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Study: Investment and long-term growth in labour productivity

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The Daily

Monday, June 25, 2007
1961 to 2005

Investment in capital, rather than gains in worker skills or technological change, was the most important factor in the growth in labour productivity in the business sector during the past four decades, according to a new study.

Between 1961 and 2005, labour productivity, one of the key indicators of an economy's health, rose at an annual rate of 2.1%. This study assessed the contribution of three main components of this growth.

These components are: gains that originate from changes in capital intensity (the amount of capital per hour worked); gains from changes in labour composition (involving more highly educated or more experienced workers); and growth in multifactor productivity, which is generally everything that cannot be accounted for by labour and capital.

The study found that during this 45-year period, increases in capital intensity were the most important factor, contributing about 55% of growth in labour productivity. (In 2005 alone, capital intensity accounted for about three-quarters of the growth.)

Multifactor productivity, the second most important factor, accounted for about one-quarter of the growth in labour productivity during this period. Growth in this area is often associated with technological change, organizational change or economies of scale.

The remainder, about 20%, came from changes in the composition of labour. A positive labour composition effect reflects the increase in the average educational attainment and experience levels of workers.

Note to readers

This release is based on the report "Investment and long-term productivity growth in the Canadian business sector" as well as on a new industry database on productivity, released today.

This paper has three main objectives. Firstly, it provides a comprehensive overview of trends in labour productivity growth in the Canadian business sector over the last four decades.

Secondly, it examines the contribution of investment in tangible assets, human capital and multifactor productivity growth to these trends.

Thirdly, it analyses the industrial sources of aggregate growth in productivity, focusing on the contribution that goods and services sectors make to aggregate productivity growth.

There is a continued interest among analysts in the role that new economy industries and natural resource industries (old economy) play in Canada's economic growth. Consequently, this paper also examines the relative contribution these two sectors make to aggregate productivity growth.

The residual portion of labour productivity growth that is not accounted for by increased capital intensity and skills upgrading is called growth in multifactor productivity.

Multifactor productivity measures at Statistics Canada are derived from a growth accounting framework that allows analysts to isolate the effects on labour productivity growth of increases in capital intensity and skills upgrading.

The data released today reflects a new industry database that, for the first time, provides a series for output, labour and capital in the new North American Industry Classification System back to 1961. The Canadian Productivity Accounts has developed these series using similar methods to backcast each series so that they would be consistent with the methods used by the System of National Accounts. Additional improvements have been made to both the labour and capital estimates in the productivity accounts. For more information on the industry productivity database, consult the Canadian System of National Accounts module of our website.

Labour productivity is a measure of the real gross domestic product (GDP) per hour worked. Over time, it serves to improve the population's standard of living and business competitiveness.

Productivity gains are important because they are closely connected with changes in real wages over the long run.

Substantial changes in structure of capital and labour

Two key factors in the growth of labour productivity – the composition of capital and the types of labour – have both changed during the past four decades.

In terms of capital, there has been a long-term shift towards machinery and equipment, and away from structure capital, land and inventories in the business sector. In the machinery and equipment category, information and communications technologies (ICT) have increased the most.

Between 1961 and 2005, non-ICT capital services increased at an annual rate of 3.9%, while ICT capital services rose at an annual rate of 14.5%. These ICT services increased dramatically as the price of ICT capital declined relative to other forms of capital. Canadian businesses have made large investments in ICTs to take advantage of this dramatic decline in prices.

At the same time, the composition of Canada's labour force has changed markedly. There have also been dramatic changes in the education qualifications of the labour force. The proportion of workers with only a high school education has declined steadily, while the percentage with postsecondary degrees has risen.

The share of labour compensation of workers with university degrees increased from 7.1% to 23.5% between 1961 and 2003. In contrast, the share of labour compensation of workers with primary or secondary education declined from 89.2% to 31.8% during that period.

Contribution of capital intensity has increased markedly over time

In general, the study found that the contribution of capital intensity to the growth in labour productivity increased markedly over time.

During the 1960s and early 1970s, ICTs accounted for only a small portion of the contribution that the growth in capital services made to the growth in labour productivity. However, during the 1990s and into the turn of the millennium, ICTs accounted for about 60% of the total contribution of capital to labour productivity growth.

A large increase in capital intensity was mainly responsible for the improvement in labour productivity growth in 2005.

The increase in labour productivity in 2005 was the strongest since 2000.

The impact of capital intensity accounted for more than three-quarters of the acceleration in labour productivity growth in 2005. The remainder, about 20%, came from the increase in multifactor productivity growth. The rate of growth in capital intensity almost tripled from 0.6% on average between 2000 and 2004 to 1.6% in 2005.

In contrast, improvements in the labour force due to higher levels of education and greater experience were virtually unchanged between the period from 2000 to 2004 and in 2005.

Since 2000, growth in labour productivity has in fact slowed considerably from the gains recorded between 1989 and 2000, particularly in the mining and manufacturing sectors. This slowdown in labour productivity growth largely reflects a decline in growth of multifactor productivity.

Capital intensity dominant in natural resources industries

The economy consists of industries that range from highly capital intensive to more labour intensive.

In terms of economic output, capital accumulation has been the dominant source of growth in the two natural resources industries (mining and oil and gas extraction). It has also been important in the finance, insurance and real estate industries.

Labour input has been the most important contributor to growth in economic output in professional services as well as in education and health care services industries, both of which are labour-intensive. But even in those, capital is an important source of output growth.

In terms of labour productivity, the contributions of the various components to growth have differed substantially across industries.

In some industries, the deepening of capital was the dominant contributor to labour productivity growth. However, in these industries, there was no consistent pattern as to whether multifactor productivity growth makes higher or even positive contributions to labour productivity growth.

Increasing the quality of the labour force was important in most industries, though less important than the growth in multifactor productivity in most industries.

As well, there is less variability across industries in the contribution of skill upgrading than there is in either capital deepening or in multifactor productivity growth. The growth in the knowledge economy is being felt across all industries.

Available on CANSIM: tables 383-0021 and 383-0022.

The research paper "Investment and productivity growth in the Canadian business sector: 1961 to 2002", as part of The Canadian Productivity Review (15-206-XIE2007006, free), is now available from the Publications module of our website.

The industry productivity database used in the research paper is available in Tables 383-0021 and 383-0022 on CANSIM. Table 383-0021 provides a series for multifactor productivity, value-added, capital input and labour input in the aggregate business sector and major sub-sectors. Table 383-0022 provides series on multifactor productivity, gross output, value-added, capital, labour and intermediate inputs at a detailed industry level.

More studies related to productivity are available online (/studies-etudes/econo-eng.htm).

For more information, or to enquire about the concepts, methods or data quality of this release, contact John Baldwin (613-951-8588) or Wulong Gu (613-951-0754), Micro-economic Analysis Division.

Tables. Table(s).