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							                             Productivity
                             Micro-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

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                              Productivity
                              Micro-economic Analysis Division



        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


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                                  Productivity
                                  Micro-economic Analysis Division



  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
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                                 Productivity
                                 Micro-economic Analysis Division



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.
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                         Productivity
                         Micro-economic Analysis Division



 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




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                                         Productivity
                                         Micro-economic Analysis Division


      Over the last 25 years, for every percent of Canada's
       economic growth, labour productivity has contributed for
                         nearly half of it...
4.0
          Labour productivity   Hours worked
3.5

3.0

2.5                       1.8
        1.5                                1.4
2.0
                                                                   1.4
1.5

1.0
        1.4               1.5              1.5
0.5                                                                0.9

0.0
      1981 to 2004    1981 to 1988     1988 to 2000            2000 to 2004
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                              Productivity
                              Micro-economic Analysis Division



  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.

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                         Productivity
                         Micro-economic Analysis Division



 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)

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                           Productivity
                           Micro-economic Analysis Division




        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).

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                         Productivity
                         Micro-economic Analysis Division


           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

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                             Productivity
                             Micro-economic Analysis Division



  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

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                                    Productivity
                                    Micro-economic Analysis Division



    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?


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                                                               Productivity
                                                               Micro-economic Analysis Division



              Trend in the aggregate
               productivity growth
percent per year
12.0

 8.0

 4.0

 0.0

-4.0

-8.0
   1960        1965    1970    1975      1980           1985      1990       1995       2000      2005
                                                years

                      Output      Labour productivity             Multifactor productivity

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                         Productivity
                         Micro-economic Analysis Division




      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)

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                                                                 Productivity
                                                                 Micro-economic Analysis Division


Sources of Labour Productivity
  Growth (Business Sector)
 4.0
 3.5
 3.0
 2.5
 2.0
 1.5
 1.0
 0.5
 0.0
-0.5
       1961 to 2005     1961 to 1973   1973 to 1979    1979 to 1988     1988 to 2000     2000 to 2005

                      Labour composition     Capital intensity      Multifactor productivity

                                                                                                        16
                       Productivity
                       Micro-economic Analysis Division



               Challenges

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


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                              Productivity
                              Micro-economic Analysis Division



     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
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                            Productivity
                            Micro-economic Analysis Division



              Challenges

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




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                            Productivity
                            Micro-economic Analysis Division



              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

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                              Productivity
                              Micro-economic Analysis Division



              Challenges

Relevance

  Focus –primarily on domestic growth

  Users requesting international comparisons




                                                                 21
                      Productivity
                      Micro-economic Analysis Division


  U.S./ Canada Labour Productivity
         Growth Comparison


• Trend comparisons




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                                                          Productivity
                                                          Micro-economic Analysis Division



Canada and US growth trend similar for GDP

              Real GDP Trend, Business Sector (1961=100)
    500




    400
                     Canada
                     United States

    300




    200




    100
       1961   1965   1969   1973   1977   1981   1985   1989   1993   1997   2001


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                                                       Productivity
                                                       Micro-economic Analysis Division


Canada and US growth trend similar for both
          GDP and hours worked
              Hours at Work, Business Sector (1961=100)



                  Canada
                  United States
  200




  150




  100
    1961   1965   1969   1973   1977   1981   1985   1989   1993   1997   2001



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                                                                             Productivity
                                                                             Micro-economic Analysis Division


Canada and US growth trend similar for Labour
                Productivity
                               Labour P roductivity Trend, Business Sector (1961=100)
  250.0




  225.0
                          Canada        United States




  200.0




  175.0




  150.0




  125.0




  100.0
          1961   1964   1967    1970   1973   1976      1979   1982   1985   1988   1991   1994   1997   2000




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                      Productivity
                      Micro-economic Analysis Division


  U.S./ Canada Labour Productivity
         Growth Comparison


• Level Comparisons




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                             Productivity
                             Micro-economic Analysis Division



 U.S./ Canada Level Comparison

• Labour productivity
  – Harmonization of labour measures
• Multifactor Productivity
  – Harmonization of capital measures




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                                                                                         Productivity
                                                                                         Micro-economic Analysis Division


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



             100

             95

             90
U.S. = 100




                                                                                                         GDP per capita
             85                                                                                          Labour productivity
                                                                                                         Work intensity
             80

