Canada’s Productivity Problem Can’t Be Measured Away
March 27, 2013
Canada’s productivity problem is real, no matter how it is calculated. A recent flurry of media coverage and commentary swirled around a debate over the methodology of how productivity growth is measured—the implication being that our performance has not been as bad as advertised.
The debate over methodology and measurement obscures the fact that no matter what method is used, our productivity growth is still dismal. In fact, a careful reading of the new research indicates that Canada’s productivity performance could actually be worse than thought!
Canada’s weak productivity growth has caused us to slip further and further behind the United States and other major industrial economies in terms of real income per capita—something that hits every Canadian in the wallet. The need for concerted action on productivity growth and innovation must remain a national priority if we hope to maintain our high living standards.
A December 2012 economic research paper (PDF) by W. Erwin Diewert and Emily Yu1 presented an alternative methodology for estimating multi-factor productivity (MFP). Formally, MFP is the difference between the estimated growth in labour and capital within an economy and the overall growth in gross domestic product.
Intangibles, such as business strategy, management capacity, and public administration, are often the difference between competitive and uncompetitive organizations and economies.
While MFP can be a hard concept to grasp, the Conference Board and others view it as a synonym for innovation in an economy. MFP encompasses the intangible factors that are not included in the estimates for labour and capital inputs. These intangibles, such as business strategy, management capacity, and public administration, are often the difference between competitive and uncompetitive organizations and economies.
Statistics Canada calculated MFP growth between 1961 and 2011 at a mere 0.28 per cent per year. For their research, Diewert and Yu developed new estimates for growth in capital, while their estimates for labour input growth and GDP growth remained the same as those of Statistics Canada. As a result, Diewert and Yu calculated annual MFP growth at 1.03 per cent—four times the StatsCan rate.
This suggested revised growth rate for MFP has fuelled extensive debate in the media and in cyberspace, where this new form of measurement has caused some to declare that Canada has resolved its productivity challenges.
Yet, Diewert and Yu’s estimates of capital input growth was much lower than that of Statistics Canada. According to Diewert and Yu, capital services grew by 2.98 per cent annually compounded; StatsCan estimated growth at 4.81 per cent. Capital stock grew by 2.33 per cent; again, far below the StatsCan estimate of 3.11 per cent. As the Conference Board pointed out in a 2010 report, under-investment in capital by Canadian businesses has been dragging down the productive capacity of our economy—and Diewert and Yu’s numbers suggest the problem may have been even more acute than we originally thought.
Indeed, when all the elements are pulled together, these authors produce overall results for productivity growth since 1961 that are slightly below Statistics Canada’s estimates. Rather than offering a new hypothesis that stronger growth in multi-factor productivity has saved the day, this methodology appears to confirm our poor performance.
Canada’s productivity problem remains serious, and could even be slightly worse than previously believed.
As might be expected, Statistics Canada has pushed back. Diewert and Yu have not provided a re-estimation of the productivity composition for the U.S. or another major economy—so we have no idea whether the productivity gap between Canada and other economies is shrinking, the same, or even growing when their suggested methodology is used.
Further, the authors’ re-estimation of MFP growth in Canada confirms serious problems in the past decade. As they themselves state, the “golden years” for Canadian MFP growth were from 1961 to 1973. In fact, the authors estimated that MFP growth in Canada was actually negative from 2000 to 2008, as well as after the 2008 financial crisis. Rising commodity prices and a strengthening currency provided much of Canada’s income growth after 2000. Recent MFP estimates are clearly much more relevant to the current productivity debate than decades-old numbers.
In short, a careful reading of the recent research suggests that Canada’s productivity problem remains serious, and could even be slightly worse than previously believed. Competing methodologies for calculating productivity may have simply diverted attention from the real issue—the steps Canada must take to improve its productivity growth.
|Glen Hodgson |
and Chief Economist,
Forecasting and Analysis
Canada’s Lagging Productivity: The Case of a Well-Educated Workforce Lacking the Much-Need Physical Capital (2010)
Canada’s Lagging Productivity: What If We Had Matched the U.S. Performance? (2011)
How Canada Performs: A Report Card on Canada