The Canadian Productivity Review Productivity Growth in Canadian and U.S. Regulated Industries by Wulong Gu and Amélie Lafrance

Executive summary

Recent research for member countries of the Organization for Economic Co-operation and Development (OECD) has suggested that “productivity growth is boosted by reforms that promote private corporate governance and competition” (Nicoletti and Scarpetta 2003:10). Regulation is seen to create barriers to entry, reduce the incentives to innovation and investment, all of which lead to slower technological progress and slower productivity growth (Crafts 2006, Conway and Nicoletti 2007).

This paper examines the productivity growth performance of a group of regulated industries in Canada, and compares it with corresponding industries in the United States.

The industries examined here consist of transportation services, including rail and air; broadcasting and telecommunications; and financial services, including financial intermediation and insurance. They provide the foundational networks on which other industries rely. They are also industries that have traditionally faced regulation in terms of the pricing of products, the supply of industry outputs, and/or restrictions on foreign investment. In recent years, they have undergone some deregulation and experienced increases in competition.

Regulation is expected to affect the level of productivity. That is, heavily regulated industries are likely to be behind less regulated industries in other countries in terms of the level of their productivity. Deregulation is posited to affect the growth in productivity—by giving the productivity level of the industries being deregulated a boost towards that of their less regulated counterparts. During periods of deregulation then, productivity growth rates are expected to be particularly robust—both relative to other industries in the same country and relative to the same industries in other countries that have already experienced more deregulation.

This paper tests this hypothesis using Canadian and United States data that were especially constructed to provide comparable data for this study. Using Canadian KLEMS and U.S. Bureau of Economic Analysis data on four sectors of the economy that include transportation services, broadcasting and telecommunications, cultural industries and financial services, we examine labour productivity growth in these industries as well as the sources of growth in labour productivity (i.e., changes in capital intensity or multifactor productivity growth).

Most of Canada’s main infrastructure industries are found to have experienced higher gains in labour productivity than the Canadian business sector as a whole from 1977 to 2003, and had similar or higher rates of growth than their counterparts in the United States.

In Canada, the growth in productivity ranged from an annual average rate of 1.4% in transportation services, to 2.9% in financial services to 4.4% in broadcasting and telecommunications during this 27-year period. These growth rates were higher than the Canadian business sector average (1.3%) over this period.

From 1977 to 2003, growth in labour productivity in the business sector as a whole was slower in Canada than in the United States. In Canada, labour productivity in the sector increased at an annual average rate of 1.3%, compared with 2.0% in the United States.

In contrast to the Canadian business sector, most infrastructure industries in Canada had higher, or comparable, growth in labour productivity than their American counterparts. These include rail transportation, financial intermediation, insurance as well as broadcasting and communications.

For example, the 2.7% rate of growth in financial intermediation in Canada was much higher than the gain of 0.5% in the United States. The gain in insurance was 3.5% in Canada but zero in the United States. Growth in rail transportation was about the same in the two countries.

On the other hand, productivity increased 4.6% in air transportation in the United States, well above the 0.2% rate in Canada.

In infrastructure industries where labour productivity growth was higher in Canada than in the United States, growth in both multifactor productivity and capital intensity was also higher than that in similar American industries, or comparable to it.