INDU Committee Meeting

STANDING COMMITTEE ON INDUSTRY

COMITÉ PERMANENT DE L'INDUSTRIE

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, November 16, 1999

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[English]

The Chair (Ms. Susan Whelan (Essex, Lib.)): I'll call the meeting to order, pursuant to the committee's mandate under Standing Order 108(2), a study concerning productivity, innovation, and competitiveness.

We're very pleased to welcome here today representatives from the Canadian Labour and Business Centre, formerly known as the Canadian Labour Market and Productivity Centre. We have with us Ms. Arlene Wortsman, the director of labour, acting co-chief, and executive officer; and Chris Parsley, senior chief economist. Then from York University we have Professor Don Daly. We're very pleased you could join us today.

My suggestion would be that we have opening comments from both witnesses, and then we'll move to questions. Unless you have a different agreement amongst yourselves, I'll proceed as listed and begin with the Canadian Labour and Business Centre.

Ms. Arlene Wortsman (Director of Labour, Acting Co-Chief and Executive Officer, Canadian Labour and Business Centre): Actually, we had asked Professor Daly to go first.

The Chair: That's fine. Then we'll start with Professor Daly.

Ms. Arlene Wortsman: I think he'll give you a bit of an overview, and we're going to talk more at the micro level.

The Chair: Okay. Then we'll start with Professor Daly.

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Professor Don Daly (York University): I'll just put up an overhead.

I don't have the coloured slides and so on that Serge Nadeau would have had at your last meeting, but I do have a couple of overheads.

What I want to do initially is to talk about what are Canada's productivity problems. I will just mention two of them and then concentrate on the third.

I think there are really three things that are important as far as Canada's performance in this whole area is concerned. One is that by all measures we've had a productivity slowdown since the 1970s. From the 1950s to the mid-1970s we had a tremendously high rate of growth and productivity, which most of the other industrialized countries had as well. Since then, by all of the measures, there has been a definite slowing down.

A second problem is that relative living standards in Canada have slipped behind the United States. Serge Nadeau would have mentioned that in his talk, I'm sure. It has been particularly apparent in comparison with the United States, but most of the European countries and Japan have also, in a sense, converged to that of the United States. Canada tends to be the exception.

The third area of problems is in manufacturing and more in terms of productivity levels, which is what I will concentrate on. I'll concentrate on manufacturing and later on talk about why that matters. Even though manufacturing is only 20% of the Canadian economy now and has tended to fall, it's still very important in a number of areas.

If you talk about productivity levels for total manufacturing, historically, Canada has been well below the United States in terms of levels of output per man-hour. If you include measures of capital and so on, the story is still the same. But the gap had been closing from about the 1950s, when our data first began to be fairly firm. It narrowed a bit through to about the mid-1970s. Since then we've slipped back relative to the United States.

That's not what supporters of free trade had predicted. We had predicted that with free trade there would be a convergence in productivity levels in manufacturing toward the U.S. level, and that hasn't happened. Instead, it has widened. The real question is, I think, what's important in that?

The area I want to concentrate on is small business, and I'll put up a chart on the overhead in just a moment.

Let me just make two points. One is that during the last three decades the increase in employment has been far greater in small businesses than in large businesses, measured by establishments. Actually, for the last 30 years there has been an absolute decline in the number of employees in large establishments employing 500 or more employees. The big growth in employment has taken place in small business, and that's a very important development. This increase in employment in small business is far more dramatic for Canada than it is for the United States.

This chart shows the relative levels in value added per employee between large plants and small plants. As you can see, there has been a significant divergence from the start of the period, which is the early 1970s, through to the mid-1990s, which is the last data we have. Relative to the United States, there has been a slight gain in the large plants vis-à-vis the U.S. national average, but for the small plants there has been a dramatic drop away. This pattern of lower productivity levels in the small establishments shows up also in lower wages, lower profits on average, etc. So there is a problem here in small business in terms of its productivity levels, particularly when the increases in employment have been so dramatic.

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Now let me turn to the third topic I mentioned. Does it matter? Do some of these points I mentioned with respect to Canada's productivity performance matter? I would say, yes, it matters in three areas. One is in terms of living standards. In a sense you're not really going to have high living standards in Canada persisting for a long period without high productivity levels. That, particularly in terms of manufacturing, is not what's been happening.

A secondary area where it's important is in terms of international competitiveness, because with the free trade and the dramatic increase in trade in manufactured products, the international competitiveness of manufacturing in total, particularly in small businesses, relative to the United States is a very important issue. Although there's been much more attention given to the dramatic increase in exports of manufactured products, which of course has taken place, there's also been a dramatic increase in imports of manufactured products. So the whole question of import competition, not just in relation to the United States but also to the countries in Asia and Mexico and so on, has become much more important with this dramatic increase in international trade. The productivity performance is a central part of that trade performance.

The third area where it matters is in terms of employment. As long as productivity levels are low and profit levels are low there's going to be less incentive for companies to invest. That can affect the rate of growth in employment in manufacturing in total in the future. So those are the three important areas as to why productivity matters.

Let me touch on the last topic I want to refer to. That was, is there any scope for government policy in this area? This is a hard one because we don't know as much about what some of the problems are in small manufacturing business as we'd like. We are currently involved in a survey of small companies in Ontario, and it's part way through but it's not yet complete. But there are a number of things that do stand out, I think. One is the whole question of corporate profits taxation. In terms of overall corporate profits taxation, the corporate tax rate in Canada is well above the OECD average. There are quite high corporate profit taxes. But on the other hand, the corporate profits tax with respect to small business is really quite different in two respects.

One is that the corporate profits tax on profits under $200,000 a year is substantially lower than above that. The second thing is that the treatment of dividends are fairly generous. The net effect of these is that I think this is one of the factors that has contributed to the more rapid increase in employment in Canada than in the United States—this differential structure in the small business corporate tax rate.

What it does is encourage small businesses to get started, but it also ensures that they stay small. I think the degree of potential distortion the effects of the corporate tax can have in terms of the whole business sector is unfortunate. That's one area where government inference can be important.

A secondary is the whole question of the exchange rate. As you are all aware, the value of the Canadian dollar has dropped vis-à-vis the United States in a major way over the last 15 or 20 years. What that's done is it has softened in a sense the extent of international competition imports, and it's also made exports more profitable. If there were to be an appreciation of the value of the Canadian dollar, this could have potentially very significant and adverse effects, both on exports and on import competition. I think the vulnerable areas are the small establishments in manufacturing where the productivity levels are already low, as we've illustrated. So this is an area of potential vulnerability in the whole system.

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On occasion, the possibility is being raised, could the government try to introduce selective measures, tax measures, incentives, R and D incentives? A variety of different things have been talked about. But for this small business sector in Canada, in manufacturing, I'm very doubtful that this could be really effective.

In Canada we have essentially 30,000 establishments with less than 100 employees per establishment. That's a lot of companies, and it just isn't possible for the federal government, or for any bank for that matter, to really have a good idea of which of those small businesses are going to succeed and flourish and which ones are going to be in difficulty and perhaps not be here five years from now. So it's very difficult to have differential incentives one way or the other.

You get this same sort of variation in profits as you do in productivity. The government just doesn't have the information on this. And in past experience—and this is the experience in Japan as well—when they tried to have selective tax and subsidy measures, the government ended up propping up the losers rather than really saving the winners.

So I'm very skeptical that a selective policy could really work. I think we would have to give some attention, if anything, to some of the other areas that would be more general, such as training, education, diffusion of technology, tax treatment, and so on.

Those are the main comments I want to make, but certainly if you have any questions to ask after the other presentation, I'd be glad to see if I could answer them.

The Chair: Thank you very much, Professor Daly.

Ms. Wortsman.

Ms. Arlene Wortsman: Thank you very much. Thank you for extending an invitation to the Canadian Labour and Business Centre.

Our organization has been interested in questions on productivity levels and growth rates since the creation of the organization in 1984.