             75

             70
                   1994

                          1995

                                 1996

                                        1997

                                               1998

                                                      1999

                                                             2000

                                                                    2001

                                                                           2002

                                                                                  2003

                                                                                          2004

                                                                                                 2005
                                                        Year




                                                                                                                               28
                                Productivity
                                Micro-economic Analysis Division


  U.S./ Canada Labour Productivity
         Growth Comparison

• Component Comparisons
  – Multifactor versus capital intensity versus skill
    upgrading




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                                                  Productivity
                                                  Micro-economic Analysis Division



                Post 2001 collapse
        Figure 1: Relative Canada/U.S. Labour Productivity Level in the
                   Business Sector, 1961-2005 (1961-100)

120




100




80
 1961   1965   1969   1973   1977   1981   1985   1989    1993   1997   2001    2005



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                                                                                    Productivity
                                                                                    Micro-economic Analysis Division



                                 Growth rate differences
                                Trend in Canada-U.S. Difference in Growth of MFP, Capital Intensity and
                                                       Labour Compositon (% )

                        2
HP Filter (Lamda=100)




                        1

                         0
                         1961   1965   1969      1973     1977     1981      1985   1989   1993    1997    2001   2005
                        -1


                        -2

                        -3

                                   MFP Grow th          Capital Intensity Grow th    Labour Composition Grow th


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                         Productivity
                         Micro-economic Analysis Division


  U.S./ Canada Labour Productivity
         Growth Comparison


• Pre and post 2000 experience




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                                                               Productivity
                                                               Micro-economic Analysis Division



          Import and Export Prices
Price Indices (2005=100)
1.10
1.05
1.00

0.95
0.90
0.85
0.80
0.75

0.70
0.65
0.60
       1981   1983   1985   1987   1989   1991   1993   1995     1997   1999   2001   2003   2005
                            Px                                                 Pm


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                                                             Productivity
                                                             Micro-economic Analysis Division



                          Terms of Trade
Terms of Trade                                                                      Exchange Rate
1.22                                                                                        0.90


1.17                                                                                          0.85


1.12                                                                                          0.80


1.07                                                                                          0.75


1.02                                                                                          0.70


0.97                                                                                          0.65


0.92                                                                                          0.60
       1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
                       Terms of Trade                                    $US/$CDN




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                                                      Productivity
                                                      Micro-economic Analysis Division



           Relative Price Changes
Durables/semi-Durables (Index                                   Non-Durables (Index 2002=100)
2002=100)
104                                                                                      125

102                                                                                     120
                                                                                        115
100
                                                                                        110
 98                                                                                     105

 96                                                                                     100

 94                                                                                     95

                                                                                        90
 92
                                                                                        85
 90
                                                                                        80
 88                                                                                     75
  1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
            Durables                   Semi-Durables                  Non-Durables


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                                                              Productivity
                                                              Micro-economic Analysis Division


 Relative Economic Performance:
          Canada vs. US
Index 1998=100
125

120

115

110

105

100

 95

 90
      1980   1982   1984   1986   1988   1990   1992   1994    1996   1998   2000   2002   2004    2006

        Labour Productivity               Real GDP Per Capita                Real NNI per capita


                                                                                                   36
                                                      Productivity
                                                      Micro-economic Analysis Division
             Provincial Program:
             Labour Productivity
                 1997-2006
 %
3.0

2.5

2.0

1.5

1.0

0.5

0.0
      Canada B.C.   Alta.   Sask.   Man.    Ont.   Que.   N.B.    N.S.   P.E.I.   N.L.

                    Labour productivity growth            National average

                                                                                         37
                                                               Productivity
                                                               Micro-economic Analysis Division



Nominal value of GDP per capita, 2003

   60,000
                                                                                54,075

   50,000

                                                     40,346
                                                                       36,749                     38,495
   40,000
            35,243                          33,856                                       35,041
                                                              32,708
                     28,106 30,883 29,900
   30,000


   20,000


   10,000


        0
             N.L.    P.E.I.   N.S.   N.B.    Que.     Ont.    Man.     Sask.     Alta.    B.C.    Canada




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                                                   Productivity
                                                   Micro-economic Analysis Division

GDP per capita, labour productivity and labour
                    effort

                                     Q u e be c


                  150
     Canada=100




                  100

                   50

                    0
                        GDP per capit a GDP per hours         Hours worked
                                          worked              per pop 15+
                                     1990         1997     2003

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                          Productivity
                          Micro-economic Analysis Division



              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                                              40