Magazine article International Productivity Monitor

Productivity Growth in Canada and the United States: Recent Industry Trends and Potential Explanations

Magazine article International Productivity Monitor

Productivity Growth in Canada and the United States: Recent Industry Trends and Potential Explanations

Article excerpt

Canada's labour productivity declined relative to that of the United States from the mid-1980s to 2010. This relative decline tended to hold back growth in Canada's standard of living relative to that in the United States, as well as Canada's relative competiveness. However, in recent years, this pattern reversed itself. Since 2010, Canada experienced gains in relative labour productivitygrowth compared to that of the United States. The reversal arises both from weaker labour productivity growth in the United States, following the financial crisis of 2008 and 2009, and from more robust labour productivity growth in Canada.

The long decline in Canada's relative labour productivity caused considerable concern in Canada, and was the source of numerous studies. Gu and Ho (2000), Faruqui et al. (2003), Ho, Rao and Tang (2004), and Baldwin and Gu (2007) compared industry productivity growth rates in Canada and the United States. They found that Canada's labour productivity relative to that in the United States started to decline in mid 1980s, and that the decline was mainly due to lower multi-factor productivity (MFP) growth in Canada. The effect of capital deepening and the effect of changes in labour composition towards more experienced and more educated workers were similar in the two countries. They also found that ICT (information and communication technologies) service industries and high-tech manufacturing (ICT manufacturing and machinery manufacturing) were major sources of difference in relative productivity performance starting in the mid-1980s. (2) Along a similar vein, Sharpe (2003) and Baldwin and Gu (2007) traced the causes to lower innovation performance and lower investment in ICT technologies. More recently, Sharpe and Tsang (2018) and Baldwin and Willox (2016) examined recent developments for productivity growth in Canada.

This article investigates the forces that are driving the reversal after the 2008-2009 financial crisis. It provides a comparison of productivity growth in Canada and the United States over the period from 1987 to 2016, with a focus on the sources of the recent gains in Canada' relative productivity performance after 2010. To understand the sources of these differences at the industry level, industry productivity statistics published in the two countries are used.

While Statistics Canada has published MFP statistics for individual industries of the business sector since the early 1990s, those data have only become available recently in the United States. The main objective of the article is to trace the difference in aggregate labour productivity growth and its three main components into the contributions of individual industries. Those three components are: capital deepening effect, skills upgrading and MFP growth.

More comparable estimates of output, capital, labour, and intermediate input and productivity growth at the industry level for Canada and the United States have become available recently from Statistics Canada and the U.S. Bureau of Labor Statistics (BLS). The most important changes to the estimation that contribute to greater comparability of the estimates come from revisions to the measurement of capital input in Canada and labour input in the United States. The revisions to Canadian data are summarized in Baldwin et al. (2014), which now use a method for estimating capital input that is similar to that by the U.S. BLS. Capital input and user cost of capital in both countries are estimated using a rate of return to capital that is smoothed and adjusted to industry averages when there are large and unusual movements. Similar to the estimates of labour composition and labour input from Statistics Canada, the U.S. BLS has also developed labour composition estimates at the industry level that take into account the changes in the composition of hours worked with different education levels and experience of workers. As a result, the concept and estimation of the capital and labour inputs are more comparable in the two countries than they were in the past. …

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