The 2015 Report Card on Canadian Prosperity is produced by the Quebec Employers

Council’s Research Department

Writing and research coordination

Norma KozhayaRami Kiwan

TranslationTerry Scott

Graphic designOblik Communication-design / oblik.ca

Legal deposit

Bibliothèque et Archives nationales du QuébecLibrary and Archives Canada

4th quarter 2015

October 2015

This publication may be consulted on the website of the Quebec Employers Council at

cpq.qc.ca

Introduction 4

Summary of results for 2015 6

1 Availability and quality of labour 7 1.1 High school graduation 7

1.2 Level of post-secondary education among adults 9

1.3 Adult competencies 10

1.4 Participation rate of older workers 12

2 Cost of labour 14 Minimum wage as a proportion of the median wage 14

3 Public finances 163.1 Marginal effective tax rates on business investments 16

3.2 Tax burden 18

3.3 Public debt 20

4 Business environment 224.1 R&D spending 22

4.2 Patents 24

4.3 Multifactor productivity 26

4.4 Cost of operating a business 28

The Report Card on Québec Prosperity, which the Quebec Employers Council has published since 2010, highlights the province of Québec’s main strengths and weaknesses. The report card is not aimed at assessing the actions undertaken by the various governments; its intended purpose is to point out the threats and opportunities that need to be considered in developing future policies. This year, coinciding with the federal elections, the Employers Council is publishing a report card on Canadian prosperity. This report card analyzes 12 socio-economic indicators.1

Compared to OECD countries, Canada performs quite well on most of the indicators, notably those pertaining to the education of the population, patents and the cost of operating a business. But Canada is lagging in the area of numeracy competencies, the marginal effective tax rates on business investments and in productivity. Thus, it would appear that certain structural reforms are needed to remedy the situation.

1 Some of the criteria analyzed in the Report Card on Québec Prosperity that allow for a comparison of Québec to other provinces, cannot be used to compare Canada to other countries because of a lack of available data.

INTRODUCTION

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Chart 1 – GDP per capita at purchasing power parity (PPP), 2014

Sources: OECD statistics OECD, Annual national accounts; Employers Council calculations.

$44,057

5

$0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 $90,000 $100,000

Mexico

Turkey

Chile

Hungary

Poland

Greece

Estonia

Slovak Republic

Portugal

Slovenia

Czech Republic

Israel

Spain

Korea

Italy

New Zealand

Japan

France

OECD - Total

United Kingdom

Finland

Belgium

Iceland

Canada

Australia

Germany

Denmark

Sweden

Austria

Netherlands

Ireland

United States

Switzerland

Norway

Luxembourg

* Use of the term “adult” is done to simplify the wording. See the corresponding graphics for the exact age reference.

Chart

Rank among OECD countries

2015 Grade

GDP per capita, current PPP dollars 1 12/34 B

Availability and quality of labour B+

Percentage of adult* population lacking a high school diploma

2 6/31 A

Percentage of adult* population who had reached the tertiary level of education

3 1/30 A

Adult competencies in numeracy 4 13/20 C

Participation rate of older workers 5 17/34 B-

Cost of labour B+

Minimum wage as a proportion of median wage 6 8/28 B+

Public finances B-

Marginal effective tax rate on investment 7 21/34 C

Tax burden 8 12/34 B

Public debt 9 20/29 B-

Business environment B+

R&D spending 10 16/29 C

Patents 11 3/11 A

Multifactor productivity 12 11/19 C+

Cost of operating a company 13 2/10 A

Average B+

Summary of results of 2015

Canada is a high-income country. It ranks 12th out of 34 OECD countries with a GDP per capita at purchasing power parity (PPP) of $44,000 in 2014, which is higher than the $39,000 average of OECD countries.

The chart below summarizes the main results of the analysis that was conducted:

6

1.1 High school graduationIn a context of constantly evolving technology and the need for skilled labour, the ability of a state to measure up to the competition is largely dependent on the skills of its labour force.

Pertinence:

The rate of high school completion is a central component in assessing the performance of educational systems. The economic and social consequences of non-graduation are serious.

Comment:

In terms of the percentage of the population aged 25 to 64 that do not have a high school diploma, Canada has the 6th-lowest proportion of 10.5%, out of 31 countries, and is ahead of Sweden (11.8%). Canada receives a grade of “A” on this indicator.

