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No. 8: Determinants of Canadian Productivity Growth: Issues and Prospects

by Richard G. Harris, Simon Fraser University and Canadian Institute for Advanced Research, December 1999


Overview

The theme of this conference is the future of the Canadian economy. This paper is about one particular aspect of that vision — the future for productivity growth in Canada. Given the high profile of the productivity debate in the last year, what was once a relatively arcane subject to most people is now daily grist for the editorial and business pages of our newspapers. Talk of a productivity crisis and various counterpoints to this argument have become commonplace. In this paper, I will try to step back somewhat from the current debate and take a broader look at what economists know, or think they know, about productivity growth, and how this knowledge might shape our views about the future for economic growth in Canada. Obviously one cannot know with any great certainty what the future will bring. Nevertheless we can say with somewhat more precision what are likely to be important potential developments, either positive or negative for productivity growth and thus living standards in Canada. The paper will first review the theory and empirical evidence and then go on to a forward looking perspective on productivity growth in Canada in the coming decades. Finally, I will offer some opinion as to how productivity considerations should enter in the formulation of economic policy.

The organization of the paper is as follows. Chapter 2 discusses some of the basic theory and measurement issues, with references to the recent Canadian and international debates on productivity. Two themes are covered. First, the link between productivity and living standards. Here we draw out the links between other determinants of living standards such as labour force participation and terms of trade changes, with an emphasis on productivity growth as the most important long term permanent determinant of living standards. Second, a discussion of the relationship between theory and measurement in light of the widespread use of the concept of multifactor productivity, and lastly a review of the on-going measurement debate as to whether and how well economists can actually measure outputs and inputs. Chapter 3 turns to a discussion of the empirical literature on the "determinants" (correlates) or drivers of productivity growth including investment, education and training, innovation, diffusion, and the broader context in which productivity growth is set. Chapter 4 of the paper deals with the prospects for future productivity growth in Canada over the next couple of decades. This chapter is largely speculative in nature drawing on what we know from economic history and the recent contributions of the endogenous or "new" growth literature. It includes a discussion of a number of important external and domestic developments in the Canadian and global economies. Chapter 5 concludes with a discussion of how traditional economic policies should account for potential productivity effects.

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