Canada U.S. Economic Growh Informaion echnology and economic growh in Canada and he U.S. Informaion and communicaion echnology was he larges conribuor o growh wihin capial services for boh Canada and he Unied Saes during he lae 1990s, bu he conribuion of his capial asse in Canada was lower han ha in he Unied Saes Tarek M. Harchaoui, Faouzi Tarkhani, Chris Jackson, and Philip Armsrong Tarek M. Harchaoui is chief of Saisics Canada mulifacor produciviy program, Micro-Economic Analysis Division Saisics Canada, Oawa, Canada. harcar@sacan.ca and Faouzi Tarkhani, Chris Jackson, and Philip Armsrong are economiss in various areas a Saisics Canada. The opinions expressed herein are hose of he auhors and do no necessarily reflec he opinions of Saisics Canada. Informaion and communicaion echnology (ICT) equipmen appears o be almos everywhere in he office, on he facory floor, in he classroom, a home, and, even in people s pockes. By all accouns, ICT appears o be rapidly changing he way many enerprises conduc business and communicae. The proliferaion of ICT has made he world seem much smaller, as compuer-relaed innovaions, such as he Inerne, le individuals on opposie sides of he world inerac in ways ha were unimagined 20 years ago. The explosion of ICT spending over he las few decades has sparked renewed ineres in he role of invesmen and capial accumulaion as sources of economic growh. While produciviy growh, capial accumulaion, and he impac of echnology were opics once reserved for academic debaes, he success of he U.S. economy during he lae 1990s has moved such issues ino he popular domain. 1 Using revised daa on oupu and capial inpu, his aricle sheds some new ligh on he changing composiion of invesmen and he growh of capial services in Canada during he 1990s and makes comparisons o he 1980s. 2 I discusses he daa sources and he hisorical rends of invesmen and capial formaion and hen analyzes he effec of hese rends on labor produciviy and mulifacor produciviy performance. In paricular, his aricle employs well-esed and familiar mehods o esimae annual indexes of capial services for he Canadian business secor from 1981 o 2000 and inroduces a decomposiion ino quaniy and qualiy componens for broad asse classes, including ICT equipmen. While much of he recen Canadian economic lieraure has documened he growing imporance of compuers, his aricle examines and compares he exen o which ICT and oher ypes of capial have conribued o economic growh in Canada. Finally, i examines he underpinnings of he produciviy performance of he Canadian and U.S. business secors over he las wo decades, using comparable mehodologies. Our approach disinguishes beween capial quaniy growh due o invesmen, and composiional change of asse ypes (someimes referred o as capial qualiy growh) due o subsiuion beween differen ypes of capial asses. Much of he invesmen boom during he 1990s reflecs subsiuion owards high-ech asses as heir relaive price seadily fell. We also inroduce quaniy and qualiy decomposiions for broad asse classes, such as ICT, oher machinery and equipmen (made of low-ech equipmen), and various ypes of srucures. Our primary conclusion is ha he Canadian business secor has experienced a seady and pervasive increase in he growh rae of capial Monhly Labor Review Ocober 2002 3
Comparison of Canada U.S. Economic Growh Exhibi 1. Classificaion of oal capial by asse class Informaion and communicaion echnology Compuers and office equipmen Communicaion equipmen Sofware-own accoun Sofware-pre-packaged Sofware-cusom design Oher machinery and equipmen Office furniure, furnishing Household and services machinery and equipmen Elecrical indusrial machinery and equipmen Nonelecrical indusrial machinery and equipmen Indusrial conainers Conveyors and indusrial rucks Auomobiles and buses Trucks (excluding Indusrial rucks) and railers Locomoives, ships and boas, and maor replacemen pars Aircraf, aircraf engines, and oher maor replacemen pars Oher equipmen Srucures Nonresidenial building consrucion Road, highway and airpor runway consrucion Gas and oil faciliy consrucion Elecric power, dams, and irrigaion consrucion Railway and elecommunicaions consrucion Oher engineering consrucion Coages Mobile homes Muliple dwellings Single dwellings Invenories Land services during he second half of he 1990s. The growh of capial services including fixed reproducible capial, land, and invenories has increased from an average annual growh rae of 3.5 percen over he 1981 88 period o 4.2 percen over he 1995 2000 period. Daa on Canadian economic growh in oupu from 1995 o 2000 show ha capial and labor coninue o make imporan conribuions o overall growh. One primary source of growh is in invesmen. The increase in he growh of invesmen, from 1.7 percen per year over 1981 88 o 11.9 percen over 1995 2000, has led o an increase in he conribuion of capial services from 1.4 percen o 1.7 percen per year beween hese wo periods. Due o srong invesmen