AVAILABILITY AND QUALITY OF LABOUR 1

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Chart 2 – Percentage of the population aged 25 to 64 lacking a highschool diploma, 2013

Sources: OECD (2014). Education at a Glance 2014: OECD Indicators, OECD Publishing; Statistics Canada. Tableau 282-0004 - Table 282-0004 – Labour Force Survey (LFS), estimates by educational attainment, sex and age group, annual (persons unless otherwise noted); Employers Council calculations.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Czech Republic

Slovak Republic

Estonia

Poland

United States

Canada

Sweden

Switzerland

Germany

Finland

Slovenia

Israel

Austria

Hungary

Norway

Luxembourg

United Kingdom

Denmark

Ireland

OECD average

Netherlands

Australia

France

Belgium

Iceland

New Zealand

Greece

Italy

Spain

Portugal

Mexico

Turkey

10.5%

8

1.2 Level of postsecondary education among adultsChart 3 – Percentage of the population aged 25 to 64 who had reached the tertiary level of education, 2012

Sources: Statistics Canada. Education indicators in Canada: a 2014 international perspective (Table A.1.1); OECD (2014). 2014 Education at a Glance: OECD indicators, OECD publishing (Table A1.3a.).

0% 10% 20% 30% 40% 50% 60%

Italy

Chile

Mexico

Slovak Republic

Austria

Hungary

Slovenia

Greece

Germany

France

Spain

OECD average

Netherlands

Denmark

Iceland

Belgium

Sweden

Switzerland

Estonia

Norway

Luxembourg

Finland

Ireland

New Zeland

United Kingdom

Australia

Korea

United States

Israel

Japan

Canada

Other tertiary

University

Legend

27.70% 24.90%

9

Pertinence:

This statistic measures the quantity of the best educated workers a society has available each year. It includes the entire adult labour force.

Comment:

Canada also has excellent results on this indicator. In fact, its population is the most educated of all the countries measured. Among the population aged 25 to 64, one out of two has reached the tertiary level of education. Canada receives a grade of “A” in this category.

1.3 Adult competencies

Pertinence:

As Statistics Canada notes:

“Given the centrality of written communication and basic mathematics in virtually all areas of life, coupled with the rapid integration of information and communication technology, individuals must be able to understand, process, and respond to textual and numerical information, in print and digital form, if they are to participate fully in society — whether as citizens, family members, consumers or employees.”2

Comment:

Numeracy is defined as the ability of respondents to have the mathematical knowledge and skills required to effectively manage the mathematical demands of diverse, everyday situations. In terms of numeracy competencies of the working-age population, Canada ranks 13th out of 20 OECD countries, based on the results of the Programme for the International Assessment of Adult Competencies (PIAAC), thereby receiving a grade of “C” in this category.

2 Skills in Canada: First results from the Programme for the International Assessment of Adult Competencies (PIAAC), p. 6, http://www.statcan.gc.ca/pub/89-555-x/89-555-x2013001-eng.pdf

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Chart 4 – Adult competencies in numeracy

Source: Skills in Canada: First results from the Programme for the International Assessment of Adult Competencies (PIAAC) http://www.statcan.gc.ca/pub/89-555-x/89-555-x2013001-eng.pdf

240 250 260 270 280 290 300

Spain

Italy

United States

Ireland

Poland

United Kingdom

Korea

Canada

Australia

Germany

Estonia

Austria

Czech Republic

Slovak Republic

Denmark

Norway

Sweden

Netherlands

Finland

Japan

Legend

OECD average

265.50

11

1.4 Participation rate of older workers

Pertinence:

The participation rate measures the supply on the labour market. In recent decades, the higher participation rate of women on the job market has had the biggest effect on the labour supply in quantitative terms. Currently, the participation rate of older workers is likely to determine the extent to which an economy will experience labour shortages in the years to come.

Chart 5 shows participation rates for the three age groups between 55 and 69 years old. But our focus here is on the 55-59 age bracket because we believe workers in this age group are more likely to continue working or looking for a job.

Comment:

The participation of workers aged 55 to 59 in Canada (73.7%) is higher than the OECD average (70.7%). But it does not rank among the highest overall, since Canada is in 17th place among the countries analyzed, thereby receiving a grade of “B-”, given that it is on the borderline between the second and third quartile.

