Archived — Research Summaries: Working Paper 2007-02: What Explains the Canada-U.S. Capital Intensity Gap?

by Someshwar Rao, Jianmin Tang and Weimin Wang.

It is widely recognized that Canada lags the United States (U.S.) in labour productivity level and the gap increased significantly since 1996, especially in the manufacturing sector. Lower capital intensity in Canada contributes to the productivity gap directly and indirectly. This paper examines the sources of the intensity gaps for total capital [including structures and machinery and equipment (M&E)], M&E capital and ICT (information and communications technology) capital between Canada and the U.S. A Bennet-type decomposition of the aggregate Canada-U.S. capital intensity gap suggests that the elimination of the differences in industrial structure between the two countries would have actually increased the capital intensity gap for total and M&E capital. On the other hand, the industrial structure accounted for a small part of the ICT capital intensity gap. This paper then creates a panel data set (18 years, 41 industries) to investigate key factors that might be responsible for the capital intensity gaps. The panel regression results suggest that differences in investment prices (including the real exchange rates), real wage rates, human capital, research and development, and business cycles all have a significant impact on the Canada-U.S. capital intensity gap.

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