and an increasing inpu share, high-ech equipmen is he only class of fixed reproducible asses ha is making a significanly larger conribuion o oupu growh in he second half of he 1990s relaive o he 1980s. Labor inpu, anoher primary source of growh, has advanced during he pos-1995 period mainly as a resul of he increase in hours worked. The conribuion of labor qualiy declined, a reflecion of a falling unemploymen rae, as more workers wih relaively lower marginal producs were drawn ino he workforce during his period. Sill anoher source of growh, mulifacor produciviy or he famous Solow residual, grew a 0.2 percen per year on average during he las wo decades in Canada, compared wih 0.9 percen per year for he Unied Saes. 3 The acceleraion of mulifacor produciviy in Canada from 0.3 percen per year over he 1988 95 period o 1.0 percen per year during he pos-1995 period (0.5 percen o 1.3 percen in he Unied Saes) suggess considerable improvemens in echnology and increases in he efficiency of producion. While he resurgence in mulifacor produciviy growh in he pos-1995 period has ye o surpass he pre-1973 performance, more rapid mulifacor produciviy growh is criical for susained growh a higher raes. During he pos-1995 period, mulifacor produciviy conribued 21 percen of he oupu growh in Canada (27 percen for he Unied Saes), up from 6.1 percen in he 1981 88 period (26 percen for he Unied Saes). Alhough he recen resurgence in mulifacor produciviy in boh counries does no surpass he pre-1973 performance, i is cerainly one of he mos imporan sylized facs of he end of he wenieh cenury. Descripion of he daa This aricle is based on mehodologies recenly implemened by he produciviy program a Saisics Canada. 4 This program consrucs new Fisher indexes of oupu and inpus for he Canadian business secor ha are hen used o consruc mulifacor produciviy esimaes. The Fisher oupu indexes use he expendiure based GDP 5 esimaes, bu exclude ou-of-scope componens such as he governmen secor, nonprofi insiuions, and he renal on owner-occupied dwellings. Corresponding adusmens are also made o capial sock and hours worked. The GDP esimaes incorporae he capializaion of sofware expendiures, making he Canada-U.S. esimaes of economic growh comparable for he firs ime since Ocober 1999, when he U.S. Bureau of Economic Analysis inroduced his change during a comprehensive hisorical revision o heir Naional Income and Produc Accouns. 4 Monhly Labor Review Ocober 2002
Table 1. Esimaes of capial sock by asse class, Canadian business secor, 1981 and 2000 1981 capial sock 2000 capial sock Asse class Value Fixed capial Toal capial Value Fixed capial Toal capial (millions of share share (millions of share share curren dollars) (percen) (percen) curren dollars) (percen) (percen) Toal capial sock... 492,588 100.0 1,278,237 100.0 Fixed reproducible capial... 290,465 100.0 929,409 100.0 Informaion, communicaion, and echnology... 11,363 3.9 2.3 59,900 6.4 4.7 Compuers and sofware... 4,444 1.5.9 37,493 4.0 2.9 Communicaion... 6,920 2.4 1.4 22,407 2.4 1.8 Oher machinery and equipmen... 80,948 27.9 16.4 238,505 25.7 18.7 Srucures... 198,153 68.2 40.2 631,008 67.9 49.4 Invenories and land... 202,123 41.0 348,828 27.3 Srucures, land, and invenories... 400,276 81.3 979,832 76.7 For his analysis, he wide number of asses used in he produciviy program (28 classes) are grouped ino hree disinc classes. Exhibi 1 shows he concordance ha produces hree broad asse classes ICT, oher machinery and equipmen, and srucures (which includes invenories and land). 6 This axonomy no only disinguishes long-lived srucures from shor-lived equipmen, bu also ICT from oher machinery and equipmen. This aricle also uses esimaes of labor growh ha ake ino accoun differences in marginal produciviy across labor ypes. 7 Conrary o he mehod ha us sums all hours worked across all workers, he mehod used in his analysis considers differences across labor ypes and sums he growh in hours worked of differen classes of labor weighed by heir relaive wage raes or heir share of labor compensaion. Much like he esimaes of capial inpu ha capure subsiuion across asse classes, he approach for aggregae labor inpu allows for subsiuion beween various ypes of labor, for example, workers cross-classified by educaion, experience, and oher characerisics. 