Executive summary

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Many historical comparisons of international productivity use measures of labour productivity (output per worker). Differences in labour productivity can be caused by differences in technical efficiency or differences in capital intensity. Moving to measures of total factor productivity allows international comparisons to ascertain whether differences in labour productivity arise from differences in efficiency or differences in factors utilized in the production process.

This paper examines the historical development of the Canadian manufacturing sector and calculates differences in productivity between the manufacturing sectors of Canada and the United States in 1929 and the extent to which it arises from efficiency differences. It starts by examining labour productivity measures and then makes corrections for differences in capital and materials intensity per worker in order to derive a measure of total factor productivity (a measure that captures differences in technical efficiency of Canada relative to the United States) using detailed industry data for 1929.

The paper asks several questions:

1) What is the traditional view of the efficiency of the Canadian manufacturing sector in the early 20^th Century?

The traditional view of the manufacturing sector is that it was a weak partner in the chain of Canadian economic development. The growth of the manufacturing sector was fostered by a development policy that involved the encouragement of western settlement, expansion of the east-west railway system and the imposition of tariffs to protect the fledgling Canadian manufacturing sector.

In what is one of the better known Canada/U.S. studies for the pre-1945 period, Dales (1966) argues that the Canadian tariff led to the development of a large portion of the manufacturing sector—secondary manufacturing—that suffered a comparative disadvantage relative to U.S. standards.¹ Dale's estimates indicate that average productivity for secondary manufacturing in Canada varied between 75% and 85% of that for total manufacturing in the United States between 1926 and 1939.

2) What was the history of development in the manufacturing sector in the early 20^th century?

The growth in the manufacturing sector during the first three decades of the 20th Century followed that of the economy as a whole. Manufacturing GDP remained at around 22% of total GDP throughout the period from 1900-1926 (Green and Urquhart, 1987). Manufacturing output grew at about the same rate as the total economy, which was expanding rapidly with western settlement. The dramatic expansion in agricultural production, which occurred with the opening of the West, was accompanied by equally rapid growth in manufacturing output.

By 1929, the substantial export positions of pulp and paper, rubber products, non-ferrous metals, non-metallic minerals and wood products suggest healthy industries able to compete in world markets. Except for wood products, these were also industries that were growing in importance when measured by employment percentages. By way of contrast, imports were important while exports were less so for iron and steel, textiles, petroleum, publishing and clothing. However, only the latter declined in terms of the share of total employment that they held during the period. In four industries, food and beverages, leather, transportation and chemicals, there was less trade and it was of a two-way nature. In this group, only leather declined in importance in terms of its percentage of employment over this period.

3) How did growth in the Canadian manufacturing sector compare to that in the United States during this period?

The early decades of the 20th Century were marked by equally rapid increases in employment in manufacturing in Canada and the United States. As of 1900, the Canadian manufacturing sector employed 6.7% as many production workers as were listed in the U.S. 1899 census (when hand trades are excluded on the U.S. side). This ratio increased to 7.3% for the respective 1910 and U.S. 1909 censuses, decreased to 5.9% in 1919 and then increased to 6.9% by 1929.

4) What were the differences in the characteristics of Canadian and U.S. manufacturing plants?

In terms of total output or employment in 1929, Canadian industries as a whole were smaller than their U.S. counterparts. On the basis of total employees, the average Canadian manufacturing industry had only 10.9% the number of employees as the average United States industry (the median only 6.5%).

The average size of plants in Canada was smaller than the United States. When measured by employees per establishment, Canadian plants averaged only 92% the average size of plants in the United States. The ratio of median plant size in the two countries is somewhat lower at 84%.

Wages and salaries per employee in manufacturing in Canada were 20% below American levels. By themselves, lower wages would have given Canadian manufacturers the incentive to use relatively more labour compared to capital. But capital costs were also higher in Canada.

5) Were the differences in factor prices reflected in factor proportions?

With lower labour and higher capital costs, manufacturers in Canada employed more labour relative to capital than did the United States manufacturing sector. The median estimates of the relative Canada/U.S. horsepower/labour, fuel/labour, and materials/labour ratios are all about the same—around 77%.

The difference between relative labour and the capital measures indicates that Canada used more labour relative to horsepower (a measure of capital input) than did the United States. Canada was therefore relatively more labour intensive in terms of its production processes.

6) What was the difference in relative efficiency of Canadian and United States manufacturing plants?

This paper examines differences in output per worker in the manufacturing sectors of Canada and the United States and the extent to which it arose from efficiency differences. It makes corrections for differences in capital and materials intensity per worker in order to derive a measure of total factor efficiency of Canada relative to the United States, using detailed industry data for 1929. It finds that while output per worker in Canada was only about 75% of that of the United States, the total factor productivity measure of Canada was about the same as that of the United States—that is, there was very little difference in technical efficiency in the two countries.

7) What do the differences between labour and total factor productivity between Canada and the United States tell us?

Ultimately, we must be interested in the reason for the differences between countries in labour productivity. Lower output per worker ratios could arise if Canada was on a lower production frontier (technical inefficiency), or because factors were being combined in different proportions because of different factor costs.

The paper finds that while output per worker in Canada was only about 75% of that of the United States, the total factor productivity measure of Canada was about the same as that of the United States—that is, there was very little difference in technical efficiency in the two countries. Canada's lower output per worker was the result of the use of less capital and materials per worker than the United States. The fact that Canada was combining more labour with all other inputs would be expected on the basis of factor (labour versus capital) prices.

The traditional literature which relies on partial labour productivity measures leaves the false impression that the Canadian manufacturing sector has always been grossly inefficient. At least in 1929, this was not the case.

 

^1. Dales focused on allocative rather than technical efficiency in that he used ratios of Canada/U.S. labour productivity relative to relative wage rates to infer inefficiency.