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The productivity and output growth of the business sector in Canada decelerated substantially between 2000 and 2010 relative to the late 1990s. The main objective of this paper is to provide a provincial perspective on the sources of the slowdown in productivity and economic growth that took place in the Canadian business sector between 2000 and 2010. The paper uses the most recent provincial multifactor productivity database.
The provincial multifactor productivity database is constructed using a growth accounting framework that allows analysts to isolate the effects of higher capital intensity, skills upgrading, and increases in multifactor productivity (MFP) on growth in labour productivity.
Labour productivity can grow as a result of higher capital intensity per worker. For example, stronger investment in information technology can raise capital intensity and labour productivity. As information technology has become less expensive, firms have substituted information technology for labour and other forms of capital.
Labour productivity can grow also as a result of an increase in the proportion of skilled workers within the workforce. Upgrading workers’ skills via education or via having a more experienced workforce can increase labour productivity. Canadian companies can upgrade their workers’ skills through formal schooling, on-the-job experience, or retraining. MFP captures all other effects. It is the residual factor capturing many influences—technological change, organizational innovation, economies of scale, and variations associated with changes in capacity utilization.
Between the period from 1997 to 2000 and the period from 2000 to 2010, output growth and labour productivity growth in the business sector slowed in all provinces. MFP growth rates declined in all provinces, except in Prince Edward Island, between the two periods.
In general, the slowdown in aggregate output and labour productivity growth was larger in central Canada and the Atlantic Provinces than in western Canada. From 1997 to 2000, output growth in the business sector was highest in central Canada and the Atlantic Provinces. Between 2000 and 2010, output growth was slowest in central Canada and the Atlantic Provinces, except Newfoundland and Labrador.
The deceleration was largest in Ontario after 2000. Over the period from 1997 to 2000, Ontario experienced the most rapid output growth in the business sector of any of the ten provinces. Between 2000 and 2010, Ontario had the slowest output growth in the business sector. Output growth declined from 7.5% per year to 1.0% per year in the Ontario business sector between the two periods.
The decline in output growth between 2000 and 2010 reflected the slowdown in both labour productivity and hours worked in all provinces, except Alberta and British Columbia. The decline in the growth in hours worked and the growth in labour productivity between 2000 and 2010 was largest in the Ontario business sector. In general, the decline in the growth in hours worked and in the growth in labour productivity was larger in central Canada and the Atlantic Provinces than in western Canada.
Ontario accounted for 64%, or 2.7 percentage points, of the of 4.3 percentage points slowdown in aggregate output growth in Canada between the period from 1997 to 2000 and the period from 2000 to 2010. The share of the decline in output growth accounted for by Ontario was larger than its output share (about 40% in the period from 2000 to 2010). Quebec accounted for about 23%, or 1.0 percentage point, of the decline in aggregate output growth in Canada, which is slightly larger than its share of output.
Over the period from 1997 to 2000, Ontario accounted for half of the overall growth in the Canadian business sector. However, for the period from 2000 to 2010, Ontario accounted for about 20% of overall growth in Canada. During the period from 2000 to 2010, the contributions of Alberta and Quebec to overall output growth in the Canadian business sector were each as large as that of Ontario.
The provincial contributions to aggregate labour productivity and MFP growth mirror the results for the provincial contributions to aggregate output growth. Ontario accounted for most (more than 60%) of the decline in aggregate labour productivity and MFP growth in the Canadian business sector. Between 1997 and 2000, Ontario accounted for more than half of the overall growth in labour productivity and MFP. Between 2000 and 2010, its contribution to aggregate labour productivity and MFP growth was significantly lower. In fact, Ontario’s contribution to aggregate MFP growth between 2000 and 2010 was negative and lowered aggregate MFP growth in Canada by 0.2 percentage points per year.
The slowdown in labour productivity growth can be traced to the contributions from the changes in investment in physical capital, shifts in labour composition, and MFP growth. The decline in labour productivity growth in the Canadian provinces between 2000 and 2010 can be attributed to the decline in MFP growth in all provinces, except Prince Edward Island and Manitoba. The decline in MFP growth was largest in Ontario between 2000 and 2010. MFP grew rapidly in most provinces over the period from 1997 to 2000. Between 2000 and 2010, MFP growth was negative or small in most provinces, except Newfoundland and Labrador.
The slowdown in labour productivity growth in the Canadian provinces between 2000 and 2010 was not due to changes in investment in physical capital. In fact, the contribution of investment in physical capital increased in six provinces. Only four provinces experienced a decline in the capital deepening effect between 2000 and 2010. The largest decline in the capital deepening effect took place in Manitoba. Before 2000, the capital deepening effect in Manitoba was one of the highest among the ten provinces. Between 2000 and 2010, it was among the lowest.
There was little change in the contribution of labour composition to labour productivity growth in all provinces, except in Manitoba and Alberta. The contribution of labour composition in Manitoba and Alberta experienced a significant decline as the pace of the compositional shift toward more experienced and more educated workers slowed in those two provinces. The decline contributed 0.3 percentage points to the overall slowdown in labour productivity growth in Manitoba and 0.2 percentage points to the overall decline in labour productivity growth in Alberta. For the other provinces, there were no significant changes in the contribution of labour composition to labour productivity growth.
The goods-producing sector was largely responsible for the slowdown in aggregate output and productivity growth between 2000 and 2010 in all provinces, except Manitoba. In Manitoba, slow aggregate output growth was due mainly to slower output growth in the services-producing industries.
While the goods-producing sector was largely responsible for the decline in aggregate output and productivity growth in almost all provinces, the exact industries within the goods-producing sector that were mostly responsible differ across provinces. For central Canada (Ontario and Quebec), the manufacturing sector was the most important contributor to the decline in aggregate output and productivity growth. For Alberta, the natural resources industry and natural-resource-related construction accounted for most of the decline in aggregate productivity growth. For British Columbia, it was the mining and oil and gas extraction sector and the manufacturing sector. For Saskatchewan, Newfoundland and Labrador, and Nova Scotia, it was the mining and oil and gas extraction sector. For Prince Edward Island and New Brunswick, it was the manufacturing and construction industries.
As a result of a large deceleration in output and productivity growth in the goods-producing industries between 2000 and 2010, the services-producing sector became the main source of aggregate output and productivity growth between 2000 and 2010 in all provinces, except Newfoundland and Labrador. For Newfoundland and Labrador, the main source of aggregate output and productivity growth was the mining and oil and gas extraction sector.
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