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Canada’s productivity measurement deserves a serious second look

The sixth and last part of our Econowatch special report on productivity


 

If you spend any time reading about the Canadian economy, you have inevitably come across the Great Canadian Productivity Puzzle. Canada’s productivity is much lower than that of other countries, and we don’t really know why. Neither do we seem to be able to fix the problem. Policymakers have used every trick in the book to try to boost productivity, but the results have disappointed. Productivity growth matters because it drives up our purchasing power: if it lags, so will our standard of living. And yet—here’s where things get interesting—Canadians are far better off than one would tell looking at our dismal productivity performance over the past 20 years. How did we do it? In this six-part special report, Maclean’s in-house economist Stephen Gordon investigates the mystery. (With a contribution from Econowatch editor Erica Alini.)

Click here to see previous posts.

“May I ask you a question, Prime Minister?” former U.S. Treasury secretary Robert Rubin interjected. Stephen Harper had just finished enumerating the virtues of the Canadian economy to a mostly American audience in New York during an official visit to the U.S. some three weeks ago. “My impression,” Rubin continued, “is that with all the great strengths of Canada, productivity still has not increased at the rate that it has in some of the competitive countries—for example, ours.”

Don Pollard/Council on Foreign Relations

As far as the economy goes, productivity, or output per hour, is perhaps the one Canadian inferiority complex that survived the Great Recession. Canada, goes the conventional wisdom, was prudent with its banks, and—let’s say it—lucky with high commodity prices. But it is not competitive or innovative. Battered Uncle Sam still beats us at that.

Initially, we thought it was all the government’s fault. “Canada had high and variable inflation. Large and growing public debt. Trade restrictions externally and internally. One of the highest rates of taxation on capital in the world,” recalled (pdf) economist Don Drummond. But then came NAFTA, the Bank of Canada’s inflation-targeting, the federal budget cuts of the 1980s, the GST and much lower corporate income tax rate. The benefits were many and varied—except for Canada’s productivity rates, which got even worse in the early 2000s.

Maybe the government wasn’t the culprit—or, at least, no longer the culprit. Perhaps it was a matter of culture. Perhaps the root cause of Canada’s persistent productivity problem lay inside corporate boardrooms, with executives too cozy to climb to the top of the world. Managers too feckless to take risks. Countless surveys of Canadian businesses found evidence of attitudinal shortcomings compared to the Americans. At least among economists and policy wonks, productivity became a national hang-up.

Recently, though, an alternative explanation has emerged: Perhaps our measurement of productivity is at fault. It is a persuasive and possibly revolutionary idea and it’s the reason why Econowatch decided to dedicate a week-long special report to the issue of productivity.

Statistics Canada, which compiles such numbers, however, seems uninterested in investigating the hypothesis of a measurement error. The agency—known among economists for its high-quality and extensive research, generous data sharing and, among reporters, for its quick and helpful feedback to media inquiries—appeared uncharacteristically defensive on this issue.

When a couple of Canadian economists published research (pdf) last December showing that using an alternative methodology yields much better productivity growth rates, StatsCan was quick to reject it, even though one of the authors, Erwin Diewert, a professor at the University of British Columbia’s Vancouver School of Economics, is widely regarded as one of the world’s finest brains in the field. (His co-author was Emily Yu, an economist at the Department of Foreign Affairs and International Trade.)

In its official response to the study, Statistics Canada dismissed the Diewert-Yu estimates as incompatible with internationally accepted methodology, including the one used to calculate the U.S.’s productivity growth rate. “Since Canadian productivity performance is often compared to the productivity performance in the United States, the methodology behind the estimates for Canada should be comparable to the largest extent possible to that used by the U.S. Bureau of Labor Statistics (BLS),” wrote (pdf) Wulong Gu, of StatsCan’s Economic Analysis Division.

In a rebuttal to the rebuttal, however, a second group of independent economists stated that StatsCan’s own methodology isn’t, in fact, closely comparable with the one used by America’s bean counters. Notably, one of those saying so was Michael Harper, a retired BLS official who helped design the U.S.’s current productivity measure and ran the Bureau’s productivity program until 2011.

