Lessons from the farming revolution

Mark Milke and Lennie Kaplan, Financial Post, March 10, 2021

In life we often take a lot for granted. Exhibit A: the technological revolution that gave us modern farming. Being a farmer centuries ago was best illustrated by Flemish artist Pieter Bruegel the Elder. His The Harvesters, painted in 1565, shows labourers gathering wheat and tying up the stacks by hand.

That was then. But over the past 100-plus years, farming across most of the world moved from backbreaking labour for men, women, children and animals alike to increased mechanization. Fields formerly worked by hand or by hoof have more recently been tilled and harvested with mechanized vehicles such as tractors and combines. That change, and many others, brought greater yield per hectare, more food to sustain growing populations worldwide and, usually, more income for farmers.

Farmers producing much more food with much less effort is an example of how capital investment — in this case in machinery — can boost labour productivity and lead to a much better life for all. For, as the Business Council of British Columbia puts it, “a country’s standard of living ultimately depends on its labour productivity, that is, its ability to generate the highest possible level of income or output per unit of labour input …”

Canada’s most productive industry is the oil and gas sector. Despite energy price gyrations over the past two decades, oil and gas has continued to be an important contributor to Canada’s labour productivity and therefore higher living standards for Canadians.

Why labour productivity is high in oil and gas is no mystery. What drives productivity are a skilled work force, innovation and capital investment. Oil and gas has all three in abundance but, in particular, workers in the sector use prodigious amounts of capital. Think of Bruegel’s farmers: 20 people cutting and bundling wheat by hand produce much less per hour than 20 people driving combines. Even one person driving a combine can massively out-produce 20 people working by hand.

It’s the same in the oil and gas sector. All the capital investment, including in machinery and technology, to extract much more oil and gas from deep underground with less labour is what leads to high per-hour outputs. The dollar value of oil and gas sector output does fluctuate depending on both the price of petroleum and how close the industry is operating to its capacity. But despite these ups and downs labour productivity in the sector is consistently high. It was $936 per hour in 2000, dropped to $402 per hour in 2012 but rose again to nearly $700 per hour as of 2019, the most recent year for which this statistic is available.

To be clear, workers in the industry, though they do well, don’t make that much money per hour. A large chunk of what they produce goes to paying for the capital and innovation that make their output so high. But they can’t be paid high wages on a sustained basis unless their productivity is high, which is why in the long run labour productivity is key to living standards.

Some sub-sectors in oil and gas extraction have lower productivity than that nearly $700 per hour, some higher. For example, labour productivity in pipeline transportation was “just” $414 per hour in 2019, while in conventional oil and gas extraction it was $514 per hour and in non-conventional extraction, i.e., the oilsands, it was fully $1,090.

In comparison, the average labour productivity for all Canadian industries taken together was only $60 per hour in 2019. Again, that’s an average so some industries did better: labour productivity per hour was $196 in mining, $169 in telecommunications, $149 in real estate, $77 in finance and insurance, $75 in motor vehicles and $68 in aerospace products and parts. On the other hand, some industries did worse, including agriculture, forestry, fishing and hunting at $54 per hour, transportation and warehousing at $51, construction at $49, retail sales at $33, arts, entertainment and recreation at $28 and food services at just $23 per hour.

To put things in relative terms, labour productivity in oil and gas extraction, at $700 per hour in 2019, was nearly 12 times the all-industry average of just $60 per hour. That kind of productivity, like the revolution in farming over centuries, can also easily be taken for granted. But that would be a mistake. While labour productivity isn’t the easiest concept to grasp, it matters — a lot.

Higher labour productivity in oil and gas extraction has led to Canadians doing much more with less — their homes are a lot easier to heat with natural gas than chopped wood — but also to significantly higher wages, higher investment by industry, more taxes and royalty revenues for governments, and much, much else that contributes to our high standard of living.

Mark Milke and Lennie Kaplan are with the Canadian Energy Centre, an Alberta government corporation funded in part by carbon taxes. Their recent report is $60 vs. $700 per Hour: Labour Productivity in Oil and Gas Extraction Compared with Other Industries. Image credit: Metropolitan Museum of Art.