Levels of multifactor productivity

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If we wish to understand the factors that drive differences in labour productivity between Canada and the United States, additional work is required to derive estimates of inputs other than labour. The most important for transforming relative labour productivity into relative multifactor productivity (MPF) is an estimate of relative capital intensity. Once again, data sources and methodology in Canada and the United States need to be harmonized. Perhaps the most important choice here is that of depreciation estimates—since capital is estimated as the sum of past investments less the depreciation that has taken place.

Canada and the United States do not use exactly the same depreciation estimates—though they both make use of used asset prices to estimate the rate at which investments in new assets decline in value (i.e., depreciate) over time. Canada has a comprehensive set of price data that is associated with its investment survey. The United States makes use of a myriad of sources (trade data) to estimate its depreciation rates. The resulting estimates for Canada and the United States differ slightly for machinery and equipment and more for buildings and engineering structures.¹⁷

There are differences between Canada and the United States in the importance of different types of physical capital. Despite the attention that is paid to machinery and equipment, it accounts for no more than 25% of total capital in Canada in 1999. In contrast, buildings account for over 55%.

Large amounts of capital are also devoted to engineering construction in Canada. In fact, at 20%, the share of engineering construction is almost as large as that of machinery and equipment. These assets underpin the utilities sector, pipelines, railways, airports, communications, and the oil and gas sector.

As previously discussed, capital stocks in both countries are the accumulation of these investments over time that are summed using the perpetual inventory method. However, if different services lives and different depreciation rates are used to compare Canada and the United States, the relative level and trend may be distorted. Thus, previous comparisons of capital intensity between Canada and the United States using unadjusted depreciation rates may partly reflect different methodologies. Depreciation rates in the United States that are used by the Bureau of Economic Analysis (BEA) are sometimes lower than those used in the Canadian productivity program, particularly in engineering structures and building structures.

Differences in the ratio of capital to gross domestic product (GDP) are provided in Figure 5 using the depreciation rate of Statistics Canada, that of the Bureau of Economic Analysis, and that based on the each country's respective depreciation rates. The line labelled 'Own' depicts the course of the total capital-to-GDP ratio if we employ the productivity estimate from the Canadian productivity program and the BEA productivity program. Figure 5 also contains the capital–output ratios using common depreciation rates (either Canadian or U.S. rates) to produce capital stocks for both countries. Using common rates raises Canada's relative capital intensity.

We first apply BEA depreciation rates to the Canadian stock and compare capital intensities between the two countries. Based on common BEA depreciation rates, Canada's relative capital intensity becomes higher than that based on 'own' depreciation rates. To undertake a sensitivity analysis, we also apply Statistics Canada's depreciation rates used in its productivity program to BEA capital stocks. Interestingly, Canada's relative capital intensity rises further with Statistics Canada's depreciation rates.¹⁸ Thus, the magnitude of the difference between Canada's capital intensity and the U.S. capital intensity is also sensitive to the choice between BEA and Statistics Canada depreciation rates. But at least in the latter part of the 1990s, there is not much difference between the two curves—and the difference is not statistically significant.

Figure 5
Canada's total capital stock intensity relative to the United States, business sector (in 1997 dollars)

However, an examination of capital-to-GDP ratios by asset class reveals substantial differences (Figure 6). Canada's engineering capital-to-GDP ratio is higher than that of the United States and has been growing relatively larger over time.¹⁹ Building capital intensity is slightly higher in the early 1990s but has fallen behind recently. Machinery and equipment was about the same in the early 1990s but it too has fallen slightly behind.

The evidence on relative capital intensity can be used to generate a measure of the relative value of capital services and then, combined with the level of relative labour productivity, to generate a measure of the relative MFP in Canada as opposed to the United States (see Table 1). The aggregate level of MFP in the Canadian business sector economy was 80.3% that of the United States in 1999. The aggregate level of labour productivity in Canada was 84.2%.

Table 1
Relative Canada–United States productivity levels for the business sector

Figure 6
Canada's total capital stock intensity relative to the United States, business sector, using Statistics Canada's depreciation rates (in 1997 dollars)

We have decomposed labour productivity differences between Canada and the United States into contributions of MFP and capital intensity (Table 2). MFP and machinery and equipment (M&E) were the main contributors to the lower level of labour productivity in Canada relative to that in the United States. The ratio of buildings and engineering structure capital to labour was higher in Canada, reducing the gap in the relative level of Canadian labour productivity. The results (Table 2) show that the aggregate level of labour productivity in the Canadian business sector was 15.8% behind that of the United States in 1999. The lower level of MFP in Canada lowered the relative level of labour productivity in Canada by 19.7%. The lower level of the M&E capital–labour ratio lowered the relative labour productivity in Canada by 3%, while the higher level of the structure capital–labour ratio increased Canadian labour productivity by 9%. Differences in MFP account for the majority of the differences in the level of labour productivity.

Table 2
Sources of Canada–United States labour productivity differences in the business sector, 1999

 

17. Canada also has estimates of expected length of life that it uses to confirm the estimates it derives from used asset price data. See Statistics Canada 2007c.

18. These results apply to all asset types in both 1997 and current dollars.

19. This trend has been occurring for a long time. Baldwin and Gorecki 1986 report that in manufacturing the Canada/U.S. ratio of machinery and equipment was relatively stable between 1961 and 1979 but structures and engineering increased in relative terms.