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No. 45, Fall 2023 with Symposium on Canada’s Productivity Performance

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The International Productivity Monitor (IPM) is the joint flagship publication of the Centre for the Study of Living Standards (CSLS) in Canada and The Productivity Institute.

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Articles from the current edition of the IPM can be accessed below and includes a symposium on Canada’s productivity performance. Access to back issues from before 2021 as well as information on submission of papers for publication in the IPM can be obtained from the CSLS website.

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Number 45, Fall 2023

Editors’ Overview Andrew Sharpe (Centre for the Studies of Living Standards) and Bart van Ark (The Productivity Institute, The University of Manchester).

  • The 45th issue of the International Productivity Monitor contains eight articles. The first part of the issue features five articles in a symposium on Canada’s productivity performance which includes contributions from Finance Canada, Innovation, Science and Economic Development Canada, Statistics Canada, and the Centre for the Study of Living Standards. The second part of the issue has three articles on measurement issues related to capital, capacity utilization, and productivity.

Symposium on Canada’s Productivity Performance

Decomposing Canada’s Post-2000 Productivity Performance and Pandemic Era Productivity Slowdown Chris Haun and Tim Sargent (Centre for the Study of Living Standards).

        • Labour productivity growth in Canada has been significantly lower since 2000, and has fallen further since 2019. In this article we examine why this has occurred. We approach the question from three angles: first we look at how Canada’s performance compares to other OECD countries, particularly the United States; second, we decompose Canadian productivity growth by sector, and look to see to what extent slower productivity growth is due to lower growth within sectors, or reallocations across sectors; and finally we perform a growth accounting exercise in order to understand the relative contributions of multifactor productivity, capital intensity and labour quality. We find that Canada’s productivity growth since 2000 has been similar to peer countries, but that the level of productivity is lower than for almost all other peer countries. Weak productivity growth after 2000 is largely attributable to weak productivity within sectors rather than sectoral reallocation. We also find that the slowdown in productivity growth post-2000 relative to 1981-2000 is largely a result of declines in multifactor productivity. However, during the latter part of the post-2000 period there was a pronounced slowdown in capital growth, particularly in ICT, that put downward pressure on productivity growth. More recently, productivity growth over the 2019-2022 period has been very weak. As a result, returning even to the pre-pandemic levels of productivity growth in the near term will be challenging

The Post-2001 Productivity Growth Divergence between Canada and the United States Wulong Gu and Michael Willox (Statistics Canada).

        • The high degree of integration between the Canadian and the U.S. economies promotes sharing of technologies and innovation spillovers that are conducive to long-term productivity growth convergence. However, since 2001 labour productivity growth rates have diverged in sharp contrast to the previous four decades. A comparison of labour productivity growth decomposed into contributions by industry for both countries reveals that the information and cultural services industry has played an outsized role in the divergence, the start of which coincides with the dot-com recession of the early 2000s. Limits on foreign investment, most notably but not exclusively related to telecommunications, and strong output price growth relative to the United States are key factors for undertaking a simple counterfactual analysis to evaluate the role of competitive intensity in the information and cultural services industry. Estimates of markups and their impact on labour productivity growth suggest that limited competition has significantly reduced the productivity performance of that industry as well as the performances of others that are dependent on its services as intermediate inputs.

A Critical Juncture: Assessing Canada’s Productivity Performance and Future Prospects Carlos Rosell, Kaleigh Dowsett and Nelson Paterson (Finance Canada).

        • It is widely acknowledged that Canada has faced long-standing issues with productivity growth, both in comparison to its past performance and relative to other advanced economies. Additionally, it is recognized that as the transformation brought on by population aging continues, improvements in the living standards of Canadians will increasingly depend on productivity growth. This situation arises at a time when Canada, along with the global economy, is at the forefront of major structural transformations, including the green transition, the realignment of global trade, and the increasing digitization and use of AI. The necessity to adapt to the scale and scope of these transformations will create pressures for all economic actors to make renewed efforts to address Canada’s longstanding productivity challenges. To better understand the direction of Canada’s future productivity growth, this article chronicles Canada’s productivity growth over recent decades and highlights key structural factors that have likely constrained Canada’s productivity performance. We then explore how these factors might shape the trajectory of productivity growth in the context of these impending structural transformations and identify areas where further research should be prioritized.

