Macro views

ProductivityMicro-economic Analysis Division

Macro views

• General discussion of productivity program– What is productivity?– How is it measured?– Why is it important?– How is it used in the growth accounting

framework?– Challenges

What is productivity?

• Productivity is a concept that measures the efficiency with which resources (labour, capital, other inputs) are employed to produce goods and services (or output)

• The growth in productivity captures the extent to which the growth in output exceeds the growth in resources devoted to production

How to measure productivity?

• Two ways to measure the efficiency of resources• The first way is to measure the productivity of

one resource at a time, what is termed a partial productivity measure

• For example, labour productivity, capital productivity, energy productivity

• Of which, labour productivity is the most popular, measured approximately by real output growth minus growth of hours worked

Why is productivity important?

“Over long periods of time, small differences in rates of productivity growth compound, like interest in a bank account, and can make an enormous difference to a society's prosperity. Nothing contributes more to reduction of poverty, to increases in leisure, and to the country's ability to finance education, public health, environment and the arts.”

Alan Blinder and William Baumol. 1993. Economics: Principles and Policy. (p.778). San Diego: Harcourt Brace Jovanovich.

Why is productivity important?

• GDP growth can be decomposed into that coming from the application of more resources and that coming from increases in productivity

Over the last 25 years, for every percent of Canada's economic growth, labour productivity has contributed for

nearly half of it...

1.4 1.5 1.50.9

1.51.8

1981 to 2004 1981 to 1988 1988 to 2000 2000 to 2004

Labour productivity Hours worked

Partial productivity measures

• Advantage: Easy to understand.• Disadvantage: Increases in productivity may be

interpreted to be coming from increases in efficiency in the use of the resource but may simply be arising from a substitution between different resources (the use of more capital). And that substitution may not have resulted in an overall saving of resource inputs.

More comprehensive measures

• Second method to measure the efficiency of resources considers all resources together—multifactor productivity (MFP)

• Real output growth minus a weighted average of the growth of combined inputs (labour and capital)

What is MFP?

• Multifactor productivity is the difference between the actual increase in output and the increase in output that would have been expected on the basis of existing technology from increases in multiple factors (both labour and capital—and perhaps other factor inputs).

Measurement ofMultifactor Productivity

• Imposition of structure (production framework)

• Use of analytical technique or specific assumptions about the economy to measure parameters associated with the structure

More comprehensive measures

• Advantage: A broader and more comprehensive measure of productivity-referred to by The Economist as a “better’ measure

• Disadvantage: more complex to understand, more complex to estimate—requires certain assumptions or more complex statistical estimation procedures to obtain the weights used to aggregate the various inputs

• Analysis used to examine the sensitivity of MFP estimates to alternate approaches

Questions posed in the growth accounting framework

• What has been the history of productivity growth over the period?

• What types of capital are used in the growth process?• What types of labour are used in the growth process?• What was the relative contribution of capital, labour

and productivity growth to economic growth? • How important are the various factors that determine

the growth in labour productivity? Is capital deepening the prime contributor to labour productivity growth?

Trend in the aggregate productivity growth

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

percent per year

Output Labour productivity Multifactor productivity

The growth accounting framework

• Labour productivity growth is decomposed into MFP growth, changes in capital deepening, changes due to upgrading of labour skills (referred to as labour composition)

Sources of Labour Productivity Growth (Business Sector)

1961 to 2005 1961 to 1973 1973 to 1979 1979 to 1988 1988 to 2000 2000 to 2005

Labour composition Capital intensity Multifactor productivity

Challenges

Quality (Criteria)– Accuracy– Coherency– Relevance– Interpretability

The Productivity Program

• Regular product of the National Accounts• Builds on the integrated National Accounts and

then adds coherent estimates of labour and capital

• Provides quality assurance through consistency checks and development of coherent data series.

• Provides analytical output as quality check and to facilitate interpretability

Challenges

Concept– Analytical construct– Externality or Residual– Macro level approach

Challenges

Measurement Issues– Estimates of Growth in Volumes– Business as Opposed to Non-Business– Comprehensiveness of Input List

(Infrastructure, Non-tangible assets)– Provision of confidence intervals to guide

users on quality

Challenges

Relevance

Focus –primarily on domestic growth

Users requesting international comparisons

U.S./ Canada Labour Productivity Growth Comparison

• Trend comparisons

Canada and US growth trend similar for GDP

Real GDP Trend, Business Sector (1961=100)

1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001

CanadaUnited States

Canada and US growth trend similar for both GDP and hours worked

Hours at Work, Business Sector (1961=100)

1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001

CanadaUnited States

Canada and US growth trend similar for Labour Productivity

Labour Productivity Trend, Business Sector (1961=100)

1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000

Canada United States

• Level Comparisons

U.S./ Canada Level Comparison

• Labour productivity– Harmonization of labour measures

• Multifactor Productivity– Harmonization of capital measures

Canada/US relative GDP per capita, labour productivity, and work intensity (total economy)

GDP per capita

Labour productivity

Work intensity

• Component Comparisons– Multifactor versus capital intensity versus skill

upgrading

Post 2001 collapseFigure 1: Relative Canada/U.S. Labour Productivity Level in the

Business Sector, 1961-2005 (1961-100)

1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005

Growth rate differences Trend in Canada-U.S. Difference in Growth of MFP, Capital Intensity and

Labour Compositon (% )

1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005

MFP Grow th Capital Intensity Grow th Labour Composition Grow th

• Pre and post 2000 experience

Import and Export Prices

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005Px Pm

Price Indices (2005=100)

Terms of Trade

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Terms of Trade $US/$CDN

Exchange RateTerms of Trade

Relative Price Changes

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Durables Semi-Durables Non-Durables

Durables/semi-Durables (Index 2002=100)

Non-Durables (Index 2002=100)

Relative Economic Performance: Canada vs. US

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Labour Productivity Real GDP Per Capita Real NNI per capita

Index 1998=100

Provincial Program: Labour Productivity

1997-2006

Canada B.C. Alta. Sask. Man. Ont. Que. N.B. N.S. P.E.I. N.L.

Labour productivity growth National average

Nominal value of GDP per capita, 2003

30,883 29,90033,856

40,346

32,708

54,075

38,495

28,106

36,749

35,04135,243

10,000

20,000

30,000

40,000

50,000

60,000

N.L. P.E.I. N.S. N.B. Que. Ont. Man. Sask. Alta. B.C. Canada

GDP per capita, labour productivity and labour effort

Q uebec

GDP per capita GDP per hoursworked

Hours workedper pop 15+

1990 1997 2003

Micro views• Firm dynamics and productivity• Heterogeneous actors (small, multinationals)• Technology use and productivity• Structural change and productivity• Firm strategies, innovation and productivity • The source of externalities—urban

agglomeration

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