Productivity Micro-economic Analysis Division 1 Productivity Micro-economic Analysis Division Statistics Canada January 2008

Productivity Micro-economic Analysis Division 2 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

Productivity Micro-economic Analysis Division 3 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

Productivity Micro-economic Analysis Division 4 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

Productivity Micro-economic Analysis Division 5 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 Economics: Principles and Policy. (p.778). San Diego: Harcourt Brace Jovanovich.

Productivity Micro-economic Analysis Division 6 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

Productivity Micro-economic Analysis Division 7 Over the last 25 years, for every percent of Canada's economic growth, labour productivity has contributed for nearly half of it to to to to 2004 Labour productivityHours worked

Productivity Micro-economic Analysis Division 8 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.

Productivity Micro-economic Analysis Division 9 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)

Productivity Micro-economic Analysis Division 10 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).

Productivity Micro-economic Analysis Division 11 Measurement of Multifactor Productivity Imposition of structure (production framework) Use of analytical technique or specific assumptions about the economy to measure parameters associated with the structure

Productivity Micro-economic Analysis Division 12 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

Productivity Micro-economic Analysis Division 13 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?

Productivity Micro-economic Analysis Division 14 Trend in the aggregate productivity growth

Productivity Micro-economic Analysis Division 15 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)

Productivity Micro-economic Analysis Division 16 Sources of Labour Productivity Growth (Business Sector)

Productivity Micro-economic Analysis Division 17 Challenges Quality (Criteria) –Accuracy –Coherency –Relevance –Interpretability

Productivity Micro-economic Analysis Division 18 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

Productivity Micro-economic Analysis Division 19 Challenges Concept –Analytical construct –Externality or Residual –Macro level approach

Productivity Micro-economic Analysis Division 20 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

Productivity Micro-economic Analysis Division 21 Challenges Relevance Focus –primarily on domestic growth Users requesting international comparisons

Productivity Micro-economic Analysis Division 22 U.S./ Canada Labour Productivity Growth Comparison Trend comparisons

Productivity Micro-economic Analysis Division 23 Canada and US growth trend similar for GDP

Productivity Micro-economic Analysis Division 24 Canada and US growth trend similar for both GDP and hours worked

Productivity Micro-economic Analysis Division 25 Canada and US growth trend similar for Labour Productivity

Productivity Micro-economic Analysis Division 26 U.S./ Canada Labour Productivity Growth Comparison Level Comparisons

Productivity Micro-economic Analysis Division 27 U.S./ Canada Level Comparison Labour productivity –Harmonization of labour measures Multifactor Productivity –Harmonization of capital measures

Productivity Micro-economic Analysis Division 28 Canada/US relative GDP per capita, labour productivity, and work intensity (total economy)

Productivity Micro-economic Analysis Division 29 U.S./ Canada Labour Productivity Growth Comparison Component Comparisons –Multifactor versus capital intensity versus skill upgrading

Productivity Micro-economic Analysis Division 30 Post 2001 collapse

Productivity Micro-economic Analysis Division 31 Growth rate differences

Productivity Micro-economic Analysis Division 32 U.S./ Canada Labour Productivity Growth Comparison Pre and post 2000 experience

Productivity Micro-economic Analysis Division 33 Import and Export Prices

Productivity Micro-economic Analysis Division 34 Terms of Trade

Productivity Micro-economic Analysis Division 35 Relative Price Changes

Productivity Micro-economic Analysis Division 36 Relative Economic Performance: Canada vs. US

Productivity Micro-economic Analysis Division 37 Provincial Program: Labour Productivity

Productivity Micro-economic Analysis Division 38 Nominal value of GDP per capita, 2003

Productivity Micro-economic Analysis Division 39 GDP per capita, labour productivity and labour effort

Productivity Micro-economic Analysis Division 40 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