June 2003     Vol. 4, no. 6

Productivity and prosperity in the information age

Kaïs Dachraoui, Tarek M. Harchaoui and Faouzi Tarkhani

In the late 1990s, the Canadian economy put on a remarkable performance. After 1995, economic growth was more rapid than in the 1981-1988 expansionary period (3.8% compared with 3.1%).  1  Both unemployment and inflation remained unusually low. Previously, low levels of unemployment usually meant sharply rising inflation. Yet, despite an unemployment rate in 1999 and 2000 of only about 7%, core inflation remained in check at 2.3%. Federal budget deficits vanished, as the structural budget balance moved steadily from deficit to surplus. And Canada's productivity performance compared favourably with that of the United States.

Productivity is not only the key to the performance of firms and industries, it is fundamental to living standards. During the late 1990s, Canada experienced a transformation in its productivity record. The causes and industry origins of the surge are not well known. Recent Statistics Canada studies provide some useful insights, not only reaffirming the role of information technology, but also revealing the mechanisms by which it has operated. This article draws heavily on that research to describe productivity trends, the role of different industries and information technology in the recent acceleration, and the implications for Canada's prosperity.

Key features of Canada's business sector productivity performance

Canada's productivity surge in the 1990s has been highlighted in a number of previous studies (Crawford 2002; OECD 2001). A few key features are summarized here.

Two productivity measures for the business sector are presented: labour productivity—the amount of output produced per unit of labour used; and multifactor productivity—the amount of output produced per unit of combined input of labour and capital (buildings, machinery, equipment). Improvements in productivity imply increased efficiency—that is, labour and capital resources are used in ways that add more value.

Canada's productivity performance over the 1981-2001 period went through three phases: strong growth from 1981 to the mid-1980s, a pronounced deceleration to the early 1990s, then a renewed surge (Chart A).

The 1990s surge peaked in 2000. Productivity declined slightly in 2001, as the business sector recorded a 0.9% increase in output and a 1% increase in combined labour and capital input. The 1990s presented the longest period of continuous growth in multifactor productivity during the last 20 years.

Since 1980, Canada and the United States have been through two business cycles (1981 to 1988, and 1988 to 2000). The 1980s were similar to the 1990s in both Canada and the U.S. in that labour productivity growth remained virtually unchanged (Chart B). Both periods saw a productivity gap in favour of the U.S. (about 0.5 percentage point).

During the 1980s and the 1990s in Canada, labour composition—which captures the increasing importance of skilled workers—was the largest contributor to labour productivity, followed by increases in information technology capital intensity and multifactor productivity growth. In contrast, in the U.S., multifactor productivity growth drove the labour productivity increase, followed by information technology capital intensity, and labour composition.

Between the early and late 1990s, labour productivity growth increased from 1.2% to 1.8% in Canada, largely as a result of the multifactor productivity revival. In contrast, owing to a surge in information technology capital intensity and multifactor productivity growth, the U.S. labour productivity growth doubled (from 1.4% to 2.8%) between these two periods.

Canada's increase in multifactor productivity in the 1990s improved not only relative to the U.S. but also by international standards (Chart C). Canada ranked fourth among the nine OECD countries to experience productivity acceleration in the 1990s.

A convenient way to assess the breadth of the Canadian productivity revival is to examine the productivity performance of industries in the business sector (Chart D). For the 12 broad sectors, the changes in average productivity growth rates between the 1981-1995 and the 1995-2000 periods differ, ranging from a drop of 3.5% in mining, quarrying and oil well to a gain of 3.1% in agricultural and related services.

The multifactor productivity growth revival during the late 1990s was not confined to one sector—retail trade; communication and utilities; and finance, insurance, and real estate all saw strong gains. At the same time, two major sectors, manufacturing and wholesale trade, experienced a productivity deceleration.

Part of the success of some industries was linked to information technology. For example, the financial sector restructured to operate much more through ATMs and Internet and telephone banking rather than through traditional face-to-face contact. Similarly, retailers were able to use bar-code and scanning technology and inventory management systems as part of a process that transformed wholesaling from a storage-based to a fast flow-through operation. These two industries reported the highest growth of information technology capital intensity during the late 1990s (Chart E).

Prosperity in the economy as a whole

What has the productivity surge meant for average incomes and the distribution of income in Canada?

Using labour productivity,  2  a simple relationship illustrates just how important productivity growth is to prosperity, measured as per capita GDP.  3 

Or, in other words,

The last two terms on the right-hand side are sometimes combined and referred to as the rate of labour utilization (OECD 2001). This measures the extent to which the population is actively engaged in employment activity—hours worked per capita.

During the 1990s, real income advanced at 1.4%, down from 1.9% during the 1980s, a reflection of a slower growth in labour utilization—from 0.8% in the 1980s to 0.1% in the 1990s (Chart F). In contrast, labour productivity growth remained virtually unchanged between these two periods. The 1990s brought a major turnaround in Canada's prosperity growth, even though it remained unchanged between the early and late 1990s.

Changes in labour utilization in the late 1990s boosted average real income, which grew at a remarkable 2.8% per year. When real income grows at this pace, each generation experiences a far more affluent lifestyle than the previous one. Over the course of a lifetime, parents can provide their children with a standard of living that is twice the level they themselves enjoyed as children.

Notes

1. This study uses the most recent annual data (September 2002) for productivity over the 1981-2000 period. Data are current as of July 2002 and reflect a downward revision in U.S. productivity estimates as of March 2002. More information on the revisions can be found at /concepts/15-204/productiv-eng.pdf.
2. The coverage of the labour productivity measure differs in this section (whole economy output and hours worked) from that used in the previous section (business sector output and hours worked). The business sector measures are generally considered to be more representative of productivity trends since they exclude activities (such as government administration) for which output is hard to measure.
3. Labour productivity is a measure subject to a number of well-known criticisms as a welfare indicator, but it is a meaningful and useful indicator nonetheless.

References

• Crawford, Allan. 2002. "Trends in productivity growth in Canada." Bank of Canada Review (Spring): 19-33.
• Organisation for Economic Co-operation and Development (OECD). 2001. Science, technology and industry scoreboard: Towards a knowledge-based economy. OECD: Paris.

The authors are with Microeconomic Analysis Division. Kaïs Dachraoui can be reached at (613) 951-0746; Tarek M. Harchaoui, at (613) 951-9856; Faouzi Tarkhani, at (613) 951-5314 or perspectives@statcan.gc.ca.

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