Chart 5 – Participation rate per age group, 2014 (in %)

Sources: Statistics Canada. Labour Force Survey (LFS), CANSIM 282-0002; OECD Stat. Data on the job market by age and sex – Indicators

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Turkey

Greece

Slovenia

Luxembourg

Poland

Mexico

Belgium

Italy

Austria

Hungary

Portugal

Ireland

Spain

OECD

United States

Chile

Korea

Australia

Canada

France

Israel

Slovak Republic

United Kingdom

Netherlands

Estonia

Finland

Japan

Germany

Norway

Czech Republic

Denmark

New Zealand

Switzerland

Sweden

Iceland

Ages 55 to 59

Ages 60 to 64

Ages 65 to 69

Legend

73.70%

13

Minimum wage as a proportion of the median wage

Pertinence:

The minimum wage level is the result of an arbitration between the objective of reducing wage inequality and family poverty, on the one hand, and the aim of avoiding excessive reduction in labour demand – and thus jobs – at the bottom of the wage scale. It isn’t so much the absolute level of the minimum wage that matters, but it’s more a case of its level in relation to the wage scale in each economy. According to the OECD, median rather than mean wage provides a better basis for international comparisons as it accounts for differences in wage dispersion across countries.

Comment:

The average minimum wage in Canada represents 44.1% of the median wage, in 2013. This ratio ranks Canada in 8th place among OECD countries. A minimum wage that is too high has the effect of reducing the demand for low-skilled jobs or possibly pushing some of these jobs into the black market and might be an incentive to drop out of school for people aged 15 to 24 who comprise two-thirds of these jobs. On the other hand, a minimum wage that is too low does not encourage inactive people to get back into the job market. Canada receives a grade of “B+” in this category.

It should be noted another factor affecting the cost of labour from the employer’s standpoint stems from payroll taxes, which add to the nominal wage. In highly labour intensive industries, payroll taxes could be a major cost component. There is no easily comparable data on these costs between the various countries, but there are some comparisons available with the United States. It can be noted in this regard that the average unit labour cost per employee in manufacturing in Canada compared to the United States has increased by 26% since 2000.3

This is even more noteworthy considering the fact this increase has not been offset by a rise in productivity, which has increased at a much slower rate in Canada than in the United States over the same time span.

3 The Conference Board. “International Comparisons of Hourly Compensation Costs in Manufacturing and Submanufacturing Industries”, December 17, 2014, cited in Marc Levinson. “U.S. Manufacturing in International Perspective”, Congressional Research Service, March 17, 2015. http://fas.org/sgp/crs/misc/R42135.pdf

COST OF LABOUR 2

14

Chart 6 – Minimum wage as a proportion of the median wage of full-time employees, 2012 and 2013

Sources: Statistics Canada. Labour Force Survey (LFS), CANSIM 282-0070; Statistics Canada. OECD Stat. Labour market, income; Employers Council calculations.

0% 10% 20% 30% 40% 50% 60% 70% 80%

Czech Republic

Mexico

United States

Estonia

Japan

Spain

Luxembourg

Canada

Korea

Greece

Slovak Republic

United Kingdom

Netherlands

Ireland

Latvia

Romania

Poland

Belgium

Lithuania

Hungary

Australia

Portugal

Israel

New Zealand

Slovenia

France

Chile

Turkey

2013

2012

Legend

45.10%44.10%

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3.1 Marginal effective tax rates on business investment

Pertinence:

The marginal effective tax rate on business investment (METR) is an indicator of the impact of the tax system on new investment. It represents the effect of all charges and tax rules influencing the return on invested capital. It notably takes account of the capital tax, sales tax, corporate income tax, amortization rules and rates, and accounting methods for inventories.

Business decisions by local companies, as well as decisions by multinationals on where to locate, are based in part on the relative tax burdens in the various jurisdictions considered.

Comment:

Since 2007, Canada has made some remarkable efforts to reduce the tax burden of businesses, notably by lowering corporate tax rates. And provinces such as Ontario have also reduced tax rates on business investment. Canada’s ranking in this category has significantly improved. But Canada had a long way to go in this regard, since it had one of the highest corporate tax rates of OECD countries in 2005. Meanwhile, other countries recently reduced their tax burden on capital. In 2014, Canada ranked 21st out of the 34 countries considered, and it receives a grade of “C”, with its METR at 19%.

PUBLIC FINANCES3

16

Chart 7 – Marginal effective tax rates on business investment, 2013 and 2014

Source: Duanjie Chen and Jack M. Mintz. The 2014 Global Tax Competitiveness Report: A Proposed Business Tax Reform Agenda, University of Calgary, SSP Research Papers, vol. 8, no 4, February 2015.

