Statistics Canada notes that the Canada-U.S. productivity gap has widened substantially. The Fraser Institute estimates that from 1981 to 2024, U.S. labour productivity increased roughly 127%, compared with 61% in Canada.

Why this Matters

Productivity is the primary driver of real wage growth, living standards, government revenues and international competitiveness.

The U.S. productivity rebound has been driven by strong business investment in technology and AI, increased spending on software, data centres, and automation, and more robust business formation and firm growth.

Canada has generally lagged in business investment per worker, technology adoption, research and development spending and capital deepening.

AI: Opportunity or Risk for Canada?

AI is unlikely to be a job killer, but it could become a major productivity enhancer. AI is having an asymmetric impact on jobs. Rather than eliminating work across the board, AI is reducing demand for occupations dominated by routine, structured, and repetitive tasks while increasing demand for jobs that require analytical thinking, creativity, judgment, technical expertise, and interpersonal skills.[1]

For Canada, this is particularly important because:

• Canada’s population is, on average, older than that of the U.S. Canada had a larger Baby Boom, and unlike the U.S., Canada’s Millennials do not outnumber Baby Boomers. Canadian labour force growth is slowing as the population ages. Births minus deaths will become increasingly negative by 2028.
• Productivity growth has been weak for nearly a decade.
• Future increases in living standards will depend more on producing more output per worker than on adding more workers.

Why Canada Is Aging Faster

1. Lower Birth Rates

Canada’s fertility rate is among the lowest in the G7 and has fallen to record lows.

• Canada: ~1.3 births per woman
• U.S.: ~1.6 births per woman
• Replacement rate: 2.1 births per woman

While both countries face demographic aging, Canada’s fertility decline has been steeper.

2. Longer Life Expectancy

Canadians generally live slightly longer than Americans, which contributes to a larger share of seniors in the population.

3. Baby Boomer Retirement

Both countries are experiencing the retirement of the Baby Boom generation, but Canada entered this phase with an older age structure and lower fertility.

4. The Immigration Wildcard

Immigration is the key reason Canada may avoid an even more dramatic aging problem.

Canada admits immigrants equal to roughly 1%-1.5% of its population annually, among the highest rates in the OECD.

Most newcomers arrive between ages 25 and 40, which:

• Boosts the working-age population
• Increases labour force growth
• Slows the rise in the median age

Without immigration, Canada’s median age would likely be approaching 45 years already.

The Productivity Connection

This is where demographics and productivity intersect. Historically, economies grow through GDP. GDP Growth = Labour Force Growth + Productivity Growth. For much of the past decade, Canada relied heavily on population growth to drive economic expansion.

The U.S., by contrast, has benefited from faster productivity growth, stronger business investment, and larger technology sectors.

As Canada’s population ages, labour force growth will slow, healthcare spending will rise, and the ratio of retirees to workers will increase. This means that future Canadian prosperity will depend increasingly on productivity growth rather than population growth.

Why AI Matters More for Canada Than the U.S.

One could argue that AI is actually more important for Canada than for the U.S.

The U.S. has two growth engines: population growth and strong productivity growth. Conversely, Canada has increasingly relied on immigration-driven population growth. Going forward, Canada will need a second engine.

AI and technology-driven productivity gains could:

• Offset labour shortages
• Increase output per worker
• Support higher wages
• Help finance rising healthcare and pension costs

What Most Demographers Expect

Most projections suggest that by the mid-2030s:

• Canada’s median age will remain above the U.S.
• The share of Canadians over 65 will remain higher than in the U.S.
• Immigration will slow, but not stop, population aging.
• Productivity growth will become the critical determinant of living standards.

Canada’s biggest long-term economic challenge is not population growth—it is generating enough productivity growth to support an older population. AI may be one of the few realistic ways to achieve that without requiring ever-higher immigration levels. As Canadian firms adopt AI aggressively, the technology could help narrow the productivity gap.

A striking statistic is that in 2024, U.S. productivity growth (2.3%) was almost four times Canada’s pace (0.6%). If that differential persisted for a decade, the impact on relative living standards would be substantial.

Bottom Line

Canada does not have an unemployment problem; it has a productivity problem. AI may be the best opportunity in a generation to address it.