The CLBC, formerly known as the Canadian Labour Market and Productivity Centre, is an independent, national, bipartite organization that contributes to economic growth and social well-being by improving business and labour practices in Canada and by providing joint advice on public policy. The centre represents the joint interests of business and labour.

We have seen in the last few years a growing concern in our constituencies about productivity. This was evident in our 1998 leadership survey, which showed that close to 40% of business leaders and close to 20% of labour leaders were concerned that Canada had a poor productivity record, a substantial rise from the last leadership survey of two years ago.

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.

Two critical points must be made concerning the Canadian Labour and Business Centre's take on productivity in Canada.

The first is that the CLBC does not invest a lot of time and energy considering various empirical questions about how to measure total multifactor productivity in a macroeconomic context. With the rise in the importance of intangible assets, such as knowledge and skills, in companies, accurate measurement of productivity at the macro level is more difficult.

Rather, the CLBC orientation is, and has always been, looking at productivity in a micro context. We believe the Canadian workplace is the hub of productivity performance, particularly in an economy marked by massive and continuous change and restructuring. It is where national productivity performance ultimately begins.

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, our focus as a bipartite organization is on issues that business and labour can best influence at the workplace level.

The micro context in Canada's productivity debate is often quite unjustly neglected. Productivity improvements stem not only from the introduction of new technology, but from the way it is applied and the context in which it is applied.

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Just as important is how work is organized, the skills required to carry it out, and the relationships between management and labour. The relationship between business and labour, however, wherever it is manifest—at the firm level, at the sector level, or at the national level through institutions such as ours—is pivotal to maintaining productivity improvements, and that's the second point.

Business and labour are, after all, ultimately responsible for the introduction and implementation of innovations in work organization, human resource management, and industrial relations that lead to improvements in micro-level productivity. Business-labour relations, admittedly, have a way to go, and there is evidence that poor relationships can be seen as a drag on workplace performance. Collectively, business and labour possess the capacity to directly control and influence productivity trends in a way that is not possible at another level.

In response to current competitive pressures and market shifts, firm level management must make strategic choices about production and technology, and, together with employees and their unions, employers must also make strategic choices about requisite organizational reforms and embark on a joint process for bringing these about.

In other words, business and labour are the major actors, and without their concentrated creative and long-term attention to organizational issues, some of the most obvious gains to productivity, such as the diffusion of communications and information technology, can simply not happen.

It's critical to note how this ongoing process in individual workplaces is facilitated at the sector level as well—for instance, in industry-wide human resource strategies, training programs and training financing arrangements that are frequently also jointly determined. Any discussion of workplace change and its impact on productivity must be broadly cast. There are in fact a number of industry-specific sector councils that allow the stakeholders to meet together to work out effective solutions that are sector-specific. They can also undertake specific research on issues or address concerns that have industry-wide relevance.

This broader casting must also account for local and national climates for industrial relations and our collective ability to resolve industrial conflicts. Our 1998 leadership survey, cited earlier, indicated a belief in both constituencies that a poor general state of industrial relations impedes productivity-enhancing progress within firms. Certainly this is evident in the recent upswing in strike actions across the country, despite the fact that time lost due to such disputes represents an extremely small fraction of the total working time.

Our organization has for many years focused on the establishment of best practices associated with high performance, high productivity strategies that employers, in collaborations with employees, can achieve in Canadian private industry and the public sector.

CLBC efforts have included studying what constitutes best practices in new modes of work organization, skills training, compensation, investment, employee participation, joint decision-making, and information-sharing. The CLBC efforts have also involved extensive consultation with business and labour across the country through local seminars and national forums and development and dissemination of resources that can help transmit some of the lessons learned and prompt innovative practices and systems in more Canadian enterprises.

Over the years, activity in the area of work organization, human resource management, and industrial relations has often taken the inevitability of productivity improvements as an article of faith. This was not an uninformed outlook, since there is a growing body of international research literature attesting to the payoff from workplace change, particularly where change has reflected bundles of complementary best practice, which include a greater degree of labour-management dialogue and joint decision-making.

As the CLBC developed its criteria for productivity-enhancing best practices, along with the large national inventory of examples, it relied heavily on the analysis provided by case studies. Case studies are rich in detail and potential interpretation, and this approach made sense with respect to our primary practical goal of identifying lessons learned and supplying information to members of both our business and labour constituencies. Case studies also help to isolate micro effects on productivity. Management often proposes workplace innovations to employees and their unions with the aim of positively influencing specific performance factors such as product quality, flexible workweek arrangements, or skills upgrading. Labour in turn translates these into specific gains to the workforce, such as job security, family leave, or training opportunities.

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Estimating the micro-productivity impact of what are usually diverse and interconnected practices and systems followed by multiple effects must be done over the long term to be captured fully. It's a complex exercise. It varies from site to site, from industry to industry, and according to the labour-management relationship that governs the process.

A particular challenge is the lack of on-site data collection for evaluative purposes. Recently, we've undertaken the development of a more precise tool for measuring these micro costs and benefits or those that occur at the primary sector levels, including the results for productivity that would add to existing case study data.

We have developed an impact profile that could be used to correlate workplace innovations with potentially higher operational performance over a longer time period and monitor future evolution. It includes taking stock of these variables identified as contributors to productivity and the diversity of work settings.

The impact profile is a tool that allows labour and management a means of observing tangible progress and their joint efforts at the firm and sector levels. Initial testing in four enterprises has yielded some salient information for both employers and employees. The impact profile allows management and labour to better plan their joint practices to improve workplace performances.

As global competition evolves, and the basis of Canada's economy and employment base increasingly reflect expanded use of knowledge, information, and technology, the labour-management relationship is all the more crucial to attaining our national productivity performance goals. CLBC research has found that most past and current change to work organizations, human resource management, and industrial relations that is potentially productivity enhancing has occurred when a crisis looms within a given primary sector. While this is not a bad thing in itself, it does suggest that further diffusion of best practices in the rest of Canadian private industry and the public sector cannot be taken for granted.

We have serious challenges in moving this agenda forward, particularly in small and medium-sized enterprises and non-manufacturing industries. The government has a role to play in collecting and helping disseminate information on best practices, particularly dealing with human resource management and labour-management cooperation. Therefore, for reasons of Canada's productivity performance, public policy has a strong interest in continuing to cultivate dialogue and collaboration between business and labour at all levels, and build on the success of innovative workplace change strategies jointly achieved in recent years.

Thank you very much.

The Chair: Thank you, very much Ms. Wortsman. Now we'll turn to questions.

Mr. Penson.

Mr. Charlie Penson (Peace River, Ref.): Thank you. I would like to welcome the panel here today.

Mr. Daly, there were a couple of things arising out of your presentation, and one of them has to do with the...you talked about government policy and how much that might influence the productivity issue. I noticed that Professor Fortin from McGill has suggested that government policy can have a great effect. He's suggesting paying down debts and getting taxes down as the two biggest issues in trying to get some of that reinvestment we're talking about in industry, and therefore a rise in productivity. Would you agree with him in that regard?

Prof. Don Daly: Yes, he gave really a very thorough talk—the C.D. Howe talk you are referring to. It is very complete. One of his areas for many years has been the broad mix of monetary and fiscal policy and debt and so on. Certainly, he's quite correct in terms of saying the key difference contributing to the tax differences between Canada and the United States is the higher interest burden that Canada has, and the effect then that the high corporate property taxation, for example, has. So I would agree with many of his points.

But one of the things he shows is that the increased demand that would come about through those changes in taxation and so on would reduce the productivity gap. From recollection, he thought that would only contribute about three percentage points, or about one-tenth the difference. He said it was important, but in terms of productivity it wouldn't be a central factor.

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I think the weakness in his story is that he really didn't have as good a handle on the micro aspects of productivity as he did on the broader issues of monetary and fiscal policy. It would help, but it wouldn't solve the problem. It wouldn't really do anything on this small versus large productivity gap, for example. So it helped, but only marginally.

