Statistics Canada released an interesting study today on the slowdown of productivity growth in Canadian manufacturing.
Conservative economists tend to view productivity as a microeconomic issue, reflecting the allocation of scarce resources through the market. The way to maximize productivity is to remove taxes, regulations and other â€œbarriersâ€ to the marketâ€™s free functioning.
However, the largest driver of productivity is investment in new machinery, equipment, structures and the technology embedded in them. Businesses will make such investments in additional capacity only if demand outstrips their existing capacity. In that sense, productivity may actually be a macroeconomic issue, reflecting the overall level of economic demand.
Todayâ€™s study supports this latter view, finding that productivity slowed mostly due to lower levels of capacity utilization. A possible policy implication is that the most effective way to boost productivity is to boost demand through a competitive exchange rate, public investment and a more equal distribution of income.
UPDATE (December 13): Quoted in the Vancouver Sun (page C3).