Back Matter
  • 1 https://isni.org/isni/0000000404811396, International Monetary Fund

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Annex 1. Data Sources

This annex describes data used in the growth accounting decomposition as described by equations (1) and (2), where output (Yt) is defined as the total-economy real Fisher chained GDP from Statistics Canada. All trend series have been obtained by smoothing the raw series using the Hodrick-Prescott filter.

Capital Services

Capital services are obtained by multiplying trend capital stock by trend capacity utilization. Trend capital stock is a smoothed version of the capital stock for the total economy (volume) available from OECD Economic Outlook No 85 (annual data). The trend capital growth is the growth in the capital stock before the adjustment for capacity utilization rate. Data on capacity utilization in the industrial sector (NAICS: Total industry) are available from Statistics Canada starting in 1988. In order to obtain a longer capacity utilization series, the pre-1988 data is estimated using the growth rates of capacity utilization for SIC: Nonfarm Goods-Producing Industries (SA).

Labor Services

Labor Services is obtained by multiplying (1-NAIRU) by trend labor force participation rate, trend average annual hours worked per employee and trend working-age population. All data are available from Statistics Canada’s Labor Force Survey, where NAIRU is the trend unemployment rate (both sexes, 15 to 64 Years); labor force participation rate is the ratio of labor force (both sexes, 15 to 64 Years) divided by working- age population (both sexes, aged 15 to 64 Years); and average annual hours worked per employee are constructed by multiplying actual hours worked per week (all sectors) by 52 and dividing it by total employment (both sexes, 15 years and over).

Trend TFP

Trend TFP level is estimated by applying an HP filter to raw TFP level as estimated in equation (1).

1

The authors are grateful to Charles Kramer, Nicoletta Batini, Lev Ratnovski, Isabelle Amano, Bing-Sun Wong and seminar participants at Finance Canada for their useful comments and insights. We are particularly indebted to Natalia Barrera for all her research support in undertaking this project. Thomas Dowling and Geoff Keim provided excellent research assistance, while Joanna Meza-Cuadra and Hildi Wicker-Deady provided production assistance. All remaining errors are ours.

2

In this analysis, we ignore the indirect effects to potential output from stabilization policies in response to the crisis. For such a discussion, please refer to Furceri and Mourougane (2009).

3

Household’s net worth is down C$52.3 billion in Canada from its peak in the third quarter of 2008 and over $12.2 trillion from its peak in the third quarter of 2007 in the United States.

4

Balakrishnan (2008) finds that Canada’s labor market is as efficient as the one in the United States. Labor market flexibility is reflected in the significant and immediate impact of the Canadian downturn on the unemployment rate, which increased from 6.2 percent in September 2008 to 8.6 percent in October.

5

Stats Canada’s baseline projections indicate that between 2006 and 2011, working-age population will rise by a cumulative 4.4 percent versus over 13 percent increase in the elderly population. This discrepancy increases over time; by 2031, the elderly population more than doubles (compared to 2006) while the size of the working-age population only increases by 8 percent.

6

For a more extensive discussion on recent literature analyzing the effects of financial crises on GDP and potential GDP growth, please refer to European Commission (2009) and IMF (2009a, b).

7

While this section is concentrated to output of the business sector, our overall analysis focuses on the output of the total economy, i.e., it also includes the non-business sector.

8

Baldwin and Gu (2009) estimate that the average annual growth rate of TFP in the United States over the period 1961-2008 was 0.9 percentage points higher than in Canada.

9

The importance of the mining sector in explaining the slowdown in Canadian TFP is also consistent with Statistics Canada’s findings (cited in Sharpe and Arsenault, 2009) that Alberta’s annual labor productivity growth is the smallest in Canada during 1997-2007 (at 1 percent), closely followed by British Columbia at 1.2 percent. Ontario and Quebec were at the middle of the sample, with average annual labor productivity growth rate of around 1.7 percent, while Newfoundland was leading with almost 5 percent annual growth rate. In terms of TFP performance, Alberta’s average TFP declined by an annual average of 1.6 percent, while again Newfoundland was leading with annual TFP growth of over 4 percent during the same period. Quebec and Ontario’s TFP growth was around 0.9 percent per annum while British Columbia’s TFP has been growing by around 0.5 percent per year, one-tenth of a percentage point above the national average.