Mr. Charlie Penson: Okay. You mentioned you were doing a study and were part way through it. I'd be really interested to get that study when it is finished. You talked about corporate tax levels, and I gather you were referring to the $200,000 amount that essentially hasn't changed over the year in terms of tax bracket and bracket creep. You mentioned that tax policy encourages the small and medium-sized enterprises to stay small. Can you just elaborate on what you mean by that?

Prof. Don Daly: Yes, this is quite an important point. The rationale is that with this large differential between the lower rate in profits up to $200,000 and the much higher rate above that, companies can say “Okay, we're getting close to the $200,000, let's do this, that or the other”. They neglect cost concerns because if they move above that $200,000, the increase in taxes is so dramatic that it discourages them from making that leap—together with the dividend tax credit.

Jack Mintz and some of his colleagues have documented the effects of this differential tax treatment quite well. Bob Brown was associated with that study too. One of the papers I am sending to the staff has full references to that. I think it's quite an important point.

Mr. Charlie Penson: A number of people have suggested that the $200,000 be adjusted for inflation; it has fallen far behind. Would you agree with that?

Prof. Don Daly: Yes, I would. When the measure was introduced, there was a desire to encourage small business. I don't think anybody had anticipated that so much of the employment increase would be associated with low productivity. That was not predicted. It was one of the things we had not predicted in the debate about free trade either—including myself. The difference is that I spotted the problem earlier than some of the others.

My understanding is that there is some consideration being given to the effects of the small business taxation because the Minister of Finance has asked for some of the material I've been making, and it has gone to the staff level as well. This seems to be one of the areas they're giving some attention to. What they're going to do, I don't know.

Mr. Charlie Penson: Okay.

The Chair: Thank you very much, Mr. Penson.

Mr. Malhi.

Mr. Gurbax Singh Malhi (Bramalea—Gore—Malton—Springdale, Lib.): How can we encourage an increase in national saving and investment? What part can the government play in giving some incentive to increase saving and investment?

Prof. Don Daly: Let me just put it in a little wider context first. The available data we have suggests that the quantity of capital we have for the average worker in Canada is actually higher than in the United States. In other words, we have a lot of capital. It's relatively more on the plant side than on the machine and equipment side. So I think more of the discussion about economic growth over the last three decades has tended to say the earlier discussion, with an emphasis on capital investment and savings, was one factor, but it probably over-exaggerated it, particularly for the Canadian situation. More important is investment in human capital, education and training, and so on.

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If you move on from those general remarks, more specific to what you're raising is the whole question of savings. We do have, in the tax treatment of RRIFs and so on, some important incentives to saving already. We have the treatment on RRIFs, where the amount of foreign content is limited to 20% of the value of assets. There are some considerations of that kind.

The savings rate in Canada has consistently been higher than in the United States. We've had a higher savings rate and a higher investment rate. It is not as high as Japan and not as high as some other countries. But on the whole, I'd be inclined to say that our savings record and our stock of capital really stand up fairly well. The problem is more that we've been making less efficient use of the labour and capital, rather than insufficient capital itself.

The Chair: Ms. Workman, do you have anything to add to that?

Ms. Arlene Wortsman: No.

The Chair: Mr. Malhi.

Mr. Gurbax Singh Malhi: I have another question. It may or may not be related to you, although you are from the Canadian Labour and Business Centre. You might have the answer for this.

This is a big problem, not in my constituency, but in most constituencies people are complaining about it. These days, small businesses or large businesses hire their employees through temporary agencies, and they are not using HRDC services. Can you suggest any incentives the government can give to businesses, so they go through HRDC to hire their employees?

Ms. Arlene Wortsman: Are you talking about specific incentives to hire temporary employees?

Mr. Gurbax Singh Malhi: No, I mean permanent employees. Some employees work, through agencies, for the same companies for one to two years.

Mr. John Cannis (Scarborough Centre, Lib.): They're hired through employment agencies.

Ms. Arlene Wortsman: I'm sorry, what is the question?

Mr. Gurbax Singh Malhi: Okay. These days, most businesses hire employees through temporary private agencies and they don't use HRDC services. Can you give the government some suggestions for incentives to businesses to use HRDC, so they can hire employees directly instead of through agencies? Some people have worked in the same place for the last two years through temporary agencies.

Ms. Arlene Wortsman: I understand what the problem is. I don't have a solution.

Do you have a solution?

Prof. Don Daly: No.

Ms. Arlene Wortsman: I'm sorry.

The Chair: Thank you, Mr. Malhi.

[Translation]

Mr. Dubé, do you have any questions?

Mr. Antoine Dubé (Lévis-et-Chutes-de-la-Chaudière, BQ): I missed Mr. Daly's presentation, but I would still like to ask a question.

As far as productivity is concerned, we are obviously comparing ourselves to the United States, since we are neighbours and they are an economic giant. I see you have data on taxation, but there is also the matter of the exchange rate.

Some observers say that because the exchange rate and the low Canadian dollar favour the exporting corporations or businesses, perhaps they have not made all the efforts they should have. Do you have an opinion on this?

[English]

Prof. Don Daly: I'll have to answer in English, I'm sorry. When I was with the government my French became pretty good, but I haven't had to use it in Toronto, so it's slipped.

Certainly I think your concern is right. We keep hearing of the effects of the exchange rate. One of the questions in the survey asks companies what the effects are and how they might be affected by an appreciation in the value of the Canadian dollar. Even though only a small number of companies have replied thus far, the answer is that it could have a very significant impact.

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The whole topic of the value of the Canadian dollar is a difficult one, because what I think has really been affecting the value of the Canadian dollar isn't so much the trade flows as much as it is the big drop in capital inflows due to a narrowing in interest rate differentials and so on. That hasn't been given much attention, but I think it's pretty fairly related to Bank of Canada policy.

One of the factors that contributed to the high interest rates and the strong dollar was a large federal deficit. With the shift from a large federal deficit to a surplus, the demand for funds domestically has eased considerably. That has been a factor in the drop in the interest rates in Canada, which has affected the dollar. But it clearly does have effects on the performance of Canadian companies both in terms of exports and in terms of import competition. It is an area of potential vulnerability that could have implications for small business particularly.

[Tanslation]

Mr. Antoine Dubé: You are making studies, the government is making studies and other countries are doing the same. I am trying to get a handle on this from the various documents that I receive, but I am no expert. I sometimes feel there is a language problem. Am I wrong in thinking that people are not all using the same scientific terminology and the same concepts? If that is the case, it must be a handicap for you.

[English]

Ms. Arlene Wortsman: I'd say that's a fair assessment.

There is no agreement on what the exact nature of the problem is. Our organization represents two different points of view, if you will. We have views from the labour community and we have views from the business community. Presumably you will hear representatives from them here at this table talking about their solutions and approaches at the macro level.

What we do have agreement on is that at the workplace level there are certain problems that are manifest there. With the rapidly increasing introduction of new technologies, the skill levels that are required in the workplace are constantly being moved up. That requires ongoing training. There are skill shortages starting to emerge in a variety of sectors, and it's anticipated that they will in more sectors of the economy.

One of the elements that there is some agreement on in measuring productivity is the nature of the investment in human capital. There is going to be a requirement for more investment in terms of training and new approaches to work arrangements. It is our view that this requirement is going to increase in the next little while. We have agreement there from both sides of our house, if you will—both labour and business—that this in fact is something that needs to be addressed. On the prescriptions that might take place at the macro level, that's open for interpretation still.

The Chair: Professor Daly, did you have something to add?

Prof. Don Daly: I'd certainly agree with what's been said. If you look at the amount of training that takes place in Canada, it tends to be relatively lower in Canada than it is in the United States and in Japan. There's much more attention paid to continuing training in Japan particularly, but also in the United States.

