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No. 21: Capital-Embodied Technical Change and the Productivity Growth Slowdown in Canada

by Surendra Gera, Wulong Gu and Frank C. Lee, Micro-Economic Policy Analysis, Industry Canada, April 1998


Summary

Previous empirical studies on productivity growth have been inconclusive in identifying the causes of the slowdown since 1973. The purpose of this study is to gain a better understanding of the causes of the slowdown by estimating the effects of capital-embodied technical change (the vintage effect) on productivity growth in Canada. In particular, we examine the implications of three issues for the slowdown. First, we examine whether the vintage effect was an important factor. Second, we investigate the implications of the "catch-up" effect for Canadian industries. Third, we analyse the impact of growth in the capital-labour ratio on Canadian industries. We find that there is significant and robust evidence of the vintage effect across Canadian industries, explaining, on average, about 14 per cent of the slowdown in total factor productivity growth and about 7 per cent of the slowdown in labour productivity growth since 1973. The vintage effect was driven mainly by a slowdown in the rate of technical progress embodied in the capital stock, particularly in machinery and equipment. We also find that the catch-up effect, although an important source of productivity growth, was not an important factor behind the slowdown. Finally, we find that in contrast to the evidence in other major industrialized economies, the rate of growth of the capital-labour ratio in Canada increased in almost all industries since 1973. This has an implication of increasing rather than decreasing labour productivity growth. We also find evidence of complementarity between capital accumulation and technological advances. Through this avenue, capital accumulation enables Canadian industries to catch up to the productivity levels of their U.S. counterparts. We interpret this as additional support for the embodiment hypothesis.

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