Study: Measurement issues in comparing Canadian and US productivity levels

The new technical paper A Comparison of Canadian and US Productivity Levels: An Exploration of Measurement Issues, compares levels of labour productivity in Canada relative to those of the United States. In doing so, it addresses two main issues.

The first concerns the comparability of the measures of gross domestic product (GDP) and labour inputs that the statistical agencies of each country produce. Second, it examines how a price index can be constructed to reconcile estimates of Canadian and US GDP per hour worked that are calculated in Canadian and US dollars respectively.

Productivity measures provide an indicator of the efficiency of the economy in that they compare the amount of output that is produced per unit of inputs devoted to the production process. Labour productivity is defined as the amount of output per unit of labour input. The former is usually measured in terms of GDP and the latter as employment or hours worked.

The paper approaches the first issue by harmonizing output and labour input measures between the two countries. Harmonizing output measures required no adjustments since the two countries now use quite similar methods to estimate GDP.

Harmonizing the measures of labour input required major modifications. In this case, an estimate of US hours worked per job was derived from a US survey that is comparable to the one used in Canada and a similar adjustment methodology to that used in Canada was employed to derive an estimate of the annual volume of US hours worked.

The impact of doing so increased the official US estimates of labour inputs and, therefore, reduced differences in labour productivity levels from those usually quoted by those who do not make allowance for differences in data sources and methodology between the two countries.

Constructing a price index that can be applied to the two separate estimates of productivity (one in Canadian dollars and one in US dollars) is more difficult than reconciling the estimates of GDP and labour.

A price index is required to transform Canadian GDP per hour worked calculated in Canadian dollars and US GDP per hour worked calculated in US dollars to a common price structure. The purchasing power prices (PPP) that are produced by Statistics Canada are calculated to examine differences in standards of living, not productivity differences.

To adapt the price relative derived from the PPPs used for comparing standards of living to a price relative for a productivity comparison, assumptions must be made about two issues. These are whether Canadian exports are priced slightly below their US competitors' prices in order to penetrate US markets, or whether imports end up at landed prices that are slightly above the US price corrected for the exchange rate.

This paper found that the estimate of the relative Canada/US productivity level is sensitive to the assumption that is made in this area. If we assume export and import prices are translated directly from one currency to another by the exchange rate (the law of one price), the overall Canadian economy was only about 94% as productive as that of the United States in 1999. If we allow for a 10 percentage-point deviation from this assumption, then the productivity gap disappears.

But even if we assume that import and export prices follow the law of one price, we still need to apply a confidence interval to our point estimate. The paper suggests that those who are willing to apply the law of one price and treat the estimate of Canada's relative productivity level as 94% should proceed cautiously.

Suggested confidence intervals around the estimate of at least 10 percentage points mean that the possibility that the Canadian economy is as productive as the American cannot be rejected. But equally, we cannot reject the possibility that Canada is less than 90% as productive as the US economy. Existing data on relative Canada/US prices do not permit more precision.

The research paper A Comparison of Canadian and US Productivity Levels: An Exploration of Measurement Issues, no. 28 (11F0027MIE2005028, free) is now available online. From the Our products and services page, under Browse our Internet publications, choose Free, then National accounts.

More studies on productivity can be found at Update on economic analysis on our Web site (11-623-XIE, free).

For more information or to enquire about the concepts, methods or data quality of this release, contact John Baldwin (613-951-8588), or Jean-Pierre Maynard (613-951-3654), Micro-economic Analysis Division.