One of the reasons companies put forth as to why they do such a limited amount of retraining is high turnover. We tend to have a higher rate of turnover, of people moving from job to job, in Canada and the United States. Companies are concerned that if they put training into individuals, they can move and the benefits will accrue to the next company. That's one of the reasons the companies put forth as to why they do less training. But I would certainly agree that this is a very important area, and there has been talk about incentives related to the amount of training that takes place.

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Ms. Arlene Wortsman: Can I just add something?

The Chair: Sure.

Ms. Arlene Wortsman: Thank you.

What Professor Daly says is absolutely correct. We conducted a national training survey about five years ago, and it showed that the level of training that is done by the private sector is relatively low in this country. One of the reasons given is companies' concern that they would put an investment into an individual and that individual would then leave.

There's no guarantee any more that people are going to stay in their jobs. There's increased turnover. There's an expectation that people are going to move around in their job careers, both within their sector and across the sector. One of the approaches that has been developed is to take a sector approach in terms of training. That provides generic training overall in an industry, without worrying about specific proprietary concerns of individual companies, but while providing some of those very basic skills that are required. As the skill levels are ratcheted up, the levels are increasing and the sector councils can ensure that there's a certain level of standard that's constantly maintained within the industry. It's an approach that is gaining some popularity.

The Chair: Professor Daly, did you want a final comment there?

Prof. Don Daly: There's one additional thought that I might mention.

It used to be that when you finished high school, university or whatever, that was all the education you were going to get over the rest of your life. What's happened is that there has been an increased recognition that education is a lifetime learning operation. The number of books and articles is doubling every ten years, which means that five years out of university, half of what you learned could be obsolete. I think it's very important that we do more—such as round tables like this—to have continuing education, because it is a lifetime occupation. That's one of the reasons universities have sabbaticals. I think more of this type of thing should be done within government and within the business sector in order to allow people to get retrained.

With the increased importance of computers, information technology and so on, there are new techniques that weren't thought of when people my age went through school. This is a new area and it's important to understand it. If we don't do this, there can be a serious danger of conflict between senior managers who haven't been exposed to these ideas and the younger people with much higher levels of university education, with much more exposure to computers and to behavioural sciences. There is a potential for conflict between the management styles of the older managers who got promoted on the basis of experience and the younger people coming in on the basis of education. It's potentially a very serious conflict area within businesses.

When I run over these ideas with students, and particularly with the part-time students, I ask them whether this is an issue that they see in their own companies. I just ask for a show of hands, and all the hands in the whole room go up. They know I'm talking about real-world problems that they themselves have encountered. So it's a very important issue that will not be easily resolved, I'm sorry to say.

The Chair: Thank you.

Thank you, Mr. Dubé.

Mr. Murray, please.

Mr. Ian Murray (Lanark—Carleton, Lib.): Thank you, Madam Chair.

Professor Daly, I feel better already knowing that this is part of our continuing education. I often feel like we come to Parliament with a storehouse of knowledge and gradually deplete it over the years that we're here.

I wanted to ask you about manufacturing. I gather that's a specialty area of yours.

Prof. Don Daly: Yes.

Mr. Ian Murray: You've already mentioned that there was an expectation that manufacturers would be disciplined by the free trade agreements but that it didn't necessarily come to pass. Perhaps it did for some companies, but not for others.

I'd like to look at this whole question of whether manufacturing matters. You may recall that about ten years ago, I think, there was a fairly famous speech by the chairman of Sony, and he was saying that manufacturing is important to a country. What was then the Canadian Manufacturers' Association had a bit of a campaign called “Manufacturing Matters”.

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My concern is if Canadian manufacturers are not being disciplined by, say, free trade, global or otherwise, if they are protected by a lower dollar, we perhaps stand to be severely impacted by any increase in the value of the dollar. So should Canada be in the manufacturing business? Have we perhaps proven that we really can't compete, that it has been falsely propped up by the lower dollar, and that maybe we should be in service industries? In terms of straight economics, one could argue that you don't need manufacturing as long as you have a GDP that's sufficient and you're providing jobs and incomes for people.

Prof. Don Daly: You raise an important point, because the services have been an increasing share of the total economy, and the area that traditionally was a source of our strength in Canada, the natural resource export sector, including grains, lumber products, base metals, forest products, and so on, has been a falling share of world trade for a long time. The big increase in world trade has taken place in manufacturing.

There's a big contrast between what's happening domestically, with the big increase in employment in the service sector, which had been growing, and what's happening in international trade, where manufacturing is the growing share of world trade.

I've just finished a calculation that exports of goods are almost 80% of output in the goods-producing industry in Canada, but exports of services are only about 25% in the service sector. Services are much more produced and consumed on a very local basis. You're not going to go very far for a hamburger or a haircut, and so on. So that's an important distinction.

In other words, on the international trade side, manufacturing is quite crucial, and we can no longer count on the natural resource exports to be a source of our export earnings, which is so important.

In terms of international trade, what I think we have to do is try to improve our productivity performance, in manufacturing in particular, so we can stay competitive, provide jobs there, provide export earnings, and so on. We've had tremendous increases in volume in exports, and it's no longer just in auto; the big increases are taking place in the non-auto manufacturing sector.

So it is a very important sector, but it hasn't been undergoing the productivity increases and the narrowing of the gap vis-à-vis the United States that I and others had predicted and that we had hoped for.

In a sense, in some of my current research, what are the particular problems in small manufacturing establishments, and what might be done on a community basis or government basis, and also in the private sector—a lot of it is in the private sector—to improve performance? Rather than writing off manufacturing, I'd rather see an improved performance so that we can continue to contribute to that very important growing share of world trade, even though in terms of total employment it has been declining.

Actually, in terms of total man hours in manufacturing, of the 14 major industrialized countries that the Bureau of Labor Statistics has put together, employment in Canadian manufacturing has performed the best of all those 14 countries over the last 40 years. So we really have been doing quite well in employment. But in order to continue doing well in employment, I think we have to do better in productivity.

Mr. Ian Murray: I was interested in your comments about employment growth in small business versus large business. Saying nice things about small business is almost a mantra with politicians, and we're always talking about how the growth in employment is in the small business sector. But I'd like to know if you believe this is essentially because human beings are replacing investment in machinery or something else that would make business more productive, and it's larger businesses that, despite the higher corporate taxes, can afford to invest in that equipment.

• 1625

On the other hand, we have small business owners who tell us that because of the amount of payroll taxes they pay, they're hiring far fewer people than they would otherwise if the payroll tax weren't so high.

It's great to have increased employment, but is there a negative side to that employment in small business? As I say, is it replacing some other investment that should take place?

Prof. Don Daly: That's quite possible, and on your point that the larger businesses are relatively more capital intensive, have more widespread use of computers and faster adoption of new technology, there are a number of advantages that big business has, including relatively more access to a wider range of sources of financial funds, both internally and in the marketplace—bonds, stocks, banks, and so on.

Often there is a concern in small business about the financing side of it. I think sometimes the financial aspects of small business are overexaggerated. I think the managerial aspects of small business are quite crucial, but also very hard to research, very hard to identify.

Can you add more to that?

The Chair: Mr. Parsley.

Mr. Chris Parsley (Senior Chief Economist, Canadian Labour and Business Centre): I would just add that employment in small businesses tends to be, from the workers' point of view, a lot less permanent, and some people see that as a bad thing. But there are articles around that show people think that actually is a good thing. In small businesses, they have the ability to move around from job to job. Some people who are younger don't want to be tied down. So the whole argument about whether you should be employed in a large firm or a small firm really, when it comes down to it, depends on individual preferences to some extent.

In terms of the creation of small businesses, we've seen a lot of small businesses being created out of large companies, and there's an interdependence between those two. The smaller companies obviously depend on the large companies because they are customers. But the small businesses also give important services to the large companies, which is often neglected. We tend to think that somehow the relationship between the two is one-sided, but in fact from some of the stuff I've seen, that doesn't tend to be the case.

