Back in June, the TD Economics group released a major report co-authored by Don Drummond: “The Productivity Puzzle. ” It provides a comprehensive overview of major studies and the empirical evidence, and should help spark some critical reflection. Progressive economists should agree with Drummond that productivity growth is vitally important to the growth of living standards over the medium and long terms, and that our recent record – average annual labour productivity growth of just 0.7%, 2000-2009, down from an average of 1.9% over the 1990s – is nothing short of appalling and should spark a major public debate.
Refreshingly, the report begins from recognition of the “puzzle” that many years of neo liberal or market friendly policies – not least trade liberalization and corporate tax cuts – have had no apparent impact upon Canadian business sector labour productivity growth or the Canada – US productivity gap. (Business sector labour productivity is now just 70% of the US level.) “Numerous reforms widely believed to encourage productivity have been implemented over the past twenty years, seemingly to no avail.” The report even accepts that there is something of a case to be made for the argument that the failure is not one of public policy, but a failure of the private sector. “Key elements of Canada’s history and industrial structure may have nurtured a complacent business culture.” (p8.) The report notes (p27) that commodity specialization may generate high incomes but tends to undermine competitive pressures to innovation and high value added activities.
Canada is found to have an especially weak record in terms of innovation, which shows up in very weak multi -factor productivity growth. This is likely in major part a consequence of our inherited industrial structure, which is weak in highly innovative sectors such as advanced machinery and equipment, and increasingly tilted to capital rather than innovation intensive raw material extraction and processing. Drummond cites a study by Andrew Sharpe showing that almost all of the productivity slowdown since 2000 is due to lagging performance by the manufacturing sector. He also details very weak Canadian business investment in advanced technology (machinery and equipment and information and communications technology ) compared to the US. Real capital investment per worker in these areas in recent years has been a good 20% below the US level.Business investment in research and development also lags seriously behind other advanced industrial countries.
This would lead many of us to think about how to reshape our industrial structure through sectoral development policies, but that is not the case here since the focus is, broadly speaking, only on framework policies. The report totally fails to note let alone draw lessons from the rapid industrial development of Asian countries which has been based on a host of strategic economic interventions, or the major role of defence policy and procurement in the US advanced capital goods sector.
Drummond also fails to consider the idea that “sound” macro-economic policy may have had adverse consequences for productivity growth. He argues that price stability and fiscal rectitude should have boosted business confidence, but perhaps operating below capacity has dampened the need for investment in capital and skills. The fact that low unemployment in recent years failed to spark real wage growth, a major shift into more secure forms of employment and greater business investment in skills suggests that we have continued to operate with some slack and that a tighter labour market might have boosted labour productivity growth.
Having rejected by assumption and approach more interventionist micro policy or more expansionary macro policy, Drummond falls back on the usual list of policy prescriptions, albeit with little genuine conviction that there are big bullets to be fired. Thus he calls for further trade and foreign investment liberalization; an end to tax measures which penalize small companies which grow bigger (actually a good point); and cuts to regional EI benefits (a sticks approach as opposed to a more sensible alternative of extending the scope for positive EI supported active job search which could help workers move to growing regions.) In a more positive vein, he calls for higher levels of public infrastructure investment and less waste of the skills of immigrants. Ultimately, he falls back on the need for more research to figure out what goes on in the “black box” of the firm, and why some innovate and add value while others do not.
In short, this is well worth a read, but the rigid frame of economic orthodoxy precludes consideration of some promising policy directions.