Saturday, 15 September 2012

Canada's Productivity

There is always lots of discussion about how Canada’s productivity lags other developed economies. Sometimes this criticism is warranted, other times it is not. In order to get a better idea of how Canada’s productivity has changed over the past 20 years I compared Canada with the other G7 countries.

An aggregate production function is specified with three inputs: capital, labour and energy. Output is measured by GDP (constant 2000 US$), capital is measured by gross fixed capital formation (constant 2000 US$), labour is measured by the number of people in the labour force, and energy is measured by energy use (kt of oil equivalent). The data set covers the period 1990 to 2010. All data are from the World Bank online data base. Data envelope analysis is used to estimate the efficient frontier and Malmquist total factor productivity (TFP) indices. Malmquist index values greater than one indicate a productivity improvement. 

The chart shows total factor productivity (TFP) for the G7 (average across countries) for each year. Between 1993 and 1998, TFP was trending downwards. During this time period there was lots of discussion about how information technology was re-shaping our lives, and presumably making us more  productive, but the effect was not showing up in the productivity numbers. Productivity recovered somewhat during the early 2000s. Between 2006 and 2009 there was a big increase in TFP but this increase was lost in the face of the Great Recession. For the sample period as a whole, however, TFP is around 1 which indicates no increase in productivity over this 20 year period. This is not good for economic wealth creation.

Looking at the individual country performance shows Canada to be the laggard in TFP (but not by much). Canada was ranked last in 9 out of the 20 years studied. Canada’s average value for the Malmquist index was slightly below 1 indicating, on average, a slight drop in productivity. For the other G7 countries, the average value was 1 or greater, but overall, none of these countries showed much in the way of productivity growth. What is interesting about this table is that, while Canada might be expected to be the laggard, some other countries would be expected to be leaders. This does not appear to have happened. 

Either the message on the importance of productivity isn’t getting through to business, or not enough high value jobs are being created, or high value workers are not getting paid their marginal productivity of labour. Moving forward, productivity growth needs to increase if we are to enjoy high living standards.


  1. Just wondering why is Canadian TFP ranked #1 for 2009 after ? Does this relate to how difficult it is to measure TFP in reality or is it an aftermath of the downturn in 2008 from which Canada emerged less wounded than other G7 nations. I bring up the difficulty in measuring TFP due to Canadian economic development following Innis' "staples" theory (i.e. reliance on natural resources rather than valued added manufactured goods). Prime Minister Harper is branding the country has an "energy superpower" which is hot air; I would buy this if there was a policy to encourage value extraction from the supply chain rather than shipping raw materials.

    1. Between 2008 and 2009, output in Canada decreased by 2.8% but capital formation dropped by a whopping 13.9%. Energy use declined by 4.8% while the labour force increased by 0.7%. The large decline in capital relative to the other variables is most likely the source of increased productivity. There are different ways to measure total factor productivity and in general, this is a difficult concept to measure.