Mr. Ian Murray: Thank you.

The Chair: Thank you.

Mr. Daly.

Prof. Don Daly: If I could add to that, in mentioning this increased importance of small business, part of the growth in the service sector has been in business services, and quite often these are services provided by small businesses. So some big companies that previously would have had staff working at middle-level management have ended up laying them off as full-time employees, but in effect hiring them back as subcontractors. They would then show up in the service sector. This is quite important.

It's more uncertain. One of the advantages of it from the point of view of the large companies is that they no longer have to pay the costs of pensions and medical benefits, and so on, which had been alluded to, and the individual person then has to provide those himself.

Some of them also like the autonomy and choice and so on that they get in working in small companies rather than in large. I think some of them would be prepared to stay in small businesses even though they recognize that their incomes are less than what they would be with a larger company, but the greater flexibility and autonomy they have is sufficient compensation for that. I think that's a factor in the growth in business services and the increased importance of contracting out by large companies to smaller service providers particularly.

The Chair: Mr. Parsley.

• 1630

Mr. Chris Parsley: Just to build upon what Professor Daly was saying, some recent survey work that has come out shows that even in micro companies of less than ten employees, the levels of employee satisfaction are much higher than in a company of ten to fifty employees. Much of that comes back to what Professor Daly was saying about autonomy.

The levels of employment satisfaction in terms of relation to firm size tends to follow a type of wavy pattern. When you get up to the 500-plus level, the evidence is that there are a lot of dissatisfied employees because of the bureaucratic nature of a large organization.

But it's not just in small businesses where you'll find more employee satisfaction. It's in the micro businesses, the ones with ten and less, where some people would say there's a lot more dynamism going on, a lot more change happening. People tend to like that, at least according to the survey that has just been released.

Mr. Ian Murray: In this area there are a lot of companies where those people are waiting for their initial public offerings so they can all get rich. I think it's quite exciting, probably.

Voices: Oh, oh!

The Chair: Thank you very much, Mr. Murray.

Mr. Riis, please.

Mr. Nelson Riis (Kamloops, Thompson and Highland Valleys, NDP): Mr. Daly, in your work have you come across the situation where, to succeed, the owner or manager of a small enterprise has to be quite canny or creative, and rather than see the $200,000 as a limit, they perhaps would have a small business that would in fact be a composite of five or six small businesses, all operating under the $200,000 limit to avail themselves of the tax advantage? Is this something you've discovered in any of your work?

Prof. Don Daly: One of the interesting ones that has had some discussion is Magna Corporation. Now, I'm sure they're above the $200,000 limit, but their philosophy is that they're an agglomeration of separate companies.

As you know, they are a major producer of automotive parts and components and so on. When any particular company begins to creep above 100 employees, they set up another company and spin it off. So they try to keep it down.

Now, I doubt if that $200,000 limit would apply there, but I wouldn't be surprised if that happened in other smaller companies. I haven't seen any literature on it, or am not aware of actual cases, but as I say, I wouldn't be surprised if there were some.

Mr. Nelson Riis: Thank you. Good.

Ms. Wortsman, with regard to those corporations that would have a productive culture as part of them, in your studies, looking from a rather unique perspective at business and labour, is there something you could identify that obviously takes place in those as opposed to others that are less productive—for instance, something that is part of their corporate culture?

Secondly, you describe the area of agreement you've come to in your organization of the need for more training and education. This is hardly surprising, is it? If there's an obvious thing to observe for the last twenty years, it would be that—the need to upgrade your employees through training and so on. Why have we been so pathetically slow at figuring this out?

I mean, we talk about the knowledge-based economy until we're blue in the face. We know where the charts are, where the growth is and so on, and yet the way you describe it, here we've come to this awareness now that we have to train our employees and educate them. Duh. Where have we been the last thirty years on this, and why are we so slow on the uptake?

Ms. Arlene Wortsman: Let me answer your first question, where you asked about the corporate culture. I think in a couple of weeks Report on Business Magazine is going to be putting out its list of the 100 best companies to work for. One of the things they have discovered is that it's the quality of the human resource practices that exists in those companies that attracts people to come and work there.

So it's not just straight monetary rewards. Do they have practices and policies that allow people to balance work and family? Do they have training policies?

Mr. Nelson Riis: And these are productive firms?

Ms. Arlene Wortsman: Absolutely.

Mr. Nelson Riis: Not happy firms only, but productive and happy?

Ms. Arlene Wortsman: Presumably, if these are the best companies to work for, these are not companies that are in difficulty. These are successful, productive firms.

• 1635

The issue that firms are going to start to confront is the skills shortage, and as it grows, employers are going to be competing for desirable employees who have the skills and training that will meet their needs. In the past, employers had the say as to who they would choose to hire. Now it's a little tighter market.

That brings me to the second point, to the questions around training. One of the reasons we are going to have difficulties around skills shortages is partially around the increased technical requirements due to technology, but the other factor that is going to be playing a greater role is the impact of demographics—an aging workforce. As the baby boom goes through, more people are going to be coming to that retirement age. There are not enough people behind them in terms of replacement workers to satisfy the requirements of the labour market.

There's going to be a need to try to retain some of your existing workforce, to upgrade their skills, and to provide some flexibility in their options, such as phased retirement policies so that not everybody walks out the door at one time. Maybe it's a gradual exit, or maybe there are ways of incorporating succession planning at all levels of the organization. So it's going to require some creativity and some innovative approaches.

The Chair: Professor Daly.

Prof. Don Daly: Let me go to your question as to why in Canada we've been so slow to recognize the importance of continual training and so on.

I think two things are important. For one thing, we had been brought up so much to recognize the key importance of the natural resource sector, and we assumed that was going to provide us with high living standards ad infinitum. We tended to be complacent about the knowledge sector and the manufacturing sector and so on. I think that's one consideration.

The other thing is that the few studies that have been made of Canadian management indicate that they had been promoted to senior positions much later in their working lives than in the United States, and the average level of education was lower than for comparable managers in the United States. So they tended to feel, well, I got to the top of this organization with only so much education, so who needs it?

There was an almost ingrained reluctance to hire BComs and BAs and MBAs, and I think that's still a factor in why we're not getting the same degree of high incomes for university-trained people in Canada as they are in the United States.

This is one of the things that was pointed out in Fortin's talk, but he didn't provide this as an explanation.

So I think this is a factor. Until those managers are replaced by people with higher levels of education and more formal training, which is now regarded as an important part of all this, and a full knowledge of both computers and their importance in business, I think this can be a continuing problem.

Does that correspond with your experience?

Ms. Arlene Wortsman: Partially, but the other factor is that most of us don't like to change unless we're absolutely forced to. If companies or individuals were allowed to continue, then there was no reason to change.

Mr. Nelson Riis: But you said other countries have been much faster on this uptake. Are they coercing their employees into doing this re-education?

Ms. Arlene Wortsman: No, it's a requirement. But what has happened also is that with globalization and competition on a global scale, companies are now forced into it. They're not competing within just the domestic market. They're competing internationally as well.

What will help give the edge is the quality of their employees and the HR practices they put in place. So it becomes a business necessity to constantly provide that training and to make sure the skill level of your workforce is au courant, if not leading-edge.

The Chair: Thank you, Mr. Riis.

Mr. Lastewka, please.

• 1640

Mr. Walt Lastewka (St. Catharines, Lib.): Thank you, Madam Chair.

Mr. Daly, I come from the school that says skills and resources, innovation and design, and then process development will lead to and help the total quality of management. If we're a country that is involved in innovation and design, we get into products and services in advance of other countries, and when we go down on innovation and design, we follow.

Would you comment on the fact that our innovation and R and D has been low and on what that did to us in terms of productivity?

Prof. Don Daly: Let me make a couple of points about research and development initially.

The Canadian discussion of science and science policy for three decades or so has emphasized the relatively low ratio of research and development in Canada as compared with other industrialized countries. Let me suggest, though, that this is a misleading indication of the degree of access Canadian companies have to new technology, for two reasons.