0% 5% 10% 15% 20% 25% 30% 35% 40%

Turkey

Chile

Slovenia

Ireland

Czech Republic

Iceland

Greece

Finland

Poland

Slovak Republic

Sweden

Hungary

Israel

Netherlands

Estonia

Luxembourg

Mexico

Switzerland

Belgium

Denmark

Canada

OECD average

New Zealand

Portugal

Norway

United Kingdom

Germany

Italy

Australia

Spain

Austria

Japan

Korea

United States

France

2014

2013

Legend

18.80%19.00%

17

3.2 Tax burden

Pertinence:

The tax burden indicator compares all tax receipts collected by public administrations in a jurisdiction to its GDP. This indicator represents the overall tax burden borne by all taxpayers, whether individuals or corporations. It takes into account all tax charges on taxpayers in each tax jurisdiction (central, regional and local governments). This indicator shows the extent of government presence in the economy.

Comment:

Tax receipts represent 30.6% of Canadian GDP. Canada has the 12th-lowest tax burden among the 34 OECD countries and receives a “B” grade in this regard. Note, for example, this ratio is lower than the OECD average, which is at 34.1%.

18

Chart 8 – Total tax receipts as a proportion of GDP, 2013

Source: OECD Statistics. Revenue Statistics – Comparative tables.

0% 10% 20% 30% 40% 50%

Denmark

France

Belgium

Finland

Sweden

Italy

Austria

Norway

Luxembourg

Hungary

Slovenia

Germany

Netherlands

Iceland

OECDaverage

Czech Republic

Greece

Portugal

United Kingdom

Spain

New Zealand

Poland

Estonia

Canada

Israel

Slovak Republic

Japan

Turkey

Ireland

Australia

Switzerland

United States

Korea

Chile

Mexico

30.6%

19

3.3 Public debt

Pertinence:

The ratio between the financial commitments of public administrations and GDP measures a contry’s ability to meet its public financial obligations. It also helps infer the likelihood of a heavier tax load or lower public spending in the coming years.

Comment:

In 2013, Canada ranked 20th out of 29 countries with a gross debt representing 87.7% of GDP. Taking the net debt, Canada’s ranking improves significantly to reach the 13th place among the 29 countries with a ratio of net debt to GDP of 37.1%. It should be noted this is the lowest ratio among the G7 countries. Also, as noted in the last federal budget, the official statistics published by the IMF and OECD may overestimate the debt levels of Canada’s public administrations compared to those of most of the other countries, including the majority of the G7 countries, because of the pension plans liabilities which are not always accounted for in the same manner. Canada receives a grade of “B-” in this category.

20

Chart 9 – Gross debt and net debt as a percentage of GDP, 2013

Source: IMF, World Economic Outlook, April 2015.

-250% -200% -150% -100% -50% 0% 50% 100% 150% 200% 250%

Chile

Norway

Australia

Korea

New Zealand

Turkey

Sweden

Denmark

Mexico

Switzerland

Poland

Finland

Israel

Netherlands

Germany

Hungary

Austria

Iceland

United Kingdom

Canada

Spain

France

United States

Belgium

Ireland

Italy

Portugal

Greece

Japan

Net debt

Gross debt

Legend

87.66%37.13%

21

4.1 R&D spending

Pertinence:

Spending on research and development is an indication of the effort made to innovate and prosper. When more resources are devoted to R&D, there is a greater chance of making technological breakthroughs and benefiting the entire economy through spinoffs.

Comment:

R&D spending comprised 1.71% of Canadian GDP in 2012. This figure places Canada in 16th position among the 29 OECD countries analyzed, and it thus receives a grade of “C”.

BUSINESS ENVIRONMENT 4

22

Chart 10 – Intra-mural spending on R&D (GERD) as a percentage of GDP, 2011 and 2012

Source: Institut de la statistique du Québec. Science, technologie et innovation, « R-D ensemble des secteurs ».

0% 1% 2% 3% 4% 5%

Israel

South Korea

Finland

Japan

Sweden

Denmark

Germany

Austria

United States

Slovenia

Belgium

France

Estonia

Netherlands

Czech Republic

Canada

United Kingdom

Norway

Ireland

Portugal

Hungary

Spain

Italy

Luxembourg

Turkey

Poland

Slovakia

Greece

Chile

2012

2011

Legend

1.78%1.71%

23

4.2 Patents

Pertinence:

Although patents do not take all innovation activity into account, they remain one of the few measurable and comparable indicators.

The ratio of patented inventions to spending on research and development is an indicator of the efficiency of this spending in terms of patents obtained.

Comment:

In terms of the number of patented inventions, Canada has an excellent performance with 272 patented inventions per billion dollars in R&D, far ahead of Norway (97 inventions), but behind the United States and Japan (289 and 340 respectively). Canada ranks 3rd out of the 11 countries analysed and receives a grade of “A”.

