Annex: Cross-Country Comparisons of Labor Productivity Growth: Methodological Issues
14. Labor productivity represents the amount of output produced per unit of labor, and is typically measured as the ratio of real GDP to hours worked. In disaggregated terms, labor productivity growth reflects the amount of capital per hours worked (capital deepening), the growth in the quality of labor, and in total factor productivity. While straightforward in concept, labor productivity is difficult to measure in practice, particularly in the context of cross-country comparisons because of significant variations in Statistics methodologies.
List of References
Baldwin, J. and D. Sabourin, 1998, “Technology Adoption: A Comparison Between Canada and the United States,” Statistics Canada, Working Paper No. 119.
Baldwin, J. and D. Sabourin, 1999, “Growth of Advanced Technology Use in Canadian Manufacturing During the 1990s,” Statistics Canada, Working Paper No. 105.
Bassanini, A, S. Scarpetta, and I. Visco, “Knowledge, Technology, and Economic Growth: Recent Evidence from OECD Countries,” OECD Economics Department Working Paper No. 259.
Carey, D. and H. Tchilinguirian, 2000, “Average Effective Tax Rates on Capital, Labor and Consumption,” OECD Working Paper No. 258.
Coulombe, S., 2000, “Three Suggestions to Improve Multi-Factor Productivity Measurement in Canadian Manufacturing,” CSLS Conference on the Canada-US Manufacturing Productivity GAP, Ottawa, January, pp. 21–22.
Cerisola, M. and J. Chan-Lau, 2001, “Tales of Two Neighbors: Productivity Growth in Canada and the United States” IMF Staff Papers, forthcoming.
The Conference Board of Canada, 2000, IT and the New Economy: The Impact of Information Technology on Labor Productivity and Growth, November.
Eldridge, L. M. Sherwood, 2000 “Investigating the Canada-U.S. Productivity Gap: BLS Methods and Data,” CSLS Conference on The Canada-U.S. Manufacturing Productivity Gap, Ottawa, Ontario, January, pp. 21–22.
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Prepared by Martin Cerisola, Paula DeMasi, and Victor Culiuc.
In line with recent attention in the literature, this paper primarily focuses on labor productivity growth rather than on total factor productivity growth. Cross-country comparisons of productivity are somewhat limited by methodological differences in how the underlying data are constructed. This paper largely focuses on a comparison between Canada and the United States because the methodological differences between these two countries appear to be less pronounced than with respect to other industrial countries. The annex to this paper provides a description of some of the most important differences in estimating productivity between Canada, the United States, and other industrial countries.
In contrast to the United States, the acceleration of labor productivity growth in Germany appears to reflect the substitution of capital for labor, as evidenced by a high rate of unemployment.
This decomposition assumes that the production function depends exclusively on two inputs, labor and capital, as well as on the “current state of technology” or total factor productivity. The growth rate of labor productivity can be decomposed into the growth rate of the capital-labor ratio, weighted by the contribution of capital in production, and the growth rate of total factor productivity.
However, methodological differences overstate the pickup in Canadian investment relative to the United States. In the Canadian national accounts, a Laspeyres index is used to deflate investment. If a Fisher-type index were used as in the United States, Canadian investment growth would be somewhat lower in the post-1995 period. For a more detailed description, see Productivity Growth in Canada (2001).
A similar process of deregulation and corporate restructuring took place in the United States during the early 1980s. Kwan (2000) notes that the extent of corporate restructuring in Canada was greater in the 1990s than in the 1980s, and that the most common type of restructuring was the adoption of new technology and mergers and consolidations.
In the first half of the 1990s, investment spending on computers and telecommunications grew at an average annual rate of 19 percent and 3 percent, respectively.
The contribution of the IT sector to aggregate GDP growth is somewhat overstated because real GDP is valued at 1992 prices and prices for goods produced in the IT sector have declined considerably since then. See the annex for a more detailed explanation.
The IT sector as a share of GDP in real terms increased from about 5 percent in 1994 to 10 percent in 1999. However, because U.S. real GDP data are chain-weighted, calculating shares can be potentially misleading. Contributions to real output growth are based on inflation-adjusted data for gross domestic income because the data used in calculating GDP are not sufficiently disaggregated to capture the growth of the IT sector alone.
Results based on Oliner and Sichel (2000). For a review of other studies which decompose the acceleration in labor productivity growth into capital deepening and total factor productivity, see “Does the Pickup in Productivity Growth Mean That There is a New Economy?” in United States: Selected Issues, (2000).
The estimated contribution rate was based on chain-weighted indices published by Statistics Canada for labor productivity and capital and labor services for the business and manufacturing sectors. Data for information technology capital stock, which were also provided by Statistics Canada, were based on 1992 prices. These data are preliminary and unpublished. They were used as a proxy for information technology capital services, and they may bias upward the relative contribution of IT investment to labor productivity growth, because these data are not based on a chain-weighted index as the rest of the data are. However, in the recently published study, Conference Board of Canada (2000), based on 1992 data for labor productivity as well as for all factor inputs, very similar results to those presented here were reached.
These surveys were conducted in 1989, 1993, and 1998.
Employment protection regulation is measured by applying factor analysis to several indicators for regular and temporary contracts such as the direct costs and delay of dismissals associated with procedural obstacles.
Eldridge and Sherwood (2000) analyze the methodological differences in constructing labor productivity in both Canada and the United States and conclude that these differences, at least at the aggregate level, do not explain much of the observed gap in labor productivity, particularly in the manufacturing sector.
For example, in Canada, based on the fixed-base-volume index, labor productivity increased by 2½ percent over the period 1999Q2 to 2000Q2. However, if a chain-type index were used instead—as in the United States—for calculating real output, then Canadian labor productivity growth would be reduced to 2 percent. See Bank of Canada (2000).
Rental residential is not included in the manufacturing sector.
Therefore, the growth in relatively higher wage industries is assumed to reflect an increase in labor quality.
Without quality adjustments, a change in price will be overstated, and the corresponding change in real output will be understated.
The 1995 European System—used by EU members—was designed to be consistent with the 1993 System of National Accounts—used by other countries.