True, Canada’s level of education may not be the best it could be, and arguments have been made that this country would benefit from a higher proportion of Ph.D. graduates and graduates in science, math, computer science, and engineering. With this as a background, this study asked whether Canada’s average educational attainment acted as a constraint to the accumulation of physical capital.

The answer is no. Human capital accumulation should be accompanied by physical capital accumulation. The report makes the claim, based on theory supported by international empirical evidence, that human capital accumulation should be accompanied by physical capital accumulation. Indeed, they showed that countries with a higher proportion of the population 25 to 64 years of age with just basic educational attainment tend to have a lower capital/labour ratio than do others.

On the other hand, countries with a higher proportion of the population with higher educational attainment rates tend to have a higher capital/labour ratio than do others. In Canada’s case, notwithstanding a possible shortfall in Ph.D.s and graduates in disciplines that support innovation, the country is blessed with a highly educated populace. In fact, it has been showed that Canada’s labour quality has been improving steadily over time. One would expect the capital/labour ratio to follow suit.

But Canada’s capital/labour ratio experienced a dramatic growth slowdown beginning around 1984. This capital/labour ratio slowdown has also been accompanied by sluggish productivity growth. In other words, Canada’s capital/labour ratio is below the level one would expect it to be, given the average educational attainment of its population. Therefore, they conclude that human capital accumulation has not been a constraint on capital investment. Thus, some other factors must be at work, limiting growth in Canada’s capital/labour ratio and impeding stronger gains in the country’s productivity. they conclude that human capital accumulation has not been a constraint on capital investment.

The report then goes on to examine whether the post- 1983 capital/labour ratio slowdown, along with the accompanying productivity woes, has been confined to a few industries or whether it has been a broad-based phenomenon. It clearly shows that the slowdown has been fairly widespread across industries. Therefore, one cannot pin the blame for the weak growth in both productivity and the capital/labour ratio on just one or two industries, nor can one claim that a change in the country’s industrial mix played a role in the slowdown. In other words, the economy has become more services oriented over time and goods production has become less important. The fact that the services sector is less capital intensive than the goods sector is not a factor behind the overall slowdown, given that capital intensity growth slowed in both the goods and services sectors.

At the same time, this report showed that the capital/labour ratio and productivity growth slowdown has occurred in most provinces. With human capital accumulation, changes in industrial structure, and problems in one province rejected as possible explanations for the capital intensity and productivity growth slowdown, the report concluded with other possible explanations. They include onerous capital taxes, the exchange rate, weak venture capital markets, under-investment in public infrastructure, and burdensome government regulation. Canada has one of the most onerous effective marginal tax rates on capital in the developed world. This has stymied investment in productivity-enhancing M&E. Fortunately, progress is being made. The federal government eliminated the capital tax in its 2006 budget, and Ontario is following suit with the scheduled elimination of its capital tax by 2010. Nevertheless, other provinces still levy a tax on capital. Therefore, more needs to be done.

The weak dollar in the 1990s and early 2000s also played a role in Canada’s sluggish capital intensity growth and accompanying weak productivity growth. The weak Canadian dollar made productivity-enhancing M&E produced in the U.S. relatively more expensive than domestic labour. Therefore, the weak loonie created the incentive for Canadian firms to substitute imported labour for capital. Fortunately, the recent strength in the Canadian dollar has been accompanied by an uptick in the capital/labour ratio, boding well for future productivity growth.

Canada suffers from a large and growing public infrastructure shortfall. At the same time, Canada suffers from an underperforming venture capital market. Entrepreneurs, the main source of radical innovations, depend upon venture capital financing to sustain and grow their businesses. The fact that new firms are probably not receiving the financial support they need, especially when compared with their U.S. counterparts, has limited the number of new successful firms to come out of Canada, hurting the country’s productivity growth performance. As well, under-investment in Canada’s public infrastructure has also played a role in the country’s lagging productivity growth performance. The consensus is clear: Canada suffers from a large and growing public infrastructure shortfall, especially in transportation. In particular, congestion on the country’s railways and roads increases the cost of doing business, thereby impeding productivity growth.

But Canada’s capital/labour ratio experienced a dramatic growth slowdown beginning around 1984. This capital/labour ratio slowdown has also been accompanied by sluggish productivity growth. In other words, Canada’s capital/labour ratio is below the level one would expect it to be, given the average educational attainment of its population. Therefore, they conclude that human capital accumulation has not been a constraint on capital investment. Thus, some other factors must be at work, limiting growth in Canada’s capital/labour ratio and impeding stronger gains in the country’s productivity.

The report then goes on to examine whether the post- 1983 capital/labour ratio slowdown, along with the accompanying productivity woes, has been confined to a few industries or whether it has been a broad-based phenomenon. It clearly shows that the slowdown has been fairly widespread across industries. Therefore, one cannot pin the blame for the weak growth in both productivity and the capital/labour ratio on just one or two industries, nor can one claim that a change in the country’s industrial mix played a role in the slowdown. In other words, the economy has become more services oriented over time and goods production has become less important. The fact that the services sector is less capital intensive than the goods sector is not a factor behind the overall slowdown, given that capital intensity growth slowed in both the goods and services sectors.

At the same time, this report showed that the capital/labour ratio and productivity growth slowdown has occurred in most provinces. With human capital accumulation, changes in industrial structure, and problems in one province rejected as possible explanations for the capital intensity and productivity growth slowdown, the report concluded with other possible explanations. They include onerous capital taxes, the exchange rate, weak venture capital markets, under-investment in public infrastructure, and burdensome government regulation. Canada has one of the most onerous effective marginal tax rates on capital in the developed world. This has stymied investment in productivity-enhancing M&E.

Fortunately, progress is being made. The federal government eliminated the capital tax in its 2006 budget, and Ontario is following suit with the scheduled elimination of its capital tax by 2010. Nevertheless, other provinces still levy a tax on capital. Therefore, more needs to be done. The weak dollar in the 1990s and early 2000s also played a role in Canada’s sluggish capital intensity growth and accompanying weak productivity growth. The weak Canadian dollar made productivity-enhancing M&E produced in the U.S. relatively more expensive than domestic labour. Therefore, the weak loonie created the incentive for Canadian firms to substitute imported labour for capital.

Fortunately, the recent strength in the Canadian dollar has been accompanied by an uptick in the capital/labour ratio, boding well for future productivity growth. Canada suffers from a large and growing public infrastructure shortfall. At the same time, Canada suffers from an underperforming venture capital market. Entrepreneurs, the main source of radical innovations, depend upon venture capital financing to sustain and grow their businesses. The fact that new firms are probably not receiving the financial support they need, especially when compared with their U.S. counterparts, has limited the number of new successful firms to come out of Canada, hurting the country’s productivity growth performance. As well, under-investment in Canada’s public infrastructure has also played a role in the country’s lagging productivity growth performance. The consensus is clear: Canada suffers from a large and growing public infrastructure shortfall, especially in transportation. In particular, congestion on the country’s railways and roads increases the cost of doing business, thereby impeding productivity growth.