Other data recently published by the Conference Board of Canada lends a broader perspective on the issue of innovation in Canada. The Conference Board conducted an innovation performance evaluation by comparing 10 indicators: public R&D, researchers, connectivity, scientific articles, entrepreneurial ambition, venture capital investment, business enterprise R&D (BERD), ICT investment, patents and labour productivity.4 According to the Conference Board of Canada, the performance by Canada on the Innovation Report Card has improved. Canada thus receives a grade of “C” and ranks 9th among the 16 countries being compared, which is progress when compared to the grade of “D” and its 13th-place ranking in the previous comparative innovation report.

Canada made progress on the venture capital indicator and on connectivity, and it performs well in the area of entrepreneurial ambition. But Canada’s results continued to be weak in terms of ICT investment, patents, business enterprise R&D and productivity. It should be noted, however, that the performance in terms of patents in the Conference Board’s data is measured in relation to the number of patents per population. The measure we use is the number of patents per dollar spent on R&D, which better reflects the efficiency of R&D spending.

4 http://www.conferenceboard.ca/hcp/provincial-fr/innovation-fr.aspx

24

Chart 11 – Number of inventions patented per billion US dollars (PPP) in intramural R&D spending (GERD), 2011 and 2012

Source: Institut de la statistique du Québec. Science, technologie et innovation, « Brevets d’invention ».

2012

2011

Legend

0 50 100 150 200 250 300 350 400

Japan

United States

Canada

Sweden

United Kingom

Finland

Germany

Denmark

France

Norway

Italy

233

272

25

4.3 Multifactor productivity

Pertinence:

Multifactor productivity measures efficiency in the use of factors of production, namely labour and capital, to produce a certain level of goods and services. This indicator reflects, to some extent, technological innovation and innovation in work methods and work organization in an economy.

The measurement should be distinguished from that of labour productivity, which simply measures GDP per hour worked.

Comment:

Canada is not in an enviable position in terms of productivity. The multifactor productivity contribution portion represents just 20% of GDP growth, thereby ranking Canada 11th out of the 19 countries analyzed, in a tie with the Netherlands. Canada thus receives a grade of “C+” on this indicator.

It should be noted here that one of Canada’s weaknesses which helps in explaining its low productivity is at the ICT investment level. In 2013, the ICT investment per worker in Canada, adjusted to purchasing power parity (PPP), was just 51% of the American level.5 Another reason for this phenomenon is the low level of robotization in the Canadian economy, especially compared to the American, Japanese and German economies.

5 Source: http://www.csls.ca/data/Summary%20with%20List%20Final%202014.pdf

26

Chart 12 – Average annual contribution of multifactor productivity to GDP growth between 2001 and 2013

Sources: Conference Board; Statistique Canada; Desjardins. Études économiques.

-60% -40% -20% 0% 20% 40% 60% 80% 100%

Italy

Spain

Denmark

New Zealand

Belgium

Australia

Ireland

Canada

Netherland

Switzerland

France

United Kingdom

Finland

Austria

Sweden

Germany

United States

Korea

Japan

20%

27

4.4 Cost of operating a business

Pertinence:

In a context of growing global competition to attract foreign investments, the costs associated with establishing and operating a company affect the competitiveness of a given economy in relation to its competitors.

Comment:

Canada provides an advantage for companies in regard to their operating costs, which are 7% lower than costs in the United States. Canada ranks 2nd among the 10 countries analyzed and it receives a grade of “A” in this category.

28

Chart 13 – Index of the operating cost of a business in 19 sectors (United States = 100)

Source: Competitive Alternatives 2014 Cost Model Detailed Comparison Report. Online: http://www.competitivealternatives.com/results/locationmenu.aspx

0 20 40 60 80 100 120

Germany

United States

Australia

Japan

Italy

France

United Kingdom

Netherlands

Canada

Mexico

2012

2014

Legend

95.00

92.80

29

Compared to other industrialized countries, Canada shows some strengths and, also, some weaknesses. Yet, Canada has exceptional potential in many areas, whether in terms of its natural resources, its institutions, its human capital or its economic development hubs.

This comparative analysis shows the importance of mobilization in favour of a more prosperous Canada. This mobilization must be based on a better understanding of the key issues and a strong support for wealth creation. However, that wealth cannot be the desirable and attainable goal we aim for unless it benefits both those who play a full part in its creation and the society as a whole.

After all, the Quebec Employers Council's (CPQ) mission is to “ensure that we are provided with the best possible conditions to prosper sustainably in a context of global competition.”

CONCLUSION

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