Although employment growth continued to be respectable through 2006, output growth slowed – signifying yet another reduction in productivity growth:

Statscan’s Philip Cross tries to figure out why (22-page pdf), paying special attention to sectoral and regional factors:

Last year’s drop in mining productivity was part of a long-term downward trend. The declining productivity of conventional wells and the shift to lower-productivity output from the oilsands is reflected in a 28% drop in labour productivity in mining since its peak in 1999 (Figure 5). Most of this reflects a 60% hike in employment in the oil and gas sector, almost all in Alberta. The employment increase in mining was led by the oilsands, which hired thousands of workers on mega-projects that will not begin producing oil for years, given the long time required to build an oilsands plant…

The downturn in manufacturing productivity in 2006 reflects a slump in
output, which lowered capacity utilization (the main determinant of
productivity in the short-term). Manufacturing output fell 4.8% in the
first 10 months of 2006 (it recovered slightly at year-end), and
productivity typically falters during contractions…

Several measures show declining labour quality, especially in
Western Canada, where employers faced severe shortages. Employment rose
faster last year for the youngest and oldest segments of the population
— the least productive — than workers in their prime
(between 25 and 54 years old)… In Alberta, people with high school education or less accounted for
over half of all employment growth in 2006. This was by far the most
ever, and a marked change from the 1990s when employers showed a marked
preference for people with more than high school education.

But there’s some hope that the reduction in productivity growth will be temporary:

While the shift from conventional oil fields to the less-productive oilsands has depressed output per employee in the short-run, this is likely to be a short-lived effect. As the oilsands gear up production, output per employee will increase, even if the level is not as high as from conventional fields. More generally, it is to be expected that the extraction of oil from the oilsands will become more efficient over time. Oilsands technology today is more advanced than a decade ago, and advances in ‘in situ’ production promise further gains…

Business investment points to better productivity growth. Fuelled by record high profits, firms have stepped up investment outlays by a steady 10% in each of the last three years. The increased competitive pressure on firms caused by the sharp rise in the exchange rate since 2003 would be a major incentive for firms to spend more. Similar pressures in the U.S. early this decade led to a sharp improvement in productivity… [I]t is rare for productivity to slump for an extended period when investment is expanding. This is encouraging for a rebound in productivity growth in the short run, holding out some prospect that the current slump will not be as prolonged as in 2002-2003. One factor that may explain the divergence of investment and productivity in 2006 was that so much of investment was driven by the energy sector, where the pay-off in higher output will not materialize until later.