Research Blog: Productivity in Canada after 2000

Every quarter, the StatCan Blog publishes a guest post on research at Statistics Canada. Our fifth post is from Wulong Gu and Danny Leung, researchers in Economic Analysis Division, Statistics Canada.

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Productivity measures the efficiency with which an economy transforms inputs into outputs. Growth in productivity is important because it is related to our standard of living, as output growth must come either from growth in inputs or from growth in productivity.

Productivity growth slowed in the Canadian business sector after 2000. This blog describes the research at Statistics Canada that aims to better understand the sources of this decline.

Latest trends in the business sector

Growth in labour productivity—real value added per hour worked—declined from 1.7% per year over the period from 1980 to 2000 to 0.9% per year over the period from 2000 to 2016. Labour productivity can be decomposed into three components: capital intensity, the upgrading of labour skills and multifactor productivity (MFP) growth. MFP growth is often associated with technological change, organizational change or economies of scale.

The 0.8-percentage-point decline in labour productivity growth after 2000 was almost entirely due to a decline in MFP growth. The contribution of capital intensity changed little, and the contribution of skills upgrading declined from 0.4% to 0.2% between the two periods.

Industry contributions to productivity growth

The source of the decline in labour productivity growth in the business sector can be clarified by examining the trends in each industry. Baldwin and Willox (2016) examined the industry origins of the labour productivity growth slowdown after 2000 and found that almost all of it can be attributed to weaker productivity growth in manufacturing; mining and oil and gas extraction; and, to a lesser extent, finance, insurance and real estate^{Footnote 1}.The shifting of labour from less productive industries to more productive industries had a slight mitigating effect on the slowdown. Gu (2018) studied the industry contributions to MFP growth and drew conclusions in line with the previous study. The slowdown in labour productivity growth after 2000 was due primarily to slowing MFP growth in manufacturing and in mining and oil and gas extraction.

The finding that the manufacturing industry and the mining and oil and gas extraction industry were largely responsible for the decline in aggregate labour productivity and MFP growth after 2000 suggested that further analysis of the trends in these industries was needed.

Natural capital and productivity growth in the mining and oil and gas extraction industry

As mentioned earlier, MFP growth is normally associated with technological change, organizational change or economies of scale. However, because MFP growth is calculated as growth in outputs that cannot be accounted for by growth in a weighted combination of measured inputs, it also captures changes in inputs that are not taken into account. Subsoil mineral and energy resources are essential for production in mining and oil and gas extraction. However, the measure of MFP normally published in the Canadian Productivity Accounts, and in the productivity accounts of other countries, does not consider the depletion of the natural resource stock or the flow of natural capital input.

This omission is relevant because, in Australia, the inclusion of natural capital helps to account for a substantial part of the decline in measured MFP in the Australian mining and oil and gas extraction industry^{Footnote 2}.The explanation for these findings also applies to the Canadian experience. As the demand for outputs in the mining and oil and gas extraction industry rose in the 2000s, the natural resources that were being exploited were increasingly difficult to extract, and labour productivity growth declined. When natural capital input is not included in measurement, the decline in labour productivity is attributed to lower MFP growth, instead of to slower growth in natural capital input.

Adams and Wang (2015) assessed the impact of incorporating natural capital into the measurement of MFP for Canada’s mining and oil and gas extraction industry. They found that before natural capital was added, MFP growth from 2000 to 2009 in the mining and oil and gas extraction industry was -7.0% per year. Including natural capital raised the average annual MFP growth to -5.3%^{Footnote 3}. Thus, while including natural capital helped explain the decline in MFP growth, substantial negative growth remains to be accounted for.

Productivity growth in manufacturing

The 2000s presented a number of challenges for the manufacturing industry. For the first time since 1961, real gross domestic product (GDP) growth in manufacturing stalled while the business sector GDP continued to expand^{Footnote 4}. Challenges—including the bursting of the tech bubble in 2001, the commodity boom and the appreciation of the Canadian dollar relative to the U.S. dollar, and stronger competition from abroad—contributed to excess capacity in the manufacturing sector in the short run and pressures to improve productivity in the sector.

Pressures to improve productivity can manifest themselves in productivity improvements within firms and in shifts in market share and resources from less productive firms to more productive firms.

With regard to the latter, most studies of the manufacturing sector after 2000—most recently by Gu and Li (2017)—found that reallocation contributes positively to productivity growth, offsetting the declines in productivity growth seen within continuing firms between the pre- and post-2000 periods.

Baldwin, Gu and Yan (2013) further examined the within-firm component of productivity growth in the manufacturing sector. They found that the slowdown in the within-firm component of manufacturing labour productivity from 2000 to 2006 was entirely due to the slowdown occurring in plants that exported over that time frame. This highlights the impact of the appreciation of the Canadian dollar and increasing global competition. The slowdown in these plants was also linked primarily, if not completely, to declines in capacity utilization.