8 This approach allows for a breakdown of he growh of labor inpu ino growh of labor hours and a labor composiion or labor qualiy effec ha is similar o he breakdown in capial growh beween he sraigh sum of all capial and changes in is composiion. Capial sock esimae in curren price Table 1 conains a breakdown of asses ino maor groupings and he 1981 and 2000 value of capial sock by asse class. The perpeual invenory calculaions resul in a ne sock of fixed reproducible asses of $929 billion in curren dollars in 2000, up from $290 billion in 1981. Adding in he esimaed value of land and invenories yields a oal capial sock of $1.3 rillion in 2000. The invesmen in ICT in consan prices has grown a an average annual rae of 16.2 percen during he 1981 2000 period, much faser han he oher wo classes of asses. (See able 2.) Despie his rapid growh, however, ICT equipmen remains a small share of he business secor s aggregae capial. In 2000, ICT capial sock in nominal erms accouned for 6.4 percen of fixed reproducible capial, which includes equipmen and srucures, up from 3.9 percen in 1981. (See able 1.) In our broader definiion of capial sock ha includes residenial asses, land and invenories, ICT asses accoun for an even smaller share (4.7 percen in 2000, compared wih 2.3 percen in 1981). Invesmen in capial growh The growh in Canada s use of capial can be raced hrough an examinaion of hree relaed daa series an index of he growh in invesmen, an index of he growh in capial sock (a sraigh sum of he differen asses), and an index of he growh in capial services from 1981 o 2000. Furhermore, each of hese can be decomposed ino hree componens: ha arising from invesmens in ICT, oher machinery and equipmen, and srucures (which include land and invenories). 9 For a clear view of aggregae rends, average annual growh raes (in erms of boh quaniies and prices) are presened in able 2 for each series for he maor asse classes and for he enire period 1981 2000, and for hree subperiods: 1981 88, 1988 95, and 1995 2000. Growh raes for business secor GDP for he same periods are also repored. The dominan feaure of he average annual growh raes is he significan drop of oupu growh during he early 1990s recession. Afer rising around 3.3 percen per year during 1981 88, Canada s real GDP growh fell o 1.5 percen per year for 1988 95 and recovered remarkably during he second half of he 1990s o reach an average 4.9 percen per year. Invesmen, capial sock, and capial services all show similar growh paerns. Invesmen. Alhough invesmen showed a similar growh paern o ha in oupu, growh in invesmen showed more sensiiviy o he business cycle. I slowed dramaically from Monhly Labor Review Ocober 2002 5
Comparison of Canada U.S. Economic Growh Table 2. (In percen) Average annual growh raes of invesmen, capial sock, capial services, and oupu, Canadian Business secor, 1981 2000 Iem Invesmen index Capial sock index Capial services index GDP Price Quaniy Price Quaniy Price Quaniy Price Quaniy 1981 2000 GDP... 2.9 3.0 All asses... 1.0 3.6 1.0 2.0 4.2 3.4 Informaion and communicaion echnology... 9.3 16.2 9.3 12.7 1.5 21.0 Oher machinery and equipmen... 2.5 2.0 2.5 2.1 5.6 3.4 Srucures... 1.5.8 1.5 1.7 6.8 2.1 1981 88 GDP... 4.5 3.3 All asses....5 1.7.5 1.8 6.4 3.5 Informaion and communicaion echnology... 14.5 11.5 14.5 8.0 1.4 21.5 Oher machinery and equipmen... 2.9 2.2 2.9 1.7 7.8 3.7 Srucures... 1.7.4 1.7 1.9 8.5 2.4 1988 85 GDP... 2.4 1.5 All asses... 1.8.2 1.8 1.3 3.7 2.6 Informaion and communicaion echnology... 8.0 13.2 8.0 11.5 2.8 17.5 Oher machinery and equipmen... 2.4 2.1 2.4 1.2 2.2 1.6 Srucures... 2.0 1.9 2.0 1.3 7.2 1.6 1995 2000 GDP... 2.4 1.5 All asses....7 11.9.7 3.5 1.7 4.2 Informaion and communicaion echnology... 3.2 27.6 3.2 21.3.3 25.1 Oher machinery and equipmen... 2.0 7.7 2.0 4.1 7.5 5.5 Srucures....3 5.6.3 2.1 4.1 2.5 1.7 percen per year during 1981 88 o 0.2 percen for 1988 95. However, i surged o 11.9 percen for 1995 2000, helping o boos GDP growh during his period. There is subsanial variaion in he growh raes across asse classes and an acceleraing rend oward equipmen invesmen, paricularly ICT. Real ICT invesmen growh was high and rising hroughou he las wo decades. Despie he GDP slowdown, i was 13.2 percen per year even during he slow growh in he early 1990s. In conras, real invesmen in nonresidenial srucures dropped o 1.9 percen and oher machinery and equipmen fell o 2.1 percen per year, during he 1988 95 period. Invesmen in all of he asse classes grew a a much higher pace during he 1995 2000 period han ha during he 1981 88 period. The more rapid growh of ICTcan be undersood by examining he behavior of relaive prices. The rae of inflaion of he GDP deflaor declined from 4.5 percen per year (1981 88) o 2.4 percen per year (1988 95) and hen o 1.4 percen per year (1995 2000). The qualiy-adused price of ICT invesmen goods fell during he same hree pos 1981 periods ( 14.5 percen o 8.0 percen o 3.2 percen per year). Relaive o he GDP deflaor, ICT prices fell a an average of 12.2 percen per year over he 1981 2000 period. The oher caegories of invesmen experienced price increases, bu in general, hey were sill lower han hose of he GDP deflaor. Invesmen paerns direcly deermine he growh of he capial sock. For example, relaively fas growh in ICT equipmen invesmen leads o faser capial sock growh raes and an increase in he capial sock share of equipmen. The long-lived naure of srucures, however, means his occurs slowly. The index of real capial sock of ICT equipmen, for example, has grown 12.7 percen per year over he las wo decades, compared