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Prepared by Evridiki Tsounta. This paper is a revised and streamlined version of Estevão and Tsounta (2010).
According to Cross (2010), the current recession was milder than the ones in the 1980s and 1990s for Canada; GDP dropped by 3.3 percent over three quarters between the fall of 2008 and the summer of 2009, compared to a GDP decline of 4.9 percent over six quarters in the early 1980s, and a 3.4 percent GDP drop in the 1991–92 downturn over four quarters. Similarly, employment fell just 1.8 percent in the recent recession, compared with 3.2 percent in 1991–92 and 5 percent in 1981–82.
Estevão and Severo (2010) show that financial shocks affect TFP growth through their effect on factor allocation, which in turn depends on an industry’s degree of reliance on external funding and whether the financial shock affects firms differently within each industry. The model presented shows that TFP growth in an industry would decline if banks’ tightened lending standards cause higher heterogeneity in capital costs within an industry. That would force the market equilibrium further away from an optimal allocation of resources as done by, say, a social planner, thus reducing industry’s TFP growth. They show that for the period going from 1990 to 2007 and using data for 31 industries in the United States and Canada, financial shocks indeed tended to lower TFP growth.
In comparison, U.S. TFP has risen by 2.9 percent in 2009.
Statistics Canada (2007) 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).
Balakrishnan (2008) finds that Canada’s labor market is as efficient as the one in the United States, though the data used in the analysis are up to 2004, thus excluding the increasing strains on the Canadian labor market amid the commodity boom, intensified by internal barriers to trade (such as interprovincial mobility barriers). 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 October 2008 to 8.7 percent in August 2009, now standing at around 8 percent.
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.
For a discussion of trend TFP for industrial countries during financial crises, refer to Haugh et al. (2009).
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.