“We find the gaps between the stated procedures for MFP estimation [a measure of productivity commonly interpreted as technical progress] used by Statistics Canada and the BLS are substantial,” Michael Harper concluded in an open, written response (pdf) he co-authored with Alice Nakamura, another renowned expert on productivity, and Lu Zhang, both from the University of Alberta School of Business. On the phone with Econowatch, Nakamura described StatsCan’s statement that it crunches the numbers roughly the way the BLS does as “misleading to the point of being harmful.”

In calculating MFP, StatsCan and the BLS use the same “bottom-up” methodology. The BLS, however, then does the math again with the “top-down” approach used by Diewert and Yu, a practice, write Harper, Nakamura and Zhang, that constitutes “an important consistency check.” The Bureau, according to the authors, is able to obtain roughly the same numbers whether it uses the bottom up or top down method.

Another important difference, write Harper, Nakamura and Zhang, lies in the way StatsCan and the BLS handle one set of industry-level statistics needed to measure MFP, called internal rates of return (IRR) on capital. The BLS replaces IRR values it deems implausible with an internationally accepted alternative. StatsCan does not.

None of this indicates that the BLS’s way of doing things is better. But StatsCan’s dismissal of the Diewert-Yu study based on issues of compatibility with U.S. statistics seems perplexing if Canada’s official way of computing multifactor productivity is significantly different from what is standard practice south of the border.

There are, as well, questions about the way StatsCan has been handling IRR statistics. Access to those numbers would enable outside economists to assess the quality of StatsCan’s MFP measurement independently, which can help defy groupthink, catch mistakes, and lead to higher-quality statistics. Such external feedback is deemed essential at the BLS, according to Michael Harper, et al. The Bureau publishes IRR statistics on its website on the same date it releases its official MFP measure.

StatsCan has provided IRR data for up to 2008 to two publicly accessible websites (see here–opens an xls file–and here), but these are unofficial statistics. The official ones, as well as other underlying data used to compute MFP, “are available and have been used by outside researchers at Statistics Canada,” the agency wrote in a email. This came as a surprise to several economists Econowatch spoke to for this story. The IRRs, though, aren’t publicly available on the StatsCan website. When asked why, the agency replied by saying that they “do not meet the quality standards of Statistics Canada to be released as official products.” Yet these are the data StatsCan uses to compute the country’s official measure of multifactor productivity.

StatsCan also told Econowatch that, “Regardless of which estimate is used, the overall trends in multifactor productivity growth in Canada remain consistent.” Both the official estimate and the Diwewert-Yu estimate, it added, “point to a general slowdown in productivity growth over the past decade in Canada and relative to the United States.” While that’s true for the past ten years, the picture since 1961 looks quite different:

Back in New York, Prime Minister Stephen Harper proceeded to address Rubin’s somewhat indelicate question by listing a number of policies Ottawa hopes will spur Canada to catch up to its southern neighbour, or at least get closer to it: investment incentives for the manufacturing sector, more trade liberalization, and using government money to encourage the commercialization of research and development activities.

So far such policies have been little better than a shot in the dark. Recently, sensible people have advanced a new hypothesis about the origin of Canada’s—real or imagined—productivity crisis. Investigating this possibility to the fullest extent seems a no-brainer.

Of course, a new consensus that Canada’s productivity is actually better than previously estimated shouldn’t discourage the adoption of measures in government and industry targeted at improving productivity growth. There’s always room for improvement. But there’s little question that better statistics—if this is indeed the issue—would greatly improve our policy aim.

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INDEX:

  • Part six: Canada’s productivity measurement deserves a second look

 
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Canada’s productivity measurement deserves a serious second look

  1. Thata boy Harper and conservatives!!

  2. “Policymakers have used every trick in the book to try to boost productivity, but the results have disappointed.”

    Doling out copious corporate welfare and tax cuts with no accountability for how the money is spent is not “using every trick in the book” to boost productivity.

    According to KPMG, our effective corporate tax rate is the lowest among *all* major economies (developed and developing) when subsidies are factored in. Clearly this supply-side trickle-down crony capitalism is not working (if it was ever meant to.)

