Measuring the Canada-U.S. Productivity Gap: Industry Dimensions

This study, using the methodology given in Jorgenson and Kuroda (1995) and Lee and Tang (2001) and the new 1999 benchmark data on expenditure-based bilateral commodity purchasing power parities (PPPs) jointly developed by Statistics Canada and the U.S. Bureau of Labor Statistics, estimates Canada-U.S. bilateral PPPs for gross output, intermediate input, two types of capital stock [structures and machinery and equipment (M&E)] and value added in 31 industries. These PPPs in turn are used to estimate the Canada-U.S. labour productivity and multifactor productivity (MFP) level gaps for all these industries. These benchmark gaps in conjunction with the industry productivity growth rates in the two countries are then used to develop time series data on the labour productivity level gaps. The new estimates show that Canada’s aggregate labour productivity was more than 20 percent below the U.S. level in 2003 and widened significantly since 1995. In addition, they show that Canada is more productive than the United States in most of the resource-based manufacturing industries, but less productive in the two machinery industries and in all service industries. The new results in general are consistent with the existing literature on the subject, but there are two key differences. First, the Canada-U.S. manufacturing labour productivity gap in this study is significantly lower than previous estimates. This difference is mainly due to the significant downward revisions to the productivity gaps in the two machinery industries. Second, this paper shows that the differences in capital intensity levels explain about 30 percent of the aggregate labour productivity gap between the two countries in 2001, and more than 50 percent of the Canada-U.S. manufacturing labour productivity gap. These estimates are significantly higher than those in Rao, Tang and Wang (2003).