wih srucures, which grew only 1.7 percen per year. The share of ICT equipmen in he sock of fixed reproducible capial in curren dollar erms has increased from 3.9 percen in 1981 o 6.4 percen in 2000. This imporan increase in he value share is due o he large increase in he quaniy of ICT capial ha more han offse he fall in he price of such capial. Capial formaion. The indexes of he growh of Canadian capial sock and capial services show ha he pos-1995 period has been one of relaively rapid growh in capial sock. The rae of growh of capial fell from 1.8 percen per year over he 1981 88 period o 1.3 percen per year over he 1988 95 period, and rebounded sharply o 3.5 percen per year over 1995 2000. A he asse level, however, while ICT equipmen mainained a susained growh across all periods, boh machinery and equipmen and srucures experienced a significan slowdown during he 1988 95 period, followed 6 Monhly Labor Review Ocober 2002
by a marked recovery in recen years. Trends in he growh of he capial sock are maor deerminans of he growh of capial services. The growh of capial services is, however, higher han he growh of capial sock, reflecing he ongoing subsiuion of shorlived equipmen for long-lived srucures. This shif in composiion is someimes referred o as changes in capial qualiy in he sense ha i resuls from changes in composiion ha are associaed wih changes in marginal produciviy. All else being equal, a shor-lived asse has a higher depreciaion rae, relaively higher service price and, herefore, a higher relaive marginal produciviy because compeiive markes equae user capial cos o marginal produciviy. As a consequence, he fas growing shor-lived asses receive a higher weigh in he capial service aggregaion, compared wih heir weigh for he capial sock. 10 For individual asse classes, he resuls in able 2 show ha capial-service growh always exceeds he growh of he capial sock, which implies asse subsiuion also occurs wihin asse classes. These daa documen an imporan recovery in he growh rae of Canadian capial services across all asse classes in he pos-1995 period. This reflecs, in large par, he rapid growh of invesmen in he second half of he 1990s for all asse classes. This is an imporan developmen because i is he growh of capial services and no he level of capial or invesmen growh ha ulimaely affecs economic growh in oupu. I is useful o compare Canada s capial services growh wih he U.S. measure of capial services. 11 For he U.S. privae business secor, which mos closely maches Saisics Canada s esimaes, he Bureau of Labor Saisics repors capial services growh of 3.8 percen for all asses in he 1981 99 period, slighly more han Canada s esimae of 3.3 percen for he same period. This may reflec srucural differences beween he wo counries. For boh counries, he rends are quie similar during he various subperiods. BLS repors a decrease in he growh of capial services from 3.9 percen for 1981 88 o 2.8 percen for 1988 95 and hen a recovery o 5.3 percen for 1995 99. (For Canada, he esimaes are 3.5 percen, 1981 88; 2.6 percen, 1988 95; and 4.2 percen, 1995 99). However, here are marked cross-counry differences in he growh of capial services a he asse level. The U.S. ICT equipmen capial services grew 17.5 percen during he 1995 99 period, up from 14.5 percen over he 1981 88 period and 8.5 percen over he 1988 95 period This is far below he performance experienced by is Canadian counerpar (25.7 percen, 1995 99; 21.5 percen, 1981 88 period; and 17.5 percen, 1988 95). Alhough in he Unied Saes, oher machinery and equipmen and srucures recovered in he 1995 99 period in comparison wih he 1988 95 period, his performance remains below ha posed in he previous decade. In conras, during he 1995 99 period, Canada s oher machinery and equipmen and srucures experienced heir fases growh since 1981. Decomposing he growh in capial services. To idenify and quanify he sources of he increase in capial services, in erms of changes in composiion of invesmen wihin asse classes and beween asse classes, we provide a framework ha decomposes he growh in capial services ino hree maor componens. In his framework, capial services increase for hree reasons subsiuion owards shor-lived, high marginal produc asses wihin asse classes (wihin qualiy effec), subsiuion beween asse classes (beween qualiy effec), and accumulaion of capial sock (capial accumulaion effec). The growh of aggregae capial services (he log represens he growh rae) is decomposable as follows 12 : (1) K ~ ln ~ K 1 = v ln 1 + ( v w K ) ln K 1 K ~ = aggregae capial services + K w ln K 1 where = qualiy change of he asse class = ICT, K = oher machinery and srucures and he capial sock of he asse class a period v = average renal cos share for he asse class a period and w = average value share of capial sock for he asse class a period Each of hese hree componens has a specific economic inerpreaion. The firs erm on he righ-hand side will be referred o as he wihin