    “Corporate income taxes are lowest in Canada (7.3 per cent effective corporate income tax rate), France (14.7 per cent), and China (14.8 per cent). At the other end of the scale, effective corporate income taxes exceed 30 per cent in Japan (31.5 per cent), Brazil (36.1 per cent), and Italy (37.6 per cent). These effective income tax rates are significantly lower than the nominal tax rates in most countries due to the inclusion of various tax incentives, including R&D tax incentives, in these calculations.”

    KPMG Competive Alternatives 2012 — Focus on Tax (Chp 3, pg 7)
    http://www.competitivealternatives.com/reports/2012_compalt_report_tax_en.pdf

  3. The “Harper Government” is only interested in “evidence” that matches its narrative. But I’m surprised that StatsCan is dismissive of external critiques. I must say, though, that my one experience with a StatsCan statistician was that she showed a complete lack of interest in seeking any background from the provincial-level expert (me) on the data she was getting from us.

    • It’s hard to tell who has the right-wing agenda here. This series, IMO, reads like a tar sands apologist piece.

      According to the OECD, our multi-factor productivity growth is just as bad. From 2000 to 2010, we ranked #16 of 19 countries with 0.1% growth. (The US has 12X that: 1.2%.)

      My guess is that there is not much room for productivity gains when digging holes in the ground. (The resources become harder and harder to get at, reducing productivity over time.)

      OECD Stat Extracts: Productivity -> Muli-factor Productivity
      http://stats.oecd.org/Index.aspx?DatasetCode=LEVEL

  4. “Canadians are far better off than one would tell looking at our dismal productivity performance over the past 20 years. How did we do it?”

    We did nothing. Let’s look at the facts. According to Statistics Canada there is a significant rise in real wages (median and average) from about 2004 to 2010:

    http://www.statcan.gc.ca/pub/11-626-x/2012008/c-g/c-g01-eng.htm

    According to the report summary, the rise of wages (of largely unskilled labor) is likely the result of two economic shocks: a construction boom (founded on a housing bubble) and a resource boom.

    The construction boom is now turning to a bust. The increase in wages due to the resource boom is founded on the remote location of the jobs (which most Canadians don’t want.) And Harper is attempting to drive down these wages by allowing corporations to hire temporary foreign workers at a 15% discount. The resource boom could also turn to a bust.

    So it’s too early to tell if this bump in real wages is anything more than a fluke. Economists tend to assert that a rise in wages is only sustainable with an accompanying boost in productivity.

    Wage Growth over the Past 30 Years: Changing Wages by Age and Education
    http://www.statcan.gc.ca/pub/11-626-x/11-626-x2012008-eng.htm

  5. According to the Conference Board of Canada, the paper from W. Erwin Diewert and Emily Yu could actually indicate worse productivity with a “careful reading.”

    In an article titled, “Canada’s Productivity Problem Can’t Be Measured Away” it says,

    “The debate over methodology and measurement obscures the fact that no matter what method is used, our productivity growth is still dismal. In fact, a careful reading of the new research indicates that Canada’s productivity performance could actually be worse than thought!

    “Canada’s weak productivity growth has caused us to slip further and further behind the United States and other major industrial economies in terms of real income per capita—something that hits every Canadian in the wallet. The need for concerted action on productivity growth and innovation must remain a national priority if we hope to maintain our high living standards. …

    “Indeed, when all the elements are pulled together, these authors produce overall results for productivity growth since 1961 that are slightly below Statistics Canada’s estimates. Rather than offering a new hypothesis that stronger growth in multi-factor productivity has saved the day, this methodology appears to confirm our poor performance.”

