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).
Thank you Erin for posting this interesting study. I guess Kaldor lives!
Another interesting angle to the StatsCan report is that they find over half of the total slowdown in productivity growth in the business sector (to just 1.1% p.a. 2000-2006, and even less since then) is due to the slowdown in productivity growth in manufacturing (where productivity growth, which had been very rapid in the 1990s, at 3.3% p.a., fell by over two-thirds … dragged down by excess capacity and the resulting slowdown in investment).
We didn’t know it at the time, but the year 2000 was a turning point in our national economic history. A combination of factors (popping of the dotcom bubble, the WTO’s abolition of the Auto Pact, 9-11 and everything that came after for the U.S. economy, the rise in global commodity prices which reinforced our own emerging resource dependence) has promoted a secular deindustrialization. Lousy productivity growth — which seems to “puzzle” market-friendly economists, but is entirely predictable for anyone who studied Kaldor, is just one of the many negative consequences of this shift.
Your comments, Jim, are very interesting for us researchers in the “local” trenches. I’ve been looking at the historical data for Hamilton for an upcoming report here at the Social Planning Council and it’s clear that 2000-2001 was a real low point for our economy locally as well, so your analysis is very helpful for our thinking here.
Thanks for posting a link to this post on Twitter! 🙂