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Economy Lab

Stop worrying, and learn to love lower productivity Add to ...

The Canadian economy has been pulling off a rare trick over the past decade or so: combining sustained increased income growth with productivity growth that is at best slow, and -- by some measures -- negative.



We are frequently told -- quite rightly -- that everything else being equal, higher productivity produces higher incomes and higher wages. But it is possible to focus too much attention on productivity, because other things are not necessarily always equal.



The accompanying graphs show Statistics Canada’s estimates for multifactor productivity (MFP). MFP captures the increase in output that cannot be explained by increases in labour and capital inputs, and are a popular measure for productivity.

Business sector MFP has been declining over the past ten years, driven by a sharp fall in productivity in the goods sector. If we dig a little deeper, the obvious culprit is the mining, oil and gas sector, where MFP has been falling since Statistics Canada started collecting the data in 1961. (The reason for this is that the low-hanging fruit has been picked; resource firms are increasingly obliged to work harder to extract less.)





The resource boom has shifted labour and especially capital to the resource sector, and this greater weight is dragging down MFP estimates for the goods sector and for the economy as a whole.



If you were concerned with productivity alone, you would view this shift as an unwelcome development and recommend measures to divert investment away from the resource sector. This sort of analysis fails to consider why productive capacity is being shifted to the resource sector in the first place. Higher commodity prices have more than offset sluggish productivity growth, and have provided Canadians with increased incomes.



Some commenters have suggested that high resource prices have provided income growth despite low productivity growth. But to a very great extent, slow growth in measured productivity is a direct result of those prices. We’re seeing a shift of productive resources from sectors where productivity is high and prices are weak to those where productivity is low and prices are strong. The net effect of this transfer is lower productivity -- and higher incomes.



[A more detailed version of this post is available at Worthwhile Canadian Initiative.]



Stephen Gordon's recent posts and Twitterfeed can be viewed here.



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