For one thing, companies have access to not just the research and development done initially within Canada but also to purchased research and development. From the balance of payments statistics, you can look at the expenditures on purchased technology. It's just as large as, and even a little larger than, research and development done domestically. So you can buy it on the open market.

Small countries usually tend to have lower ratios of R and D than large countries because of that. Now, that doesn't fit all of them. Sweden, for example, is an exception.

The other thing is that in terms of manufacturing, the proportion of manufacturing in Canada that's operated by subsidiaries of multinationals, primarily U.S., is almost 50% of the total employment. The subsidiaries have relatively easy access to technologies through their parents. As well, if they have a problem, they can call somebody, and somebody will fly in from Buffalo or New York or California or wherever in a matter of hours to help them deal with their problems.

Earlier work that had been done by one of the government departments indicated that if you took account of purchased technology and that available to subsidiaries, Canada was really right up among the leading countries in terms of access to technology. So the problem is not lack of access but the fact that we're very slow in adopting new technology. This is especially so of small companies.

In the survey we did of only a handful of companies, only one of those companies was getting their new technology from research and development they were doing themselves. The other six out of seven were getting it from the suppliers of machinery and equipment or on the open market or from universities and so on.

So I think we've been preoccupied with research and development done domestically, giving insufficient attention to the problem of slow adoption of technology. That's the crucial issue.

There are a few areas where Canada led. We led, for example, in the adoption of oxygen furnaces and mini-mills in steel. So there were some exceptions, but most of the studies that have been made show that Canada was slower in adopting the new technology than other countries, and the problems of slow adoption are relatively more serious for smaller companies than large.

John Baldwin has done a study on that, and he may have alluded to that in his remarks when he was here.

If I were to encourage the committee to do anything, then, it would be to put more focus on the importance of adoption of technology rather than the research and development area itself.

• 1645

Mr. Walt Lastewka: I have two more questions. Do I have time?

The Chair: Sure.

Mr. Walt Lastewka: I want to back that up then into skills and resources that we have. I used to work for a multinational company, and when you compared engineers from one country to the next, I found out that the U.S. engineers were more entrepreneurial, more aggressive—as you just said—in adapting technology from wherever they could get it in their processes. Could you comment on that?

Prof. Don Daly: Yes, I think that's true. Now, historically, we had a much lower proportion of our total labour force with a university degree than in the United States. We're beginning to catch up in terms of the current output, but really the current output is only about 2% of the stocks, so it's going to take a long time for the increases in education currently taking place to work through. I've just completed some comparisons of the proportion of university graduates in science and engineering and computer work in Canada and the United States over a four-year period. The interesting thing is the proportion in Canada is now just identical to the U.S.

The difference is that the proportion taking business degrees and business training, the sorts of areas you were emphasizing in terms of human resources development, is the area where Canada is still below the U.S. Our output used to be half of the U.S.; now it's up to 60%. In the U.S. I think engineering schools were having a more successful blend of engineering with business school courses than what we've been able to do in Canada.

Queen's is an exception. Queen's has a strong engineering department, a strong business school, and they've worked very hard on integrating a business program and an engineering program. At York we don't have an engineering program, so we really haven't been able to do that.

A combination of engineering and science and business would really be important, and we haven't been as successful in that as they have been in the United States. I think that's a very important consideration.

The Chair: That's the last question.

Mr. Walt Lastewka: Ms. Wortsman, I'd like to ask you, if there were two initiatives you would recommend to improve Canada's productivity, what would they be?

Ms. Arlene Wortsman: Our focus is primarily at the workplace. What we see, because we are already in workplaces on a daily basis, is the requirement I guess for ongoing training and some kind of incentive program, particularly to assist small and medium-sized companies, because it's the larger companies that actually have an ongoing training program. It's clear that both managers and employees constantly need to upgrade and refresh their skill levels. With the increase and the rapid pace of technological change, it's going to be ongoing. So I guess that would be the first one, to make sure there are opportunities for training.

The other one is on issues around providing opportunities for alternative work arrangements. Last week there was a study that came out from Statistics Canada which talked about the high stress levels of Canadians. Well, that's increasing and people are going to need to find some balance. As companies are going to be looking to compete for workers, they're going to have to provide some alternatives other than straight monetary incentives.

Mr. Walt Lastewka: Mr. Daly, how would you answer that question?

Prof. Don Daly: I would share the first one, the importance of training. The second one is the importance of faster adoption of new technology. I don't have the answers to that.

Let me just talk briefly about Japan. Japan's most rapid growth in productivity took place very largely on the basis of purchased technology. At that time, the amount of research and development they did within Japan was very low, but they had spectacular increases in productivity. Almost 10% per year went on for a decade, a decade and a half.

• 1650

They did a number of things. They initiated work teams organized by the Japanese productivity agency, where they sent teams of people, including both labour and management representatives, to the major industrialized countries and reviewed what was done, did a write-up on a group basis, went back, and worked on the dissemination. So if you go through the Japanese productivity agency, they just have literally hundreds of videos and tapes and a tremendous emphasis on managerial techniques, much of the kind you're speaking of.

Another thing they did was to put a lot of work into getting access through their embassies and so on to all the latest scientific literature. They would airmail it back in the diplomatic bags to Tokyo, they would do translations into Japanese, and they would then make available through the 165 regional offices within Japan a summary of these latest articles. They would tailor them, so that they would be sending, say, to a textile company, new developments in the textile field, and machinery would go to a machining person. They would have a one-page summary in Japanese. If they wanted the whole thing, they could get the full article translated into Japanese, available in 24 hours. Their concentration was on purchased technology and rapid implementation and heavy training, and the results were just spectacular.

Now, I think we've tended to be preoccupied with the research and development side, which in a sense looks at jobs for scientists and engineers who have above-average incomes, but with insufficient attention to the adoption of those ideas on the plant floor, which is of course, as you point out, quite crucial. I think that's a shift of emphasis, and, if your committee could recommend it, I think it would be desirable to flag that as an area that has not had the degree of attention in Canada that it deserves, and that touches on our problem area.

Mr. Walt Lastewka: Thank you.

The Chair: Thank you, Mr. Lastewka.

Mr. Jones.

Mr. Jim Jones (Markham, PC): Thank you, Madam Chairman. Welcome, Professor Daly, and the Canadian Labour and Business Centre.

Professor Daly, you said we won't improve our living standards without an increase in productivity. I have some questions around that.

Long term, is having a low Canadian dollar good for this country and this economy? It might help in the trade surplus with the U.S., but is that good long term?

Prof. Don Daly: That's a hard question to answer. In a sense, the exchange rate is really a result of other policies, particularly monetary policies. And I think it has encouraged exports, it's reduced the degree of import competition, but it has increased the costs of purchased products, purchased materials, to Canadian companies. Our costs for fresh fruit and vegetables are higher because of the value of the Canadian dollar. It has a number of negative effects, but it's very hard to draw an overall net result of it. It has costs and it has benefits.

Mr. Jim Jones: In the last few years, the growth in the worldwide GDP has been increasing because a lot of developing countries are growing their economy. I know in the last few years the U.S.'s GDP has grown from 20%, roughly, to 25%. I was watching a program within the last year, and Bill Clinton was stating that his objective was to try to grow to 35%. Meanwhile in Canada, at one time we had 4% of the world's GDP, and we're shrinking. Maybe we're roughly around 2%.

• 1655

Why can the U.S. grow when the whole pie is growing, and yet we're shrinking, and we're shrinking even less than as the pie is growing? We're not getting our proportional share.

Prof. Don Daly: There are two things really.

One is that for a variety of reasons, the proportion of the Canadian population that's working and in the labour force has dropped particularly markedly in relation to the United States. Partly it's a matter of a different age distribution. That's part of the story, and that's a major factor.

The other one is the productivity performance, particularly in manufacturing, as I've alluded to before. I would say those are the two things.

