Regional Dimensions of GDP, Profits and the Return on Human Capital (RHC *tm)

Travis Fast

Much attention has been recently paid to the absurd levels of profit growth in the Oil Having Provinces (OHPs *tm) compared with wage growth. In what follows I will present a couple of the comparative macro-economic charts on this topic.

As the first graph clearly demonstrates the dizzying heights profits, as a percent of labour income, have reached in the OHPs. However, this trend, although not as perverse, is persistent for the country in the aggregate. At the provincial level, corporate profits in New Brunswick, Québec, Prince Edward Island and Nova Scotia performed well under the national average and Ontario, Manitoba and British Columbia performed just under the national average. Note that the national average is by construction a weighted average.

From this it is often concluded that what we are witnessing is the perverse effects of a resource inspired boom in oil resource profits. And while this is undoubtedly true, such an analysis misses a couple of important points. First, as already mentioned the rise in the ratio of corporate profits to labour income has been the general trend of the last eighteen or so years.

Second, from a historical perspective these general levels are not without precedent as the second graph above shows. Indeed, a similar (profits to labour income) ratio was achieved back in 1974. What is novel is that the trend and level has, if averaged, been relatively stable over the past eight years whereas in 74 it was quite novel and short lived. Moreover, the correlation with the price of oil is rather weak (see graph below). In 1974 the inflation adjusted average cost of oil was $39.77. In 1980, the price of oil peaked at $99.50. And here is the kicker, in inflation adjusted dollars the price of oil over the last 7 years was $42.52 ($64.92 in 1997).

So clearly there is something more than the price or quantity of oil at work here. That is even if one concedes there has been a resource boom driven by the price of oil this does not explain why the revenue earned is divided as it is between employees, shareholders and government. That is a political question as is the national ratio of profits to total labour income. The oil boom only exaggerates the consequences of an existing economic structure.


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