    The Conference Board of Canada: Canada’s Productivity Problem Can’t Be Measured Away
    http://www.conferenceboard.ca/insideedge/2013/mar2013/mar27-insideoutlook.aspx

  6. I’ve done my own personal study of how a certain demographic of Canadians react to the possibility of being able to improve their lives by becoming entrepreneurs. In other words how they react to the opportunity to become their own bosses, to run their own businesses, to work for themselves instead of the man who they all hate working for. This study was done mainly through contacting people on Kijiji who had posted ads in the resume section looking for work, while the other was by direct contact with people i knew personally or had made aquaintances with. I got the same reaction time and time again. I contacted over 300 people over the course of three years. I got the same reaction time and time again which more or less amounted to this mindset. If I wasn’t prepared to put up all the money, do all the work. and hand them all the profits, then it just wasn’t going to happen. Deadbeats every one of them. Deadbeats. Canada’s much vaunted entrepreneurial spirit? While I’m sure that it exists I just couldn’t find any evidence of it in the methods that I used to try and find it.

    • Metropika,
      I like how you worded your comment. I was as surprised as you were by the conclusions.
      Then again, anyone I know who wants to have a business, just starts one – they don’t go on Kijiji to find work. Most people I know who find jobs aren’t trying to do it through posted jobs – they go out and make connections, do cold calls and find creative ways to network with people.
      In addition, it takes a tremendous amount of work to start and run a business – not everyone has the mindset to even begin such a task, let alone keep it going.
      As someone who comes from a family who had their own business had one of my own, have a partner who has one, and is considering starting up a social business – it’s a heck of a lot of work and a great risk. A large number of businesses don’t make it. Starting and failing is part of the entrepreneurial spirit, and most people paying bills and supporting families may not be equipped for it. Training programs do little to prepare people for the twists and turns in real life enterprises.
      Though we do need that kind of spirit for any job these days, it takes nurturing and support to run any business. That adds up to plenty of resources that many people do not have.
      I encourage everyone I meet who is looking for work to have an entrepreneurial spirit. That’s the way to start in a more progressive way that most people are more willing to consider.

      Many people I know who have businesses are willing to get work in order to maintain their investment, but not the other way around.

      I know plenty who have started and run their own businesses, Perhaps you’re in a much different demographic than I am. Interesting to read your post …

      • Beverly,

        Yes there are a number of different dynamics that come into play which dictate who becomes a successful entrepreneur and who doesn’t. It can be as simple as having a well prepared business plan. But having run a relatively successful home based business for the last six years I was willing to help each one of those individuals I emailed and talked to get started in a number of different endeavors. In other words I was willing to be a working partner, to provide them with the direction that would help them become successful. I think that the obstacle in question is the commitment. They know that they’d have to put in long hours. Hours that might eat into their social life, being on a slow pitch baseball team or beer league hockey tourney. But the reality is, in our present economy, unless your making a minimum of $150,000 a year you’ll never be able to retire with your home mortgage paid in full and have enough money in the bank to live in relative comfort. It’d be nice to be able to travel or have sufficient funds in reserve for any eventualities that might arise.

  7. Harper uses extortion, threats and bribes to peddle his dirtiest oil on earth tar sands..which has devastated once pristine Alberta ecosystems and wilderness and their native inhabitants..along with many other of his cronies’ projects which harm environments worldwide. He has sabotaged climate talks, he blocks laws for animal cruelty and endangered species protection, he promotes horrific wildlife massacre bloodbaths, such as the harp seal pup bloodbaths (ignoring the entire world which has banned and boycotted Canada for that atrocity) and many other less publicized ones like elk massacres and endangered polar bear trophy hunts. he indulges in massive land and air pollution across Canada and clearcutting of old growth. Along with his crushing of laws upholding human rights, and his arms peddling and warmongering, Harper has shown he’s simply a threat to the public and must be removed from public office.

  8. Anyone serious about looking at “productivity” would drill down much deeper than the Stats Can data on this topic. And look at industry sector by sector – and then company by company.

    The fact that two different economic studies can yield such radically different results reflects poorly on the “profession” itself, IMO. But, good to discuss publicly in this forum.

    So, what to make of the constant drum beat for lower corporate taxes because Canadian companies needed it to make productivity enhancing investments? If I’m not mistaken, a position that at least 75% of the current bloggers on EconoWatch embraced during the last fed election, some quite enthusiastically.

  9. Yeah, there are really many factors that are affecting the productivity of Canada.. maybe they would consider some things then.

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