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Study: Impact of public infrastructure on productivity
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Between 1962 and 2006, roughly one-half of the total growth in multifactor productivity in the private sector was the result of growth in public infrastructure.
Public capital (the nation's roads, bridges, sewer systems and water treatment systems) constitutes a vital input for private sector production. It enables concentrations of economic resources and provides wider and deeper markets for output and employment.
The contribution of public infrastructure to productivity growth has not been constant over time. The largest contributions to productivity growth occurred during the 1960s and early 1970s, when it contributed up to 0.4 percentage points to average annual productivity growth.
During the 1980s and 1990s, its contribution to productivity averaged only 0.1 percentage points a year. The slower growth in the stock of public capital after 1980 occurred as decades of cross-country highway expansion came to an end.
Analysts studying productivity growth have long been faced with the problem of explaining why growth was much higher before 1980 than afterwards. A substantial portion of the difference came from the much higher growth in public infrastructure in the period preceding 1980.
In its analysis, the paper used earlier research that estimated the rate of return to public infrastructure as the impact on private sector costs. It found that the rate centred on 17%. The paper also examined how robust the results were to alternate estimates of the rate of return. To do so, it used a range of estimates of the impact of public capital on private sector costs. All produced results indicating that public capital made a significant contribution to productivity growth.
Note to readersThis release is based on a research paper that uses a growth accounting framework to examine the importance of investment in public infrastructure to the growth in private sector productivity. Despite the importance of public infrastructure, estimates of its impact on productivity growth are not widely available. The framework that is generally used for productivity analysis focuses only on business sector outputs and inputs, examining how output increases with inputs. This omission of public capital from the statistical framework used to estimate productivity growth stems from a lack of information needed to include public infrastructure in the calculated measure of productivity, namely information on the magnitude of public capital stock and quantitative estimates of the impact of public infrastructure investments on business sector output. The recent analytical studies "Infrastructure capital: What is it? Where is it? How much of it is there?," published in The Canadian Productivity Review (15-206-XIE2008016, free), and "An examination of public capital's role in production," published in Economic Analysis Research Paper Series (11F0027MIE2008050, free), provide new more comprehensive data on public infrastructure and estimates of the impact of public infrastructure on business sector output. Using this information, this paper produces a new measure of multifactor productivity for the business sector that incorporates the impact of public infrastructure. Multifactor productivity measures the efficiency with which capital and labour are used in production. Growth in this area is often associated with technological change, organizational change or economies of scale. |
The study "The impact of public infrastructure on Canadian multifactor productivity estimates" is now available as part of The Canadian Productivity Review (15-206-XWE2008021, free), from the Publications module of our website.
For more information on public infrastructure, consult the studies "An examination of public capital's role in production" published in the Economic Analysis Research Paper Series (11F0027MIE2008050, free), "Infrastructure capital: What is it? Where is it? How much of it is there?" published in The Canadian Productivity Review (15-206-XIE2008016, free), and "Public infrastructure in Canada: Where do we stand?" published in Insights on the Canadian Economy (11-624-MIE2003005, free), available from the Publications module of our website.
For more information, or to enquire about the concepts, methods or data quality of this release, contact Ryan Macdonald (613-951-5687), Micro-economic Analysis Division.