qualiy effec, which measures subsiuion and capial qualiy growh wihin disinc asse classes. The second erm represens he beween qualiy effec, which measures subsiuion beween disinc asse classes. The las erm is he capial accumulaion effec, which measures capial sock accumulaion. Table 3 presens he conribuion o he growh in oal fixed capial services from each componen for 1981 2000 and subperiods. The decomposiion allows us o idenify he sources of increase of capial services growh by comparing each componen across asse classes and over ime. Table 3 should be read in he following manner. Consider he 3.4- percen per year growh of capial services for he 1981 2000 period (las column, firs row). This is made up of a 1.2-percen Monhly Labor Review Ocober 2002 7
Comparison of Canada U.S. Economic Growh Table 3. Decomposiion of he growh in capial services by asse class, Canadian business secor, 1981 2000 Asse class Wihin Beween Weighed Capial qualiy qualiy capial services effec 1 effec 1 accumulaion 1 growh 2 1981 2000 Fixed capial... 0.9 0.3 2.1 3.4 Informaion and communicaion echnology....4.3.5 1.2 Oher machinery and equipmen....3.1.4.8 Srucures....2.1 1.2 1.4 1981 88 Fixed capial... 1.4.1 2.0 3.5 Informaion and communicaion echnology....6.2.2 1.0 Oher machinery and equipmen....5.1.3.9 Srucures....3.1 1.4 1.6 1988 95 Fixed capial....7.3 1.7 2.6 Informaion and communicaion echnology....4.3.4 1.1 Oher machinery and equipmen....1.1.3.4 Srucures....2.1 1.0 1.1 1995 2000 Fixed capial....7.6 2.9 4.2 Informaion and communicaion echnology....2.6.8 1.6 Oher machinery and equipmen....3.1.8 1.2 Srucures....2.1 1.3 1.4 1 Average annual percenage poin conribuion. 2 Average annual growh rae. conribuion from ICT, 0.8 percen from oher machinery and equipmen and 1.4 percen from srucures. Looked a from he decomposiion oulined in equaion 1, his 3.4 percen comes from 0.9 percen of a wihin-class effec (subsiuion across asses wihin an asse class), 0.3 percen from a beween-class effec (subsiuion across asse classes), and 2.1 percen of a capial-accumulaion effec (general growh across all asse classes). The esimaes show ha a he aggregae level, he capialaccumulaion effec is he primary source behind he growh of oal capial services for all periods. However, his varies across asse classes: he oal qualiy effec (he sum of he wihin and beween qualiy effec) consiues he maor source behind he growh of ICT capial services for all periods, whereas he capial-accumulaion effec ends o dominae for oher machinery and equipmen and srucures. Subsiuion across asse groups wihin an asse class becomes increasingly imporan over ime, paricularly for ICT. For all periods and all asse classes, he oal qualiy effec is primarily driven by he wihin qualiy effec. However, he 0.7-percenage poin annual increase of capial services beween 1981 88 and 1995 2000, which is mainly aribuable o ICT and oher machinery and equipmen, is mosly driven by he beween-effec, which increased by 0.5 percenage poins per year and he capial-accumulaion effec, by 0.9 percenage poins per year. Sources of economic growh Framework. The growh of capial services along wih he growh in labor inpu and mulifacor produciviy are he hree primary deerminans of he economic growh in oupu. This ype of growh accouning exercise has a rich hisory beginning wih he seminal work of Rober M. Solow, who inegraed he aggregae producion funcion wih naional income daa o produce an esimae of produciviy growh ha capured disembodied echnical change. 13 Aggregae oupu Y is considered o be produced from capial services K ~ and labor services L ~. Represening produciviy as a Hicks-neural augmenaion A of aggregae inpu, oupu can be wrien as: (2) ~ ~ Y = AF K, L ) ( Under he assumpions of compeiive produc and facor markes, and consan reurns o scale, growh accouning gives he growh of oupu as he sum of he share-weighed growh of inpus and growh in mulifacor produciviy: (3) lny = s k, ~ lnk + s L, ~ lnl + lna 8 Monhly Labor Review Ocober 2002
where s s K, = capial s average share of nominal value-added L, s labor average share of nominal value-added K, + sl, = 1 A he augmenaion facor, capures mulifacor produciviy refers o a firs difference. Equaion (3) has several aracive feaures. I faciliaes he decomposiion of he growh in oupu ino he conribuions made by labor and capial inpus on one hand, and a residual ha is called mulifacor produciviy growh, on he oher hand. I also allows for he quanificaion of he conribuions of differen ypes of capial, such as ICT, o he growh of oupu. In addiion, rearranging equaion (3) enables us o presen resuls in erms of labor produciviy growh as: (4) Y ~ K ln sk ln + sl lnh H =, H, ( ) where Y H = oupu per hour worked K ~ = he raio of capial services o hours worked H + lna This gives he familiar formula ha allocaes labor produciviy growh among hree facors. The firs is capial deepening, he growh in capial services per hour. Capial deepening (also called capial