Working Paper Series

Unbundling Canada's Weak Productivity Performance: A Review of the Issues

By Susanto Basu, Boston College

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Abstract

Canada is one of the few OECD countries to trail the United States in both the level and growth rate of productivity over a long period of time (1980–2005). This paper suggests a method for breaking down this productivity gap into three components: differences in allocative efficiency, the effects of scale economies, and a residual. The residual, in turn, is a function of a variety of factors, including management practices, infrastructure, and innovative activities such as R&D. Spending on innovation has direct benefits and also creates positive externalities. Measuring the contribution of all these components of productivity growth requires both firm-level and aggregate data. The paper then reviews efforts to find how economic policies work through these various channels to affect aggregate productivity. It concludes that regulation and economic policy clearly have a statistically significant effect on productivity. But there is not yet clear evidence on the economic significance of the effects. Establishing the likely quantitative importance of plausible policy changes is the highest priority for future research.