Canada-U.S. Productivity Comparisons

StatsCan released a new analytical study today on the decline of Canadian labour productivity relative to the U.S., up to 2003.

http://www.statcan.ca/Daily/English/080721/d080721a.htm

Main findings are not surprising: Canadian business sector productivity has slipped relative to U.S. productivity (to 87% by 2003).  (We know it’s fallen significantly further than that since — Canadian labour productivity has hardly grown at all since 2003, and by nothing since 2006, while U.S. productivity is growing at something close to 2% per year).  The StatsCan numbers are less dramatic than information published by Andrw Sharpe’s Centre for the Study of Living Standards, according to whom Canadian productivityin the business sector had fallen to 74% of U.S. levels by 2006.

http://www.csls.ca/data/iptjune2007.pdf

The StatsCan report argues that most of the decline in Canada’s relative productivity gap is located in the goods side of the economy, which is somewhat surprising.  (There’s been a lot of attention paid to service sector productivity growth in the U.S., both the alleged “Wal-Mart” effect and the indirect impact of the spread of information technology through service industries.)  In this case, the resource-led structural shift in Canada’s good sector (booming petroleum exports, shrinking manufacturing) is very bad news indeed on two fronts: productivity in resources production is falling rapidly (as record prices lead producers to develop increasingly marginal deposits), and hundreds of thousands of high-productivity manufacturing jobs are being wiped off the map.  In the StatsCan report, mining (including petroleum) is included in what they call an “engineering” sector; declining relative productivity in that sector as well as the traditional goods sector explains most of the decline in overall relative productivity since 1999.  Our relative services productivity is even worse — but it hasn’t been deteriorating since 1999 as our goods-sector comparion has been.

 

The StatsCan report also highlights the importance of Canada’s lower investment in machinery and equipment. We have more capital in use, proportionately, than the U.S., but that’s all due to our reliance on mega-structures (mines, pipelines, etc.).  We use less machinery and equipment than the Americans, and it’s M&E capital that economists have found is especially closely linked to productivity.

One other interesting tidbit: in the non-business sector (government, public services, non-profits) Canadian productivity is 6% HIGHER than U.S. productivity.  That offsets a portion of our inferior business sector performance, so that the overall productivity gap is slightly smaller than the business sector productivity gap.  This productivity advantage was achieved despite a dramatically lower use of M&E by the Canadian non-business sector (which StatsCan pegs at only a third of U.S. equipment-intensity — a finding that I find surprising and questonable).

The StatsCan report pins the main blame for Canada’s poor productivity performance on what it calls “multifactor productivity.”  They thus commit a strange but increasingly common error in the productivity literature.

 

 

 

 

 

 

 

The report explicitly says Canadian productivity is lower “because of lower multifactor productivity,” which makes it sound like MFP is an independent, measurable causal factor.  In fact, however, MFP is an econometric artifact of a particular method of attempting to disaggregate productivity into its traditional factor-driven “causes”.  More specifically, it is the residual left over in a regression of productivity on the stocks of capital and labour (sometimes, not always, adjusting the labour input for skill and education levels).

The fewer explanatory variables you consider, or the less accurate is the specification of the relationship among them, the “more important” will this MFP residual seem to be.  The StatsCan paper only considers a gross measure of capital intensity (not specific types of capital or labour quality) – so their MFP residual seems especially large, thus their blanket conclusion that it’s Canada’s MFP performance (whatever the heck that is) that’s at fault.  This is silly.  Saying that “Canadian productivity is lower mostly because of lower MFP” is utterly equivalent to saying “Canadian productivity is lower and we don’t really know why”!

In my view the MFP approach misses broad complementarities and structural changes that are associated with M&E investment, which I would view as being even more important to productivity growth than the traditional Addison-style growth-accounting regressions make it seem.  This view was enunciated by my old professor Edward J. Nell in his work on transformational growth (in the Polanyi tradition): new capital investment is essential to incorporate changes in product, process, and work organization that are not at all captured in a simple quantitative measurement of the amount of capital in use at any point in time.  (The best reference:  The general theory of transformational growth : Keynes after Sraffa By: Nell, Edward J. Cambridge ; New York : Cambridge University Press, 1998, 784 pp.)

 

At any rate, the more evidence comes out, the more it is clear that Canada’s status as a leading developed economy is very much at risk as our level of productivity and innovation fades, and as we become ever-more-dependent on the extraction and export of the stuff that happens to be buried beneath our feet.  Most damning of all, the erosion of Canada’s relative productivity performance (as demonstrated most convincingly by Chart 3A in the CSLS package mentioned above) coincides precisely with the arrival of hard-edged neoliberalism within our fair borders.  Until the early 1980s Canada was rapidly catching-up to the rest of the industrialized world — thanks (in my view) to deliberate, interventionist policies.  Since then, in a context of hands-off free trade, privatization, and deregulation, we’ve been fading fast.