inensiy) makes workers more producive by providing more capial for each hour of work and raises he growh of labor produciviy in proporion o he share of capial. The second erm is he improvemen in labor qualiy, defined as he difference beween he weighed growh raes of each caegory of labor and he growh in he simple sum of hours worked across all worker caegories. Reflecing he rising proporion of hours supplied by workers wih higher marginal producs, labor qualiy improvemen (also called he labor composiion effec) raises average labor produciviy growh in proporion o labor s share. The hird erm is mulifacor produciviy growh, which increases labor produciviy growh on a poin-for-poin basis. Long-erm labor produciviy growh arises from hree sources: mulifacor produciviy growh, he conribuion of increased capial inensiy, and he conribuion of shifs in labor composiion. As shown in equaion (4), labor produciviy (oupu per hour) can differ from mulifacor produciviy (oupu per uni of combined capial and labor inpus) if capial deepening occurs or if labor qualiy improves. The resuls associaed wih equaions (3) and (4) provide wo differen, bu relaed, perspecives on he sources of growh: he laer decomposes he sources of labor produciviy growh and he former idenifies he sources of economic growh of real GNP. Sources of labor produciviy growh. The conribuion of capial inensiy o labor produciviy growh equals he growh in he capial-hours raio muliplied by capial s share of nominal value-added. The conribuion of labor composiion equals he difference beween he growh raes of labor inpu and of hours worked muliplied by labor s share of nominal value-added. Hisorically, capial s share has been slighly more han one-hird of nominal value-added in he business secor. Table 4 indicaes ha from 1981 o 2000, Canada s labor produciviy grew a an annual rae of 1.4 percen in he business secor. Of he 1.4 percen growh in labor produciviy, 0.2 percen can be aribued o increases in mulifacor produciviy, 0.6 percen o he conribuion of capial inensiy, and 0.5 percen o changes in labor composiion. Table 4 displays a moderae labor produciviy increase during he 1980s and early 1990s, and an acceleraion of labor produciviy growh in he lae 1990s. This acceleraion reflecs he remarkable pickup in mulifacor produciviy growh in recen years. During he 1988 95 period, mulifacor produciviy decreased 0.3 percen per year in he business secor. A he same ime, he average annual conribuion of capial inensiy o labor produciviy growh increased o 0.9 percen, and Table 4. Annual average percenage poin conribuion o labor produciviy, Canadian business secor, 1981 2000 Iem 1981 2000 1981 88 1988 95 1995 2000 Labor produciviy growh (annual average growh rae)... 1.4 1.3 1.2 1.7 Capial deepening....6.6.9.4 Informaion and communicaion echnology....4.3.4.4 Oher machinery and equipmen....1.1.1.1 Srucures....1.1.3.1 Labor qualiy....5.5.6.3 Mulifacor produciviy....2.2.3 1.0 Monhly Labor Review Ocober 2002 9
Comparison of Canada U.S. Economic Growh labor composiion made a 0.6-percenage poin conribuion. Labor produciviy, herefore, increased 1.2 percen per year from 1988 o 1995. ICT capial began o play an increasingly imporan role during his period, conribuing 0.4 percen per year, or more han wo-fifhs of he conribuion of capial deepening o labor produciviy growh. During 1995 2000, labor produciviy grew 1.7 percen per year in he business secor, 0.5 percenage poins faser han during he 1988 95 period. This acceleraion is aribued enirely o he remarkable resurgence of mulifacor produciviy growh, which increased by more han one percenage poin. Coninuing he rend in subsiuion of ICT for oher forms of capial, ICT capial accouned for he whole conribuion of capial deepening o labor produciviy growh. Growh in labor qualiy slowed relaive o he growh in hours in he 1995 2000 period. Sources of economic growh. Using he framework previously explained, we combine he capial and labor inpus wih oupu daa o esimae he componens of equaion (3) o quanify he sources of economic growh in oupu from 1981 2000. In addiion o he sandard conribuion of aggregae capial services, he analysis also examines he conribuion of each broad asse class o oal growh. Table 5 illusraes in he second column, for he period 1981 88, ha oupu grew a 3.3 percen per year, of which aggregae capial services conribued 1.4 percen, labor inpu 1.7 percen, and mulifacor produciviy 0.2 percen. The 1.4 percen capial conribuion is from he growh rae of capial services muliplied by he share s K, and may also be decomposed ino an 0.8-percen conribuion of capial accumulaion and 0.6 percen of qualiy change. Similarly, he 1.7-percen labor inpu conribuion can be decomposed ino a 1.2-percen conribuion from increased hours worked and a 0.5-percen conribuion from qualiy change due o subsiuion oward more highly educaed workers. For 1995 2000, oupu grew 4.9 percen per year, capial services conribued 1.7 percenage