Productivity statistics at Statistics Canada and most other statistical agencies do not account for short-run changes in capacity utilization when measuring MFP. When inputs are being used below their capacity, measured MFP growth is lower. Baldwin, Gu and Yan (2013) and Gu and Wang (2013) concluded that capacity utilization accounts for a significant fraction of the slowdown in productivity in the early post-2000 period. However, over the long run, when the entire 2000-to-2015 period is compared with the 1980-to-2000 period, capacity utilization is not expected to contribute significantly. Indeed, Gu (2018) found that the impact of lower capacity utilization on MFP in the early 2000s is offset by increasing capacity utilization after 2009.

Forthcoming research

Research will continue at Statistics Canada to improve our understanding of the post-2000 productivity slowdown.

Studies that examined the impact of firm size^{Footnote 5}, intangible capital^{Footnote 6} and public infrastructure^{Footnote 7} on productivity growth are being updated.

Work is also progressing in new areas. The slowing of labour and MFP productivity growth is not unique to Canada—it is occurring in almost all advanced economies. A striking feature of the slowdown is that it has been accompanied by robust labour productivity growth among the most globally productive firms and a widening productivity gap between the most productive firms and all other firms, even within countries^{Footnote 8}. Future studies will examine whether the divergence is also taking place in Canada, and the degree of dynamism between the group of firms at the productivity frontier and those below the frontier. These studies will also investigate whether the widening gap and the weak productivity growth among firms below the productivity frontier are due to factors such as a lack of innovation, a spread of innovation from frontier firms to non-frontier firms, a lack of competition and a decline in dynamism.

In addition to these studies of long-term trends, information needs in other areas of productivity analysis are also being addressed. These areas include environmentally adjusted MFP, which is a broader measure of productivity that takes into account technological improvements in production and in pollution mitigation; the impact of the increasing productivity dispersion among firms on the employment earnings dispersion of workers; and the impact of robots and digital technologies on productivity growth.

References

ABS (Australian Bureau of Statistics). 2014. Introduction of Mining Natural Resources into Australia Productivity Measures, 2012-13.

Adams, P. and W. Wang. 2015. Accounting for Natural Capital in Productivity of the Mining and Oil and Gas Sector. Analytical Studies Branch Research Paper Series. No. 372. Statistics Canada Catalogue no. 11F0019M. Ottawa: Statistics Canada.

Baldwin, J.R., D. Leung and L. Rispoli. 2013. Canadian Labour Productivity Differences Across Firm Size Classes, 2002 to 2008. The Canadian Productivity Review. No. 032. Statistics Canada Catalogue no. 15-206-X. Ottawa: Statistics Canada.

Baldwin, J.R. and M. Willox. 2016. The Industry Origins of Canada’s Weaker Labour Productivity Performance and the Role of Structural Adjustment in the 1990s and the 2000s. Analytical Studies Branch Research Paper Series. No. 373. Statistics Canada Catalogue no. 11F0019M. Ottawa: Statistics Canada.

Baldwin, J.R., W. Gu, and B. Yan. 2013. “Export growth, capacity utilization and productivity growth: Evidence for Canadian manufacturing plants.” Review of Income and Wealth 49: 665-688.

Baldwin, J.R., W. Gu, and R. Macdonald. 2012. “Intangible capital and productivity growth in Canada.” The Canadian Productivity Review. No. 029. Statistics Canada Catalogue no. 15-206-X. Ottawa: Statistics Canada.

Clarke, S., and L. Couture. 2017. Real Growth of Canadian Manufacturing Since 2000. Economic Insights. No. 074. Statistics Canada Catalogue no. 11-626-X. Ottawa: Statistics Canada.

Gu, W. 2018. Accounting for Slower Productivity Growth in the Canadian Business Sector After 2000: Do Measurement Issues Matter? Analytical Studies Branch Research Paper Series. Forthcoming. Statistics Canada Catalogue no. 11F0019M. Ottawa: Statistics Canada.

Gu, W., and J. Li. 2017. Multinationals and Reallocation: Productivity Growth in the Canadian Manufacturing Sector. Analytical Studies Branch Research Paper Series. No. 398. Statistics Canada Catalogue no. 11F0019M. Ottawa: Statistics Canada.

Gu, W. and R. Macdonald. 2009. The Impact of Public Infrastructure on Canadian Multifactor Productivity Estimates. The Canadian Productivity Review. No. 21. Statistics Canada Catalogue no. 115-206-X. Ottawa: Statistics Canada.

Gu, W., and W. Wang. 2013. Productivity Growth and Capacity Utilization. Economic Analysis Research Paper Series. No. 085. Statistics Canada Catalogue no. 11F0027M. Ottawa: Statistics Canada.

OECD, 2015. Future of Productivity. Paris, OECD.

OECD, 2016. The Productivity-Inclusiveness Nexus. Paris, OECD

Tang, J. 2014. “Are small or large producers driving the Canada-U.S. labour productivity gap? Recent evidence from manufacturing.” Canadian Journal of Economics. Vol. 47, issue 2: 517-539.

Topps, V., and T. Kuluys. 2014. “On productivity: The influence of natural resource inputs.” International Productivity Monitor 27: 64-78.

Veldhuizen, E., and M. de Haan. “The Dutch growth accounts: Measuring productivity with non-zero profits.” Paper prepared for the 32^nd General Conference of the International Association for Research in Income and Wealth, Boston, Massachusetts, August 5 to 11, 2012.