Stephen Gordon is a professor of economics at Laval University in Quebec City and a fellow of the Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE). He also maintains the economics blog Worthwhile Canadian Initiative and can be followed on Twitter.
It is generally understood that sustained economic growth depends ultimately on sustained growth in productivity, so Canada’s low levels of productivity and weak rates of productivity growth have worried economists for decades. Like so many results in economics, the relationship is one that holds when everything else is kept constant.
But there is an important case in which a fall in productivity will increase incomes, and recent Canadian experience appears to be consistent with this exception. Our preoccupation with productivity may be misplaced.
One of the more widely-used productivity yardsticks is ‘multifactor productivity’ (MFP), which measures the increases in output that cannot be attributed to the simple accumulation of productive inputs such as labour and capital. Statistics Canada produces MFP estimates (see here for details), and the most recent data suggest that business sector MFP has fallen by 5 per cent since 2002. But we also know that this was also a period in which real wages grew by almost 6 per cent.
Everything else held constant, it’s very hard to see how falling productivity can be reconciled with increasing incomes. The explanation is of course that everything has not been held constant: the prices of natural resources such as oil have increased sharply since 2002. But according to Statistics Canada’s estimates, MFP in the mining, oil and gas extraction sector has fallen by a third since 2002; see here.
This reduction probably says more about the problems interpreting MFP in this sector than it does about technical progress; it is difficult to believe that resources output would increase by 50 per cent if producers reverted to the technology they were using in 2000.
Even so, a one-third reduction in productivity when combined with a doubling of the output price is still a net gain.
The shift of labour and capital to the resources sector in the past decade has reduced average productivity -- but it also increased average incomes. We shouldn’t be viewing this as a problem.
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