poins, labor inpu conribued 2.2 percenage poins, and mulifacor produciviy conribued 1.0 percenage poins. As repored earlier, here has been an increase in he conribuion of capial services during 1995 2000 as he growh conribuion increased o 1.7 percen from 1.4 percen per year over he 1981 88 period. ICTshows he larges increase in he conribuion of capial services beween he wo periods, nearly doubling from 0.4 percen o 0.7 percen. In addiion, he mos recen esimaes show an increase in he growh of mulifacor produciviy ha is more han any rae since 1981. Mulifacor produciviy growh. Canada s mulifacor produciviy grew a an average 0.2-percen per year, compared wih 0.9 percen per year for he Unied Saes during 1981 99, he mos recen period for which U.S. mulifacor produciviy esimaes are available. (See able 6.) This produciviy gap beween he wo counries is largely aribuable o Canada s relaively modes mulifacor produciviy performance from 1981 o 1995. The lack of mulifacor produciviy gain in Canada from 1981 o 1995 (0.0 percen, compared wih 0.7 percen in he Unied Saes) reflecs a 2.4-percen increase in oupu (3.3 percen in he Unied Saes) and a 2.4-percen increase in combined inpus of capial and labor (2.5 percen in he Unied Saes). In he lae 1990s, oupu grew a an average annual rae of 4.8 percen in Canada (4.9 percen for he Unied Saes), a 3.2-percenage poin increase relaive o he early 1990s (2.7 percenage poins for he Unied Saes). Mulifacor produciviy growh makes an imporan recovery o 1.0 percen in Canada (1.3 percen for he Unied Saes as well), while capial services conribuion o growh recovered o 1.7 percen in Canada (1.8 percen in he Unied Saes), and labor s conribuion rebounded o 2.1 percen poins (1.8 percen for he Unied Saes). Mulifacor produciviy growh is he source of 21 percen of oupu growh in Canada (27 percen in he Unied Saes), up from 6.1 percen in he 1981 88 period (26 percen for he Table 5. Sources of economic growh, Canadian business secor, 1981 2000 (Annual average percenage poin conribuion) Source 1981 2000 1981 88 1988 95 1995 2000 Oupu growh (annual average growh rae)... 3.0 3.3 1.5 4.9 Conribuion of capial services... 1.3 1.4 1.0 1.7 Informaion communicaion echnology....5.4.4.7 Oher machinery and equipmen....3.4.2.5 Srucures....5.6.4.5 Conribuion of labor Inpu... 1.5 1.7.8 2.2 Mulifacor produciviy (annual average growh rae)....2.2.3 1.0 Conribuion of capial sock....9.8.6 1.4 Conribuion of capial qualiy....5.6.4.3 Conribuion of labor hours... 1.0 1.2.1 1.9 10 Monhly Labor Review Ocober 2002
Table 6. Sources of economic growh, Canada and U.S. business secors, 1981 99 Source Canada U.S. Canada U.S. Canada U.S. Canada U.S. 1981 99 1981 88 1988 95 1995 99 Oupu (annual average growh rae)... 2.9 3.6 3.3 3.9 1.5 2.2 4.8 4.9 Conribuion of labor Inpu... 1.4 1.5 1.7 1.6.8.9 2.1 1.8 Conribuion of capial services... 1.3 1.2 1.4 1.3 1.0.8 1.7 1.8 Conribuion of informaion and communicaion echnology....5.5.4.4.4.3.7 1.1 Conribuion of oher machinery and equipmen....3.3.4.4.2.2.5.4 Conribuion of srucures....5.4.6.4.4.2.6.4 Mulifacor produciviy (annual average growh rae)....2.9.2 1.0.3.5 1.0 1.3 NOTE: Numbers may no add due o rounding. Unied Saes). The acceleraion in mulifacor produciviy growh in Canada and he Unied Saes is perhaps he mos remarkable feaure of he daa. Is acceleraion in Canada from 0.3 percen per year o 1.0 percen per year (0.5 percen o 1.3 percen in he Unied Saes) beween 1988 95 and 1995 99 suggess considerable improvemens in echnology and increases in he efficiency of producion. While he resurgence in mulifacor produciviy growh in he pos- 1995 period has ye o surpass he pre-1973 performance, more rapid mulifacor produciviy growh occurred in he las par of he 1990s. Conclusion In boh Canada and he Unied Saes, he growh in oupu in he pos-1995 period has been subsanially above ha in he earlier par of he decade and of he previous decade. In addiion, afer almos wo decades of lackluser performance, he produciviy saisics, beginning in 1995, have begun o reveal he impac of increasing capial formaion in ICT echnologies. Progress in ICT is driving down relaive prices of compuers, sofware, and communicaion equipmen and inducing firms o inves in hese asses (16.2-percen per year growh on average during he 1981 2000 period). The aricle also examines he paern of growh in capial services in erms of boh quaniy and qualiy componens. I disinguishes beween capial quaniy growh due o invesmen, and capial qualiy growh due o subsiuion beween differen ypes of capial asses. Much of he recen invesmen boom has been associaed wih subsiuion across asses as he relaive price of highech asses seadily fell. Capial qualiy grew in Canada over he 1981 2000 period a 1.2 percen per year on average, of which 75 percen was due o changes wihin asse classes. For Canada, in erms of he sources of he 3.3-percen annual average growh over he 1981 88 period, capial inpu conribued 1.4 percen per year (0.6 percen