10

Estimates of the NAIRU in general are very sensitive to methodological choices (Setterfield et al., 1992; Staiger et al., 1997) and therefore should be interpreted with considerable caution. Finance Canada defines that “structural unemployment occurs when workers are unable to fill available jobs because they lack the skills, do not live where jobs are available, or are unwilling to work at the wage rate offered in the market.” Jackson (2005) discusses studies estimating the NAIRU from mid-1980s to mid-1990s in Canada.

11

The large range of estimates indicates the degree of uncertainty in estimating this unobservable series.

12

Within the old-fashioned vertical long-term Phillips curve framework, the LSRU concept (proposed by Modigliani and Papademos, 1975) is the same as that of the NAIRU. But the LSRU is a broader concept than the NAIRU since it can also apply to the non-vertical, long-term Phillips curves arising from theories such as proposed by Eckstein and Brinner (1972); Tobin (1972); Akerlof, Dickens and Perry (2000).

13

Betcherman (2000) looks at evidence of the importance of labor market policies and institutions for structural unemployment and finds that the generosity of the unemployment insurance system has been systemically associated with higher levels of unemployment across OECD countries.

14

Details on data used and the methodology are provided in the Annex.

15

For a discussion of the advantages and disadvantages of using statistical filters to estimate potential output, refer to Cotis et al. (2005). Possible extensions of the study could include using different filtering techniques, for instance a lower smoothness parameter as suggested by Ravn and Uhlig (2002) or filtering a longer series (including projections of the raw series) instead of projecting the trend variables.

16

Robidoux and Wong (2003) indicate that the TFP gap between the United States and Canada might be smaller when using time-varying capital and labor income shares. Throughout the analysis we choose to keep the income shares constant so as to isolate the impact of income share changes to potential GDP growth changes.

17

The sharp slowdown in capital accumulation reflects distressed banking systems worldwide and the global financial instability which has led to considerable uncertainty and misallocation of resources.

18

Statistics Canada (2007b) indicates that Canada’s depreciation rate is greater than the rates observed in the United States due to higher depreciation in building and engineering construction. While both countries have similar depreciation rates for machinery and equipment asset classes (18 percent on average in the United States and 20 percent in Canada), there is a considerable difference between Canadian and U.S. depreciation rates for buildings and engineering construction (U.S. rate is 3 percent versus an 8 percent Canadian average).

19

Fortin (2000) paraphrasing two former chairmen of the U.S. Council of Economic Advisers, notes that high unemployment rates could be even worse than we thought because they raise structural unemployment, while low rates could be even better than we thought because they reduce structural unemployment (Okun 1973; Stiglitz 1997).

20

For a discussion of trend TFP for industrial countries during financial crises, refer to Haugh et al. (2009).

21

The loss in potential output would have been around 5 percent assuming potential output grows from 2009 to 2014 at the same average rate observed in 2005-08.

22

For a discussion on the methodology used to construct the U.S. potential growth series, please refer to Barrera et al. (2009). Our estimates of U.S. potential growth differ slightly from theirs, as we incorporate recent revisions in GDP data which occurred following the publication of their study.

23

Pilat (2005) finds that Canada lags many OECD countries in innovative performance and may have some scope for further catch-up. However, it notes that Canadian investment in R&D is unlikely to catch up with the R&D intensity recorded in some OECD countries, as it is limited by the structural composition of the economy―i.e., without a large high-tech industry―and by a relatively small average firm size.

24

For a more extensive discussion of possible structural reforms that could raise productivity in Canada, the reader is referred to OECD (2004 and 2006) and Bishop and Burleton (2009).

Canada's Potential Growth: Another Victim of the Crisis?
Author: Mr. Marcello M. Estevão and Ms. Evridiki Tsounta