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This paper provides a consistent international comparison of long-term productivity growth in manufacturing industries in Canada and the United States. While much comparative work has been done with respect to productivity growth in the manufacturing sector in the two countries in the past, this has often been on the basis of measures that are not comparable. Our approach here is to construct a measure of output growth for the Canadian manufacturing industries that is comparable to the U.S. measure used in the Bureau of Labor Statistics (BLS) productivity program.

In its system of official productivity measures for the United States, the BLS employs a measure of sectoral output that equals the value of gross output less the value of intra-sector sales and transfers. In contrast, Statistics Canada and most other statistical agencies employ a value-added concept of manufacturing output, defined as the value of gross output less the value of all intermediate purchases of goods and services.

To provide a consistent international comparison of long-term productivity growth in manufacturing industries in Canada and the United States, we have used a version of an industry productivity database for Canadian manufacturing industries that is quite comparable to the productivity database for the U.S. manufacturing industries from the BLS. In the database, output is defined as sectoral output, and labour productivity is the real sectoral output per hour worked. Labour input is measured by hours worked, which represents the total number of hours that a person devotes to work, whether paid or unpaid. Capital service input is an estimate of the service flows derived from the stock of capital assets; it is estimated from the aggregation of capital stock of various asset types within each industry, using the estimated user cost of capital as weight.

Several questions are posed in the paper.

1. What has been the history of labour productivity growth in the manufacturing sector in Canada and the United States during the 1961-to-2003 period?

From 1961 to 2003, aggregate labour productivity growth in the manufacturing sector was the same in the two countries. It increased at an annual rate of 3.2% in both countries.

The similar labour productivity growth in the two countries reflects faster growth in both output and hours worked in the Canadian manufacturing sector. The output of manufacturing grew faster in Canada than in the United States for the 1961-to-2003 period: 3.9% per year in Canada compared with 3.1% per year in the United States. The hours worked of the manufacturing sector also grew faster in Canada over the period: 0.7% per year in Canada compared with -0.1% in the United States.

From 1961 to 1996, labour productivity growth was higher in Canada than in the United States. As a result, the labour productivity level in Canada, relative to that in the United States, increased by 14 percentage points from 1961 to 1996. The faster labour productivity growth in Canada over this period reflects the faster hours worked growth and even faster real-output growth in Canada.

After 1996, aggregate labour productivity growth declined slightly in Canada while it accelerated markedly in the United States. Annual labour productivity growth in Canada declined from 3.2% for the 1961-to-1996 period to 2.8% for the 1996-to-2003 period; in contrast, annual labour productivity growth in the United States increased from 2.8% to 4.9% in these respective periods. As a result, annual labour productivity growth in Canada was 2.1 percentage points lower than in the United States for the 1996-to-2003 period.

2. What have been the sources of manufacturing labour productivity growth in Canada over the period?

Labour productivity growth can be decomposed into three components. The first is the contribution of capital deepening—or the capital deepening effect—whereby more capital services make workers more productive. The second is the contribution of intermediate input deepening—or the intermediate deepening effect—that reflects the impact of more intermediate-intensive production on labour productivity. The third component is multifactor productivity (MFP) growth, which is often associated with technological change, organizational change or economies of scale.

Intermediate input deepening is the dominant source of labour productivity growth in the Canadian manufacturing sector over the 1961-to-2003 period. Of the 3.2% annual growth in labour productivity for this period, 1.8 percentage point can be attributed to the contribution of intermediate input deepening. The growth in MFP is the second most important contributor to the labour productivity growth. It accounted for 1.1 percentage point of the 3.2% annual growth in labour productivity. Increases in capital intensity contributed the remaining 0.4 percentage point to annual labour productivity growth.

3. What have been the sources of manufacturing labour productivity growth in the United States over the period?

Labour productivity grew at an annual rate of 3.2% in the U.S. manufacturing sector. MFP growth and intermediate input deepening made similar contributions to labour productivity growth; each contributed 1.3% per year to labour productivity growth during this period, which together accounted for about 80% of labour productivity growth in the U.S. manufacturing sector. Increases in capital intensity made a significant contribution to labour productivity growth in the United States, contributing 0.6 percentage point or about 20% of the U.S. labour productivity growth from 1961 to 2003.

4. What have been the differences in the sources of manufacturing labour productivity growth in Canada and the United States over the period?

Intermediate input deepening was a more important source of labour productivity growth in Canada than in the United States, while investment in capital and MFP growth were more important in the United States than in Canada. The relatively higher effect of intermediate deepening on annual labour productivity growth in Canada compared with the United States offset the relatively lower effect of capital deepening and MFP growth in Canada. The net effect was similar rates of labour productivity growth in the two countries.

The contribution of intermediate input deepening was higher in Canadian manufacturing than in U.S. manufacturing. This accords with differences in the input intensity in the two countries. Inputs as a share of total outputs are higher in Canada—perhaps because of differences in where its manufacturing sector is in the value chain—and increases in input intensity have made a greater contribution to labour productivity growth. The evidence on intermediate input deepening in the two countries could also be the result of differences in the degree of vertical specialization of the production process—with Canada increasing specialization faster than the United States, since the former started off at a lower level.

The contribution of capital deepening was lower in Canadian manufacturing than in U.S. manufacturing. For the 1961-to-2003 period, capital deepening's effect on annual labour productivity growth was 0.4% in Canada compared with 0.6% in the United States.

MFP growth was lower in the Canadian manufacturing sector than in that of the United States. From 1961 to 2003, the aggregate MFP grew at a rate of 1.0% per year in the Canadian manufacturing sector, while it grew at a rate of 1.3% per year in the U.S. manufacturing sector.

5. What have been the factors behind the large labour productivity growth gap in favour of the U.S. manufacturing sector after the mid-1990s?

Over the 1996-to-2003 period, labour productivity growth grew at 2.8% per year in the Canadian manufacturing sector while it grew at 4.9% per year in that of the United States. The post-1996 slower labour productivity growth in Canada compared with the United States was due to slower growth in MFP and slower growth in capital intensity. The slower MFP growth in Canada accounted for 60% of the labour productivity growth difference in the two countries and slower growth in capital intensity accounted for 30%. The remaining 10% was due to the differences in intermediate input deepening in the two countries.

The slower MFP growth after 1996 in the Canadian manufacturing sector relative to the United States was due to lower MFP growth in the computer and electronic products industry. There has been more rapid technological progress within the computer and electronic products industry in the United States compared with that in Canada.

The slower growth in the capital–labour ratio in Canadian manufacturing compared with the United States after the mid-1990s occurred as changes took place in the relative price of capital and labour inputs in the two countries. After the mid-1990s, the relative price of labour compared with that of investment increased at a slower rate in Canada than it did in the United States. This slower increase in the relative price of labour compared with capital in Canada suggests that Canadian manufacturers had a greater incentive to substitute labour for capital, which led to slower growth in capital intensity during that period in Canada.