Recent Productivity Trends in Canada: Navigating the Twin Transitions of Green and Digitalization Jonathan Barr, Peter Foltin and Jianmin Tang (Innovation, Science, and Economic Development Canada)

        • Canada, like other countries, is undergoing an economic transformation as a result of the green and digital transitions. These megatrends create new challenges and opportunities for productivity growth. The green transition could place downward pressure on productivity growth given the current structure of the Canadian economy. That said, the Porter Hypothesis posits that well-formulated environmental regulations can actually spur innovation, which can in turn stimulate productivity. Canada’s ICT and digitally intensive sectors have seen strong productivity growth since 2000, but Canada’s overall performance in digitally- and R&D-intensive sectors trails other G7 countries. Embracing emerging clean and digital technologies and helping small and medium-sized business adopt them remain important issues to help unlock new productivity opportunities in Canada.

Canada’s Productivity/Patenting Paradox:  Recent Trends and Implications for Future Productivity Growth Iain Cockburn, Megan MacGarvie and John McKeon (Boston University).

        • Canada’s slow productivity growth rate relative to peer countries has been the focus of considerable attention among academics and policymakers. In contrast to the relatively flat trajectory for total factor productivity, Canada’s production of patents has grown considerably in the last three decades. In this article, we examine changes in Canadian patenting over the past 30 years, with a view to understanding this “patent productivity paradox”: slower productivity growth than might be expected given significant increases in patenting. We draw on recent literature on patents as a measure of innovation as well as literature on the relationship between patents and productivity to study this paradox. We propose several explanations for the disconnect between TFP growth and patenting and examine the evidence. We find that the weaker relationship between productivity and patenting in Canada is not explained by the relative rate of invention in information and communications technology, nor by lower invention quality. However, we find suggestive evidence that foreign ownership of patents and inventor migration help to explain the weaker relationship between productivity and patenting in Canada.

Other articles

Measuring Capital and Multifactor Productivity: The Role of Asset Depreciation and Initial Capital Stock Estimates Pierre-Alain Pionnier, Belén Zinni and Kéa Baret (OECD).

  • This paper suggests a meaningful way to compare how the depreciation and retirement of assets are estimated in the national accounts of different countries and shows large differences. Applying the same assumptions in the US as in other G7 countries would reduce the US net capital stock by up to 1/3 and increase US GDP by up to 0.5 per cent. The growth rates of capital services and MFP would be less affected. This paper also considers two commonly used methods to estimate initial capital stocks and the impact they may have on measured capital and MFP. They assume that either investment growth rates or capital-stock-to-output ratios are constant over time. The first one is misleading because it fails to account for trends and fluctuations in real-estate investment. The second one works well for the US but may be less reliable for other countries. Overall, this paper calls for a more frequent review of asset depreciation patterns by statistical agencies, and for extending investment series to the maximum extent before relying on crude methods to estimate initial capital stocks.

Capital Utilization and Productivity Function Estimation: Implications for Productivity Analysis Jianmin Tang (Innovation, Science, and Economic Development Canada) and Weimin Wang (Statistics Canada).

  • During business cycles and disruptions of global value chains, capacity utilization has important implications for explaining variations in productivity and for evaluating the effectiveness of a certain investments such as R&D and ICTs. Unfortunately, data on capacity utilization is not easily available, especially at the firm level. This article develops and evaluates a methodology for measuring capacity utilization at the micro level. Unlike the literature using ad-hoc proxies (for example, the ratio of energy use to capital stock) or ex-post return to capital which is endogenous to productivity shocks, the new measure is practical and easily implemented. Importantly, it is based on the theory of the firm in terms of profit-maximizing and price-taking and is exogenous to productivity shocks. Using Canadian micro data, this article shows that the developed new measure under the assumption of capital being not adjustable in the short term explain well the variations in firm productivity. It also finds that controlling for capacity utilization may be essential in evaluating the economic impact of certain investments such as in ICT.

Measuring Productivity: The Response of National Statistical Institutes to the OECD’s Productivity and Capital Manuals Nicholas Oulton (London School of Economics)

  • In 2001, the Organization for Economic Cooperation and Development issued its Productivity Manual, alongside its Capital Manual (the latter was updated in 2009). These Manuals set out a detailed guide for National Statistical Institutes (NSIs) on how to expand their national accounts to incorporate a production account using the KLEMS methodology. In many cases full acceptance of these proposals might well require changes to national accounts methodology, for instance the adoption of double deflation, and also a considerable statistical effort, such as incorporating data on wages and employment into the national accounts in a consistent way. This article summarizes the response of some leading NSIs to this challenge and assesses how far they have succeeded in meeting it.

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