Estimating Total Factor Productivity Growth: Canadian Freight Railways, 1986 to 2009

By Uguccioni, James | International Productivity Monitor, Spring 2016 | Go to article overview

Estimating Total Factor Productivity Growth: Canadian Freight Railways, 1986 to 2009


Uguccioni, James, International Productivity Monitor


ABSTRACT

Canadian railways are a vital part of the country's transportation sector, moving goods and people across the country. We perform firm-level productivity analysis of Canadian freight railways for 1986 to 2009, focusing on the two railways which dominate the market: Canadian National (CN) and Canadian Pacific (CP). We obtain total factor productivity (TFP) estimates both by constructing productivity indices and by econometrically estimating cost functions. Driven in part by operational improvements, the strong TFP growth at both firms considerably outpaced aggregate TFP growth in Canada over the period of interest. This robust TFP growth, together with significant capital deepening, led to impressive labour productivity gains. We pay special attention to the productivity effects of the 1995 privatization of CN. While CN enjoyed much stronger productivity growth over the 1986-2009 period than CP, its performance was equally superior before and after the 1995 privatization.

Drumond, Ryan, and Veall (2013) argue that research at the firm-level is one of the most promising new frontiers in the productivity literature. They note that increasingly available microdata allows researchers to focus on how and why firms enter and exit a market, investigate the growth decisions faced by new, small businesses, and study managerial and operational decisions with an economic lens. The OECD (2015) points out that firm-level data also allows researchers to test the validity of industry-level findings at a finer level of detail. In a recent report by the Centre for the Study of Living Standards, Sharpe (2015) asserts that researchers ought to focus on the firm level to help policymakers develop more targeted interventions to imrpove productivity growth. Sharpe suggests that the increasingly available microdata at the firm level provided by Statistics Canada allows research to improve understanding of drivers of productivity growth.

Canada's two major freight railways, Canadian National (CN) and Canadian Pacific (CP), operate transcontinental networks which carry more than 80 per cent of Canadian rail freight by most metrics (Cairns, 2015). (2) Even more impressive than their dominance of the Canadian freight rail market is their total factor productivity (TFP) growth, which by our estimates averaged well above the -0.11 per cent per year annual average for the Canadian business sector for the same period. (3) Given their sustained success, the two railways are natural candidates for firm-level productivity analysis.

CN and CP are not by any means the only freight rail firms in Canada. Over the years both firms sold off their less profitable branch lines, and dozens of shortline railways have entered the market to fill regional demand by taking over the lines. While the Canadian freight rail sector is made up of a number of firms, each of them is dwarfed by CN and CP in terms of market share. As Statistics Canada has not made any firm-level data available on the shortlines, they will not be discussed at any level of depth. Most of the literature regarding Canadian freight rail applies a similar scope to their study (Freeman et al., 1987, Tretheway, Waters, and Fok, 1997; Waters and Tretheway, 1999; Iacobacci and Schulman, 2009). McKellips and Calver (2015) do provide a sector level analysis, estimating that TFP in the railway transportation sector grew 1.26 per cent per year from 2000 to 2013.

This article provides estimates for TFP growth at the firm level, as well as for the two railways combined. As Statistics Canada does not provide TFP estimates beyond the three-digit NAICS level for transportation, our estimates provide valuable information about productivity developments in freight rail. (4) Furthermore, to the best of our knowledge we are the first to apply the method of Caves, Christensen, and Swanson (1981a) to estimate TFP growth at CN and CP since Freeman et al. (1987).

Ultimately, we reaffirm the general finding in the literature that CN and CP are productivity success stories when compared with Canadian industry as a whole. …

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