the issue, but to communicate and to enter into public education on this particular issue is, no question—and I can tell you this after only two days—going to be perhaps our biggest challenge. But of course this challenge is made a little easier by the fact that experts such as you appear in front of this committee to help us understand the issue.

So on behalf of the committee, once again I'd like to express to you our warmest and sincerest gratitude for your contribution. Thank you.

The meeting is adjourned.