Faster Total Factor Productivity Growth In Canada example essay topic

Introduction The measure of productivity is extremely important in determining growth performance of a country. After two decades of high productivity growth in the 1950's and 1960's, we observed a significant slowdown of productivity growth following the oil crisis in 1973. The debate on the causes of the worldwide slowdown has turned into a vital concern for economists and policymakers. Several explanations of the slowdown have been suggested, such as the low investment and savings rate, the energy crisis in the 1970's, and the low rate of public investment in infrastructures. However, none of these explanations has been found to be fully satisfactory. Economists define productivity as "the difference between labour plus capital costs and economic outputs" (Salgado, p. 9).

It is generally acknowledged that over time, rising levels of productivity are necessary conditions to rising standards of living. Also, the slowdown of output growth is related to the slowdown of labor productivity growth. This is because output growth comprises the growth of the number of hours worked and the growth of output per hour worked (labor productivity). Productivity is determined by the efficiency with which resources are combined to produce a given output. It is usually measured by calculating the ratio of a weighted index of outputs to a weighted index of inputs. In a simple economy with only one type of output and one type of input, productivity is the ratio of output to input.

However, since most economies have a variety of outputs and inputs, productivity can be measured in a number of different ways. For example, the fixed-weight system or the chain-weight method can be used. Productivity in Canada and the United States An examination of the recent growth performance in Canada and the United States across sectors and industries suggests that the reasons for slower growth are not identical in both countries According to Slifman and Corrado, a major reason for the slowdown in Canada appears to be diminishing benefits from increasing returns to scale, particularly in manufacturing, whereas in the United States, a major reason appears to be the rising share of the services sector in total output. Although productivity has slowed down in both countries, it would seem that the level of productivity in Canada is not lower than that in the United States, contrary to what is commonly believed.

Between 1961 and 1992, aggregate labor productivity actually grew faster in Canada than in the United States (see Table 1). This could be due to the fact that during this period, investment rates were higher in Canada than in the United States. With relatively more capital, all other things being equal, Canadian workers became more productive. Faster total factor productivity (TFP) growth in Canada also contributed to faster labor productivity growth (see Table 2). The slowdown of labor productivity and TFP growth in 1973-92, compared with 1961-73, was more severe in Canada than in the United States, as shown in Table 2. During the later period, however, labor productivity grew faster in Canada than in the U.S., due to higher investment rates.

The energy price shocks of the 1970's and the following structural changes in the Canadian and U.S. economies were partly responsible for the slowdown after 1973. As the price of energy moved closer to its pre-1973 level during the 1980's and 1990's, the labor productivity growth did not, especially in Canada. During 1981-92, productivity growth rates rose more in the United States than in Canada. In fact, the U.S. experienced slightly higher aggregate labor productivity growth and higher aggregate TFP growth.

The U.S. economy's stronger growth can be attributed to the performance of the goods sector. In Canada, the recovery of the goods sector was weaker, and it therefore only partially offset the slowdown of growth in other sectors. Productivity growth in all Canadian sectors, including goods, was lower in 1981-92 than in 1961-73. Table 1: Growth in Labor Productivity (annual averages, in percent) Source: Statistics Canada; United States and Ranil Salgado.

According to an article in the "Globe and Mail" on December 26th 1998, one possible reason for the slowdown is a weak labor market which includes high unemployment. The author of the article, Dale Orr, states that "the reason for our relatively slow growth in our standard of living over the 1990's is not that Canadian workers have not been working effectively and productively it is that a lower fraction of our population is working". The article also brings up that using GDP per capita as a standard measure of productivity is an imperfect gauge of living standards since it does not take into account distribution of income, social benefits, or other important economic variables. Finally, the article states that corporate Canada has historically invested less in machinery, technology, and equipment than most other industrialized nations. In addition, they invest less in research and development and less in workforce training. It is also worthwhile noting that our governments (at all levels) have imposed cuts on all aspects of training.

Some examples include cuts in UI programs (including worker adjustment and training programs), cuts in funding to technical colleges, cuts in research funding and general cuts to post-secondary funding. All these have served to hurt Canadian productivity. According to Industry Canada, Canada's productivity has been increasing in assembly labor productivity over the past decade. They say there has been a 40 percent improvement since 1983 and that Canadian assembly plant have increased labor productivity more rapidly than U.S. plants (see Figure 1 and Table 3). Figure 1: Workers per Vehicle Source: Harbor and Associates Inc.

Workers per vehicle = ratio of total employment to daily output. Table 3: Canada is Competitive on Assembly Costs Source: Statistics Canada, Industry Canada Element Measure Canadian Advantage over the U.S. Productivity Workers / Vehicle 9% Direct Labor Costs $/Hour 18% Based on 1997 average prevailing exchange rate. ($U.S. = $C 1.384) In the United States, slower technological progress in the services sector may be the reason productivity growth recovered more slowly in this sector than in the goods sector. Other factors that may have played a role include a mis measurement of the output and input of different sectors. A 1996 study by Slifman and Corrado attempts to explain the relatively slow recovery of productivity growth in the services sector by examining trends in labor productivity and profitability across sectors in the United States. This study found that labor productivity growth rebounded after the early 1980's to the levels of the 1960's in all sectors except nonfarm, non corporate services. The difficulty of measuring prices (and therefore, output and productivity) in this particular sector appears to be a likely explanation for this discrepancy.

In other words, at least in the United States, what appears to be a slowdown in aggregate productivity could be, in large part, the result of measurement problems in the services sector. Slifman and Corrado believe that productivity growth in the U.S. has been underestimated, especially in the service sector. Conclusion In accordance with the above mentioned evidence, it is not possible to support the assertion that the level of productivity in Canada is generally lower than that in the United States. This is because, as was shown, some sectors are higher in productivity in Canada than in the United States and vice versa. There is absolutely no question that improved productivity rates are vital to the well being of all workers and our standards of living, but the solution to the productivity challenge does not lie with individual workers and their abilities to work harder or longer.

Rather it lies with our employers and our governments. Instead of aggravating the situation by further expanding free trade, tax breaks and continuing high unemployment strategies, attention should be focused on developing high performance labor force programs. Finally, investment in Canadian workers by their employers and the government are necessary for increases in productivity, which in turn will increase the standards of living for all Canadians.

Bibliography

1) Bryan, Ingrid A. (1994) Canada in the New Global Economy.
John Wiley & Sons Canada Ltd. 2) Costello, D.M. (1993) A Cross-Country, Cross-Industry Comparison of Productivity Growth Journal of Political Economy, 101 (2) 3) Rou bini, No uriel.
1998) Productivity Growth, Its Slowdown in the 1973-90 Period and its Resurgence in the 1990's: Truth or Statistical Fluke Stern School of Business, New York University.
4) Salgado, Ranil. (1997) Developments in Productivity Across Industries in Canada and the United States.
Staff Country Report 97/20 5) Slifman, Lawrence; Corrado, Carol. (1996) Decomposition of Productivity and Unit Costs.
Federal Reserve Board Staff Studies, No. 1 6) Wells, J.S. ; Baldwin, J. ; Maynard, J. -P. (September 1999) Productivity Growth in Canada and the United States.