Productivity In The US Essay Research Paper

Productivity In The U.S. Essay, Research Paper

Introduction

The measure of productivity is extremely important in determining growth performance of a country. After two decades of high productivity growth in the 1950 s and 1960 s, we observed a significant slowdown of productivity growth following the oil crisis in 1973. The debate on the causes of the worldwide slowdown has turned into a vital concern for economists and policymakers. Several explanations of the slowdown have been suggested, such as the low investment and savings rate, the energy crisis in the 1970 s, and the low rate of public investment in infrastructures. However, none of these explanations has been found to be fully satisfactory. Economists define productivity as “the difference between labour plus capital costs and economic outputs” (Salgado, p.9). It is generally acknowledged that over time, rising levels of productivity are necessary conditions to rising standards of living. Also, the slowdown of output growth is related to the slowdown of labor productivity growth. This is because output growth comprises the growth of the number of hours worked and the growth of output per hour worked (labor productivity). Productivity is determined by the efficiency with which resources are combined to produce a given output. It is usually measured by calculating the ratio of a weighted index of outputs to a weighted index of inputs. In a simple economy with only one type of output and one type of input, productivity is the ratio of output to input. However, since most economies have a variety of outputs and inputs, productivity can be measured in a number of different ways. For example, the fixed-weight system or the chain-weight method can be used.

Productivity in Canada and the United States

An examination of the recent growth performance in Canada and the United States across sectors and industries suggests that the reasons for slower growth are not identical in both countries. According to Slifman and Corrado, a major reason for the slowdown in Canada appears to be diminishing benefits from increasing returns to scale, particularly in manufacturing, whereas in the United States, a major reason appears to be the rising share of the services sector in total output. Although productivity has slowed down in both countries, it would seem that the level of productivity in Canada is not lower than that in the United States, contrary to what is commonly believed.

Between 1961 and 1992, aggregate labor productivity actually grew faster in Canada than in the United States (see Table 1). This could be due to the fact that during this period, investment rates were higher in Canada than in the United States. With relatively more capital, all other things being equal, Canadian workers became more productive. Faster total factor productivity (TFP) growth in Canada also contributed to faster labor productivity growth (see Table 2). The slowdown of labor productivity and TFP growth in 1973-92, compared with 1961-73, was more severe in Canada than in the United States, as shown in Table 2. During the later period, however, labor productivity grew faster in Canada than in the U.S., due to higher investment rates. The energy price shocks of the 1970 s and the following structural changes in the Canadian and U.S. economies were partly responsible for the slowdown after 1973. As the price of energy moved closer to its pre-1973 level during the 1980 s and 1990 s, the labor productivity growth did not, especially in Canada. During 1981-92, productivity growth rates rose more in the United States than in Canada. In fact, the U.S. experienced slightly higher aggregate labor productivity growth and higher aggregate TFP growth. The U.S. economy s stronger growth can be attributed to the performance of the goods sector. In Canada, the recovery of the goods sector was weaker, and it therefore only partially offset the slowdown of growth in other sectors. Productivity growth in all Canadian sectors, including goods, was lower in 1981-92 than in 1961-73.

Table 1: Growth in Labor Productivity (annual averages, in percent)

Source: Statistics Canada; United States and Ranil Salgado.

Sectors 1961-92 1961-73 1973-92 1973-81 1981-92

Canada 1.88 3.34 1.13 1.11 1.14

Goods 2.94 4.90 1.70 1.55 1.81

Services 1.72 2.57 1.18 1.20 1.16

Government 0.61 1.30 0.17 0.21 0.15

U.S. 1.14 1.74 0.89 0.53 1.16

Goods 1.73 2.22 1.41 -0.10 2.52

Services 1.13 1.82 0.70 0.89 0.57

Government 0.43 0.27 0.52 0.71 0.38

Table 2: Growth in TFP (annual averages, in percent)

Source: Statistics Canada; United States, and Ranil Salgado

Sectors 1961-92 1961-73 1973-92 1973-81 1981-92

Canada 1.31 2.69 0.43 0.24 0.58

Goods 1.80 3.59 0.67 0.02 1.15

Services 1.18 2.50 0.34 0.86 -0.03

Government 0.58 1.32 0.12 0.08 0.15

U.S. 0.72 1.00 0.54 0.01 0.93

Goods 0.99 1.42 0.72 -1.21 2.13

Services 0.44 0.80 0.22 0.37 0.10

Government 0.33 0.11 0.46 0.66 0.32

Possible Reasons for the Slowdown

There are many possible explanations for the slowdown of aggregate productivity growth. According to an article in the “Globe and Mail” on December 26th 1998, one possible reason for the slowdown is a weak labor market which includes high unem

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