This lack of convergence for Canada vis-à-vis the United States is a bit of a puzzler, because pretty well all of the other major industrialized countries—the European countries and Japan—have tended to converge towards the United States. And relative to, say, Japan, we have the advantages of foreign ownership, common language, and easy access to technology. We have all sorts of advantages, and yet we haven't been able to use them as effectively as Japan, where they have to do all sorts of things in translation and so on, and with a trivial amount of foreign direct investment in their country. They've been able to do it and achieve a convergence vis-à-vis the U.S. that we haven't been able to.

The reasons for Canada being an outlier on this one are not that clear. Some of the things we have alluded to, such as less continuing education, higher tax rates, and higher corporate profits tax rates—all of these things—could contribute to it. But how much of it is an explanation? I confess I don't know, and I haven't seen anybody who's been able to resolve that.

But it is an important question you're asking.

Mr. Jim Jones: My colleague said something about the knowledge-based economy. Of the U.S. economy, roughly 40%, and I think it was even as high as 45%, is in the high-tech or knowledge-based economy. Canada's economy is lagging around 19% or 20% in the high-tech or knowledge-based economy.

What do we have to do to start moving upward on this ladder so that we get more in parallel with the U.S. instead of lagging? A lot our economy is still in the resource-based economy.

Prof. Don Daly: To really do well in the knowledge-intensive industries, Canada needs three things. I'll just list them first and then talk about the evidence of them.

One, we need a supply of scientists, engineers, and people with computer skills. Secondly, we need people with business and managerial skills. Thirdly, so much of business now involves purchasing materials from other industries and other companies. We need low-cost purchased materials.

If you look at the evidence, in terms of the total stock, even though we're now beginning to produce as many scientists and engineers as the U.S., the stock is still lower. In other words, we have relatively fewer scientists and engineers. The proportion of small businesses that don't have a single scientist or engineering person on staff is really very high.

Secondly, the proportion of people who are getting training in business in Canada has now got up to about 60% of the U.S., but it had run for a long time at half the U.S. In other words, we have fewer people with training in management skills, including computers, behavioural sciences, and so on.

• 1700

The third area is the cost to purchase materials. When I've talked to companies, and from the earlier studies that have been made, it's been suggested that Canada tends to have higher costs on some of these components. For example, the cost of computers in Canada is going to be higher than in the U.S., in Canadian dollars and relative to wages and so on.

So in a sense, Canada is at a relative, comparative disadvantage in all three of the areas that you really need to be successful in this knowledge-intensive area. A number of studies have referred to the relatively spectacular improvement in productivity in the U.S. industries in this area, and Canada has very little of that. But the reasons for that are these three factors, and you have to deal with all three of them.

I don't know how you deal with the last one, higher-cost materials, but more education in science, engineering, and business—skills that are relevant to the knowledge—is important. That's part of education policy, but that's under the provinces, and the federal government has pulled back in a major way on established programs financing, so they're providing less funds to that. The universities are having real problems in allocating resources under that shrinking base and are having to push more of the costs onto the students.

Some consideration of all three of those areas is necessary. To only deal with one of them would be an incomplete part of the story. Does that make sense?

Mr. Jim Jones: Yes.

The Chair: Thank you, Mr. Jones.

Mr. Jim Jones: I have one last question.

The Chair: Briefly, please, Mr. Jones.

Mr. Jim Jones: Professor Daly, several countries are reducing their corporate or business tax to attract high-tech companies, both in manufacturing and in software or research and development work in that country. They're trying to attract the large corporations, growth, and expansion. Which is, in your opinion, more important: reducing corporate business tax or reducing personal income tax? Let's say our goal is to try to go from 8% unemployment down to 4%.

A voice: 7.2%.

Prof. Don Daly: One of the examples of a country that has done very well with a low corporate tax rate is Ireland. With a name like Daly, I just came back from there actually and saw firsthand, from visiting with my relatives and touring around, what they refer to as the Celtic tiger. It's based very much on low corporate tax rates, considerable encouragement of foreign direct investment, and also of course some of the benefits of being part of the European Union. So corporate tax is important.

In terms of overall productivity performance, the corporate tax rate and the small business tax rate are very important issues. But at the same time, in the long term, the only way we're going to be able to reduce our total level of taxation in Canada is if we reduce the share of interest charges on the public debt, particularly at the federal level. So some debt repayment in the short term would permit reductions in personal income tax in the longer term.

If we were able to achieve important productivity increases, then governments would have a significantly better flow of taxation than what they've had. One of the reasons their deficits have been high has been the degree of slack and unemployment in the Canadian economy, as Pierre Fortin referred to in his C.D. Howe talk.

So I'd put a higher priority on corporate profits tax considerations in the short term, but the much higher individual tax rates, as well as low incomes—$50,000 or $60,000 in Canada, compared to the U.S.—are a consideration in the brain drain, particularly for professional people, which is part of our problem.

• 1705

The Chair: Thank you.

Mr. Cannis, please.

Mr. John Cannis: Thank you, Madam Chair. Let me also welcome the panel. Professor Daly, I see this graph you have here is from 1973 to 1993. First I'd like to ask if there are any more recent stats or data. I'll tell you what I'm referring to. In one of your comments you talked about productivity and does it matter, and you outlined three areas—living standards, international competitiveness, and employment.

On the living standards side, how do we correlate the fact that the Canadian standard of living has been recognized internationally for so many years in a row? Is it the fact that unemployment since 1993 has gone from 11.45% to 7.2% nationally? Is it the fact that the debt-to-GDP ratio is on the decline? Is it the fact that the deficit is now eliminated and we are into a surplus? Is it the fact that on the corporate side EI contributions have come down in the billions of dollars, helping the employer and the employee?

What I would like to focus on is the knowledge retraining you talked about. When I look at that 1993 graph, you often referred to automation, computers, and what have you. In 1993 most of the businesses were running 360/20 systems, cumbersome systems in output. Productivity was down, it was hard, and nobody at that time talked about PCs, stand-alone, local area networks, wide area networks. It wasn't even heard about.

Today we have automation, and we have software being introduced, maybe sometimes on a weekly basis, that makes us more productive. So I'm curious if there's been a study since this, since we've moved from this resource-based economy to an information-based economy or a knowledge-based economy. Have you, your organization, and all the other organizations done a most recent study, say in the last four or five years, to see where we are in terms of productivity? Today we are faced with tools and retraining, for example. I agree with what Arlene had to say, and that is one of the biggest problems I've heard out there, the skill-level set that is lacking.

So maybe HRDC can look at retraining, which companies are not unfortunately investing in, would you say? Have you also measured, and I'll close with this, Madam Chair, the independent productivity. Over the last eight years, I would say, at least there's been such a tremendous increase in independent consultants, if you will, one- or two-man software designers, engineers that have gone on their own—

Mr. Charlie Penson: Is this a speech or what?

Mr. John Cannis: It is a speech, because I'd like to put some facts on record.

The Chair: Speed up your question.

Mr. John Cannis: My question is, has there been a study done in the last four years to measure productivity?

Prof. Don Daly: Yes, I'm making available to the staff one I'm working on, which is the basis of some of my remarks, including this chart. The next version of it will be presented at a conference in January, including some of the surveys of companies. Yes, there has been work. Pierre Fortin has a summary of this in the context of living standards with a good deal of documentation.

Some of the material I've been drawing on, including the chart you're referring to there, is based on census of manufacturing data. At the time that chart was done, 1992 was the last date available, done to 1996. John Baldwin, who testified at your last session, was the source of that paper. He's giving a paper at this January conference on small business productivity, which I'm looking forward to seeing. He will have some additional material on that.

I don't know whether he got into that in his presentation when he was here before, but certainly that is one that's coming. So there are a number of studies being done on productivity.

• 1710

Part of the problem is that some of the major government-funded agencies that have been involved in this area before—the Economic Council of Canada, where I got started in my interest in this area, the Ontario Economic Council, and the Science Council of Canada—were all abolished about five or so years back.

