Download Canadian Productivity: When Do We Catch Up

ECMC42
Canadian Productivity: When Do We Catch Up?
Jason Cheng
Introduction
Due to the significant rise in investment into ICT – Information and Communication
Technologies (computers, software, telecommunication, etc.), the United States has seen an
extraordinary rise in hourly labour productivity from 1995 to 2000. Although a similar trend is
appearing in Canada, the rate of increase in productivity is far less pronounced in comparison.
However, historical analysis does show that once Canada overcomes its current economic
slowdown, it productivity rate will eventually catch up.
National Wealth
The importance of productivity is important when calculating a country’s national wealth.
In order to increase this wealth:
(1)Have more people employed (Employment rate increases)
(2)Have people working longer hours (Increase productivity)
Multiplying the two numbers together will get the national income per capita.
Why does Canada have an income per capita lower than US?
In 2000, it was calculated that Canada’s income per capita was 22% lower than the US.
Most important reason is that employed Canadians work fewer hours than the Americans. As a
result, Canada has a lower productivity rate and a subsequent lower national wealth. Similarly,
European countries also have less wealth than US. However, this is not because of lower
productivity, but rather they have a lower employment rate along with shorter working hours.
How does employment affect productivity?
The importance of employment cannot be overlooked when studying productivity and
wealth. In particular, two issues needs special attention.
1.In the US, macro-economic policy focuses on full employment. For the past 20 years,
US have done better than most other countries in creating employment and sufficient
hours for everyone who wants to work. As for Canada and Europe, they take a rather
out-of-date and less effective approach.
2.Full employment economy helps productivity to increase at a faster rate.
NOTE: when overall demand is high and there is a labor shortage, investment increases, which
increases productivity. Thus, a country’s employment level can play a big role in affecting
productivity and determining its national wealth.
Productivity rate in US and Canada
Let’s turn now from employment to productivity. Over the years, the gap between US
and Canada’s productivity rate has widened. Why does Canada have such a slower rate of
increase in productivity than US? In US, it normally sees an increase of productivity by an
average of 1.4% annually. From 1995 to 2000 however, the increase had accelerated to 2.5%.
Economists have agreed that the new economy can be defined as the introduction and spread of
advanced new ICTs. US have invested heavily into ICT, notably in machinery and equipment
between 1992 and 2000. However, Canada did not follow the same trend until 1997 due to its
economic slowdown prior to that.
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ECMC42
Canadian Productivity: When Do We Catch Up?
Jason Cheng
How does the advancement of ICT affect productivity?
In the US, more than half of the recent increase in hourly productivity is due to two factors
1.Due to the increase multifactor productivity of the computer and semiconductor
manufacturing sector. This reflects the significant drop in cost causing a sharp increase in
their actual volume per input unit.
2.An increased investment by sectors using ICTs in these new products which have has
increased the amount of capita per hour worked.
Gordon’s view of productivity
Robert Gordon, a famous and credible economist for the past 35 years sees the trend of
the recent increase in productivity differently.
1.He believes that for point one, the increase in multifactor productivity is limited to the ICT
manufacturing sector that manufactures durable consumer goods.
2.For point two, an economic slow down can reverse this trend.
3.He feels that the recent jump in productivity is an isolated one-time increase in the level of
productivity rather than a sustained increase of 2.5% per year.
Will Canada ever catch up?
Canadian productivity has a long way to go before it catches up. However, there are
three quantitative trends that are evident.
1.Hourly productivity in the Canadian business sector has increased from 1.3% (1981-1995)
to 1.8% (1995-200).
2.ICT-capital per hour worked did not play a big role in the increased in hourly productivity.
However, in the US, the figured almost doubled.
3.Unlike the US, the multifactor productivity growth in Canada also takes into account the
total increase in hourly productivity in the business sector.
Looking towards the future, Canada is making good progress in catching up. Although Canada’s
investment into ICT is comparatively smaller than the US, there has been amazing growth in this
area over the past four years. In particular, there is a sharp increase in investing in machinery
and equipment (15% annually). Also, the growth in ICT in the US has pushed the prices down in
the manufacturing sector allowing Canada to benefit in low import prices resulting in an
increased wealth to some extent.
Conclusion
From 1997 to 2000, Canada has made significant progress in catching up to the US.
Unfortunately, due to the tragic event of September 11, 2001, this momentum was cut short by
the continental economic slowdown. However, in the long run, due to the geographic proximity,
the economic integration and the institutional similarities between Canada and the US have
always led to very similar, although not perfectly synchronized, performances in productivity.
The government plays an important role in creating economic environment that fosters growth
with investment being the key. Lastly, the central bank also needs to help the country reach the
highest level of employment possible by setting low interest rates.
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