Research Monographs: Industry-level Productivity and International Competitiveness Between Canada and the United States (2001)

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Editors: Dale W. Jorgenson and Frank C. Lee

Contents

Preface

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The purpose of this monograph is to illuminate the economic interrelationships between Canada and the United States. In order to achieve this objective, we have presented detailed comparisons of productivity trends and levels of output, input, and productivity for individual industries in the two countries. These comparisons employ purchasing power parities for both outputs and inputs and use a common methodology. While the estimates are preliminary in character, they embody the best information currently available on the determinants of relative standards of living and economic growth in both countries.

This monograph reflects the views of the authors, but not necessarily those of Industry Canada or of the institutions the authors are affiliated with. We would like to express our appreciation to Statistics Canada, the U.S. Bureau of Labor Statistics (BLS) and the Bureau of Economic Analysis (BEA) for data accessibility and consultations. In particular, the authors are grateful to Katharine Kemp of Statistics Canada for providing bilateral commodity price data, and Bruce Grimm and Dave Wasshausen of the BEA for details on the BEA investment data and prices.

We are grateful to Bob Arnold of CBO for helpful comments and discussions of the CBO's results and methods. We thank Erwin Diewert (University of British Columbia), Steve Oliner (Federal Reserve Board), Dan Sichel (Federal Reserve Board), and seminar participants at the Federal Reserve Bank of New York for helpful comments and discussions on Chapter 2. Dave Fiore provided excellent research assistance for Chapter 2. We are also indebted to Erwin Diewert (University of British Columbia), René Durand (Industry Canada), Rick Harris (Simon Fraser University), Jeremy Rudin (Finance Canada), Larry Rosenblum (U.S. Bureau of Labor Statistics) for their helpful comments on Chapters 3, 4 and 5. In addition, we thank Masahiro Kuroda (Keio University) and Kun-Young Yun (Yonsei University) for helpful discussions.

Last but not the least, we wish to thank Serge Nadeau and Someshwar Rao at Industry Canada for their unwavering support throughout the duration of the project. In addition, we also thank Denis Gauthier who supported this project at the inception. However, the authors are solely responsible for any remaining errors and omissions.

Introduction

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One of the principal economic policy objectives shared by Canada and the United States is maintaining high and growing standards of living. Both countries have been remarkably successful at this and stand at the top of the world rankings in terms of economic performance. The first objective of this monograph is to quantify the sources of economic growth at the industry level in Canada and the United States. The second objective is to assess the relative competitiveness of American and Canadian industries.

In Chapter 2, Jorgenson and Stiroh focus on the recent revival of U.S. economic growth. They attribute the rise in the rate of U.S. economic growth since 1995 to a surge of investment in computers, software, and communications equipment and to a jump in the growth rate of total factor productivity (TFP). Average labour productivity (ALP) grew 0.95 percent per year more rapidly during 1995-98 than during 1990-95. More rapid TFP growth contributed 0.72 percent per year, while capital deepening generated 0.34 percent per year. These increases offset a modest decline in the rate of improvement of labour quality as the pool of available workers was exhausted.

In Chapter 3, Wulong Gu, Frank Lee and Jianmin Tang also adopt the constant quality indices of capital and labour inputs used in Chapter 2 for each of the 122 industries studied in Canada. The extent of asset types is not as detailed as that in the United States. They only consider five asset types — machinery and equipment (M&E), building structures, engineering structures, land and inventories. However, on the labour input side, workers are cross-classified by two sexes, three employment classes, seven age groups and four educational groups, for a total of 168 types. At the aggregate level, the same framework is adopted by aggregating the capital stock across different asset types and hours worked across different types of workers.

The results show that the Canadian private business sector's output growth slowed down from an annual rate of 5.6 percent during 1961-73 to 3.3 percent during 1973-88, and to 1.5 percent during 1988-95. TFP growth accounted for about 46 percent of output growth during 1961-73, and for 22 percent and 26 percent, respectively, during 1973-88 and 1988-95. At the same time, over 80 percent of the slowdown in output growth observed from the first to the second period is attributable to the slowdown in TFP growth. On the other hand, over 80 percent of the slowdown in output growth from 1973-88 to 1988-95 originated from the slowdown in the growth of both capital and labour inputs. The slowdown in the growth of capital stock and hours worked was mainly responsible for the input growth slowdown between the last two periods.

For a majority of the 122 industries examined in this chapter, input growth was a dominant source of output growth during 1961-73 and 1973-88. However, during 1988-95, TFP growth accounted for more than half of output growth in slightly more than half of these industries, primarily because input growth slowed down more than productivity growth between 1973-88 and 1988-95.

In Chapter 4, Wulong Gu and Mun Ho compare output growth between Canada and the United States in 33 industries. They first aggregate capital input in both countries to four asset types (M&E, structures, land and inventories) so that the underlying data used in the study are comparable. The authors do not use the U.S. data that incorporate the latest benchmark revision in the U.S. National Income and Product Accounts for the purpose of comparing the United States with Canada. The extensive benchmark revisions made in the United States have not yet taken place in the Canadian National Income and Product Accounts.

The results show that average growth rates of output in Canada were higher than in the United States for almost all industries before 1988. After 1988, output growth in Canada has been slightly lower than in the United States. On the productivity side, there was a substantial catch-up by Canadian industries to the productivity levels of U.S. industries during the period 1961-73. After 1973, productivity in Canadian industries grew at a rate similar to that of U.S. industries. Input growth is identified as the dominant source of output growth at the sectoral level, with productivity growth contributing about 20 percent of output growth for both countries during the entire period.

In the last chapter, Frank Lee and Jianmin Tang focus on international competitiveness between Canadian and U.S. industries. They first construct Canada-U.S. bilateral purchasing power parities for outputs and inputs by industry using bilateral Canada-U.S. commodity price data following Jorgenson and Introduction Kuroda (1995). In 1995, more than half of Canadian industries were more competitive than their U.S. counterparts. However, the competitive position of Canadian industries is threatened by higher capital input prices and lower TFP levels. Canada had higher capital input prices than the United States in 27 of the 33 industries, whereas Canada had lower TFP levels than the United States in 23 of the 33 industries. Unlike capital input prices, all Canadian industries had an advantage over their U.S. counterparts in terms of labour costs. Finally, most Canadian industries paid almost the same price for their intermediate inputs as their U.S. counterparts.

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