for qualiy and 0.8 percen for capial quaniy) and labor inpu conribued 1.7 percen per year (1.2 percen for hours and 0.5 percen for labor qualiy). This is somewha similar o he 1995 2000 period, when capial inpu, a 1.7 percen, conribued less han labor inpu, a 2.2 percen per year o oupu growh. In boh Canada and he Unied Saes, ICT is he larges conribuor o growh wihin capial services, during he lae 1990s, followed closely by srucures in Canada. Bu he conribuion of ICT in Canada is lower han ha in he Unied Saes. Wha is even more remarkable abou he pos-1995 period, compared wih he previous periods, is he recovery in he mulifacor produciviy performance, posed a 1.0 percen per year in Canada and 1.3 percen in he Unied Saes (compared wih 0.2 percen in Canada and 1.0 percen in he Unied Saes, for he 1981 88 period). NOTES ACKNOWLEDGMENT: The auhors appreciae he commens ha were made by John R. Baldwin and Wulong Gu. 1 See D. W. Jorgenson, and K. J. Siroh, 2000, Raising he speed limi: U.S. economic growh in he informaion age, Brookings Papers on Economic Aciviy, vol. 1, pp. 125 211; and for a Canada- U.S. comparison, see H. Khan and M. Sanos, Conribuion of ICT Use o Oupu and Labour-Produciviy Growh in Canada, Bank of Canada Discussion Paper, 2002. 2 The daa used in his sudy are hose available in March 2002. Therefore, hey do no reflec he recen revisions ha boh Saisics Canada and he U.S. Bureau of Labor Saisics have incorporaed in heir esimaes. A more recen Canada-U.S. comparison based on he Monhly Labor Review Ocober 2002 11
Comparison of Canada U.S. Economic Growh las produciviy figures can be found in The Daily of July 12, 2002, Saisics Canada s news release, on he Inerne a: www.sacan.ca. 3 R. M. Solow, Technical Change and he Aggregae Producion Funcion, Review of Economics and Saisics, 1957, vol. 39, pp. 312 20. 4 Saisics Canada s new mehodology for esimaing he growh of capial services ha is appropriae for an aggregae producion funcion analysis is oulined in T. M. Harchaoui, and F. Tarkhani, A Comprehensive Revision of he Capial Inpu Mehodology for Saisics Canada Mulifacor Produciviy Program, in J. R. Baldwin and T. M. Harchaoui, eds., Produciviy Growh in Canada, ch. 4, Saisics Canada, 15-204XPE, 2002, forhcoming. The esimaion procedure begins wih esimaes of real invesmen flows by deailed asse class, hen calculaes capial sock for each asse class by indusry using he perpeual invenory echnique. I hen esimaes he user cos of capial for each indusry using inpu-oupu ables o derive raes of reurn a he indusry level, micro-economic price daa on more han 30,000 sales of used asses o obain depreciaion raes and deailed informaion on ax raes. The growh raes of he sock of capial by asse ype of individual indusries are hen aggregaed using he user cos of capial o derive an esimae of he growh in he flow of capial services by indusry. See also G. Gellaly, M. Tanguay, and B. Yan, An Alernaive Mehodology for Esimaing Economic Depreciaion: New Resuls Using a Survival Model, in Baldwin and Harchaoui, eds., Produciviy Growh in Canada, ch. 2, 2002, forhcoming. 5 Noe ha preliminary GDP daa from 1998 onward are used in his analysis. These daa were released in he Income and Expendiure Accouns, May 31, 2001. 6 The definiion of informaion and communicaions echnologies (ICT) asses, which includes compuer hardware, sofware, and elecommunicaion equipmen, is chosen o permi comparisons wih he Unied Saes. See Mulifacor Produciviy Trends, 1999, USDL 00 267 (Bureau of Labor Saisics Sep. 21, 2000), on he Inerne a: hp://www.bls.gov/mprhome.hm. There are currenly effors underway wihin he Organisaion for Economic Co-operaion and Developmen (OECD) o define a broader se of ICT commodiies which include no only he invesmen asses used in our definiion, bu also inermediae goods and services, and final demand caegories. 7 W. Gu, M. Kaci, J. P. Maynard, and M. Sillamaa, The Changing Composiion of he Canadian Workforce and Is Impac on Produciviy Growh, in Baldwin and Harchaoui, eds., Produciviy Growh in Canada, ch. 3, 2002, forhcoming. 8 D. W. Jorgenson, F. M. Gollop, and B. M. Fraumeni, Produciviy and U.S. Economic Growh (Cambridge, Harvard Universiy Press, 1987). 9 See he appendix o Harchaoui and Tarkhani, A Comprehensive Revision of he Capial Inpu Mehodology, in Baldwin and Harchaoui, eds., Produciviy Growh in Canada, 2002, forhcoming, for he differences beween hese various conceps. 10 Harchaoui, and Tarkhani, A Comprehensive Revision of he Capial Inpu Mehodology, in Baldwin and Harchaoui, eds., Produciviy Growh in Canada, ch. 4, 2002, forhcoming. 11 Mulifacor Produciviy Trends, 1999, 2000. 12 M. S. Ho, D. W. Jorgenson, and K. J. Siroh, U.S. High-Tech Invesmen and he Pervasive Slowdown in he Growh of Capial Services, 1999 on he Inerne a: hp://www.pos.economics.harvard.edu/faculy/orgenson/ papers/hiech.pdf. 13 Solow, Technical Change and he Aggregae Producion Funcion, 1957. 12 Monhly Labor Review Ocober 2002