Some of these studies can only be done with the special resources of matching company data through Statistics Canada. John Baldwin has been involved in a lot of this, but his budget is limited. I've been trying for four years to get additional funding to finance exactly this area. We're still scrambling to get funds to interview small businesses. We got $25,000. That's about 15% of what we need, and we haven't got the rest of it.

So topics that I think are quite important in dealing with exactly the questions you raised have fallen by the wayside because the costs of doing it are more than university academics can finance.

Mr. John Cannis: So you will agree with me, Professor Daly, that lack of access to capital for yourself or funds to complete this study is hindering you.

Prof. Don Daly: Yes.

Mr. John Cannis: This is another area that's hindering productivity—access to capital for small and medium-sized businesses.

Prof. Don Daly: Yes. But let me go back just briefly to the difference in results of the sort of ranking Canada gets by the UN and some of the European agencies that brings these things together. Canada ends up with quite a high ranking.

What happens is some of their ranking is influenced by non-economic factors such as length of life and infant mortality and so on rather than economic. The economic ones do tend to show a much less promising picture than some of these other indicators.

Three months or so back, Bill Watson did a really first-class dissection in the National Post of the limitations of those other measures. It's just a classic. What I do is reproduce articles for my students, and that's one I've kept because it's just such a delightful discussion of the limitations in those other indexes and his preference for an economic measure such as GDP or productivity, which is what I've been tending to emphasis.

The Chair: Thanks, Mr. Cannis.

Mr. Pickard.

Mr. Jerry Pickard (Chatham—Kent Essex, Lib.): Thank you very much, Madam Chairman.

I hear all the time the government is responsible for the brain drain in Canada. I think what I'm hearing outlined is we need specialized people in specialized skill areas and probably a multitude of skill areas, not a single skill area.

I look at two or three questions that relate to our productivity and the people who are going to be in the field moving corporate entities along.

It's simple enough when I look at the medical profession. We need more doctors. We don't have facilities. We don't have training institutions. We don't have the university support, medical schools, and it will take time to develop those within universities. Certainly our projections for that development were wrong 10 or 15 years ago. That's not only in the medical profession but in all related areas. They didn't look at specialization of doctors. They didn't look at some of the factors that affect it.

I would guess from my own perspective the same problem has happened with the advancing technology at the speed it's moving, and quite possibly we haven't been able to keep up in the training side of it. Therefore opportunities in the U.S. are maybe more plentiful and people are going there just as a matter of being able to enter and participate at the levels they wish to. That's one.

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Secondly, I had a fellow come to me last week and describe this great new skill his son is working on in California. It's a real estate proposal showing a 3-D screen, and you can see everything that's in a room. You can see the house on a 3-D scale. They put everything in the computer system. In other words, it's high technology again. He said his son had got into the business. The business is now very large, employing 150 people in California, with unlimited expansion. He wishes his son were in Canada, but the opportunity wasn't here.

Possibly you could help me understand a little bit more about opportunities here, what we need to do in order to meet those opportunities, and where we should be going in order to give opportunity. Maybe the other side of this is that we need to, as you were suggesting, adapt and adopt technologies, bring them into Canada, and see if we can move forward at a more rapid pace. I don't know, but if you would comment, I would appreciate it.

Prof. Don Daly: On the medical and nursing side, the data does indicate that the migration of Canadians to the U.S. in those two areas is very, very high. It's becoming a real problem. Ivan Fellegi brought together all the material on the brain drain, and this is one of the areas he identified as a serious loss.

The cost of educating a medical doctor in terms of public funds... The president of the University of Western Ontario put this together, and I may not have the numbers exactly right, but I think it's something like $600,000 over and above the cost of the fees to finance a medical education. For that to happen and then for them to go to the United States is a big loss. That is a real problem area that will take a long time to solve.

On your example of the real estate technology, let me give you a personal example. My oldest son was in the area of developing computer access, with photographs and so on, for real estate. A client could come in and identify the region—and the one they were testing was Ottawa—and the price range they would be prepared to consider for a house, press a button, and it would show up on the screen in about five seconds all the houses that were listed in those regions and in that price range.

When that company—and it was one of the largest real estate companies in Canada—got into financial difficulty, it was that group that was let go. They ended up selling the technology, so that after all the staff had gone, a major source of income to that company was the sale of that product and that technology to the United States. So we got it started, and now...

He's in a different area now.

Mr. Jerry Pickard: But moving a step forward from that, can government do something about that? Are policies required in order to move ahead, or is it just that larger markets and more money and more developed corporations gain the benefits of quick movement?

Prof. Don Daly: Well, certainly a part of it is the larger markets, which permit the large overhead fixed costs of developing a new technology. Quite often these things are quite costly to develop—they have high fixed costs—but then they cost very little to operate—they have very low marginal costs. So there are advantages to being able to do this in a large market. With free trade, that should improve our position relatively.

That's one aspect of it, but the other one is that the U.S. has a tradition in its history of putting high priority on change, revolutionary change—the War of Independence, the Civil War. Canada tends to be much more conservative in the sense of moving by degrees. It took until 1923 for the Statute of Westminster to have some degree of dominion status. In fact we had effective Canadian government earlier.

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It's much slower. There's much more reluctance to change, and there's a tendency to favour slow change rather than rapid change. One of the sociologists—and his name has slipped my mind for the moment; it will come back to me when I've gone—has written a book dealing with this question of the differences in attitude to change between Canada and the United States. The United States just has a tradition of being more open to change than Canada has been.

History is very slow to change. It has some advantages, but until we see a greater openness to change and a greater willingness to be entrepreneurial in small businesses, as was alluded to before, until some of those things develop in Canada, it may be very hard for us to turn that story around.

Mr. Jerry Pickard: I've run out of time. I'll just ask Arlene and Chris if they have anything to add, if that's fair. If not...

The Chair: Do you have anything to add, Ms. Wortsman or Mr. Parsley?

Ms. Wortsman.

Ms. Arlene Wortsman: In terms of the cultural approach—

Mr. Jerry Pickard: Personal resources and what's happening with the brain drain and education.

Ms. Arlene Wortsman: Let me talk about what we see at the workplace, because we see it on a daily basis. Reference was made to the knowledge sector and the high-tech sector, but what we're seeing right across the board in all sectors is the increasing introduction of new technologies, from the very lowest level right up to the most senior levels. This requires training and supplementing the skill sets of everybody within those workplaces.

What we don't see is a commitment to do all that, only when forced to. There's not enough of a proactive approach. That's what's missing. I'll leave it at that.

The Chair: Thank you very much, Mr. Pickard.

I want to thank all of our witnesses for joining us here today. It's been very interesting and obviously can add a lot of food for thought as we continue on in our study.

If you have any further comments, or Professor Daly, when your report is done, we'd appreciate it.

Do you have any closing comments, Professor Daly?

Prof. Don Daly: I'd just like to comment that the overall level and calibre of the questions has been very high. I was questioned like this in the OECD and on some of my PhD exams. You've done your homework, and you're asking some very thoughtful questions. I wish we could give clearer answers to some of them, but when and if we do, we'll let you know.

The Chair: Thank you.

Ms. Wortsman.

Ms. Arlene Wortsman: We'd like to thank you very much for the opportunity to address you. We agree with Professor Daly about the calibre of the questions, some of which we have no answers to.

One piece of work that might be of interest to you, which should be available early in the spring, is we will be going out to survey business and labour leaders across the country on their perceptions of the economic problems confronting the country, as well as issues about what needs to be done within the workplace. Those results should be available sometime in March.

The Chair: Thank you.

We do appreciate it, and as Professor Daly pointed out, we're all continuing to learn as we continue to study this matter. When we stop, we should be here, so we'll still be around.

I'm going to adjourn this part of the meeting and we're going to move into a steering committee meeting.

The meeting is now adjourned.