Public Policy Sources #37:
Introduction

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Recently the economics of productivity has become a hot topic among Canadian politicians and policy-makers. Evidence of a growing gap between Canadian and American per-capita income has sparked concern about the economic prospects of Canada over the long term. In particular, many observers feel that Canada's lagging productivity growth is responsible for the stagnant performance of the Canadian economy. Many of these commentators believe that, in the absence of sustained growth in productivity, Canadians will not be able to enjoy a high and growing standard of living in the future (see OECD 1998; Sharpe 1998; Policy Research Initiative 1999; HCSCF 1999; Globe and Mail 1999).

Interest in the economics of productivity and growth has also increased among academic economists. In the past 20 years, important academic economists have increasingly focused their attentions on growth theory (see Journal of Economic Perspectives, Winter 1994). Measurement of productivity change, and the role of technical progress in the growth process is of paramount interest (see Canadian Journal of Economics, April 1999). There is now a plethora of theoretical and empirical papers on the subjects of economic growth and endogenous technological progress in the academic economics journals. Much of the current public debate on productivity growth in Canada has been framed in terms of this literature.

At present, there is much disagreement among academic economists about the relevance of many of the new theoretical models of growth. In addition, the empirical literature does not tend to offer robust conclusions in support of one theory or another. The only conclusion that does appear to be accepted across studies is the problem of measurement: the reliability of our current measures of productivity are suspect given the poor quality of our data. Hence, increasingly, economists have tried to improve the existing stock of data (Griliches 1994).

In spite of these disagreements, however, most economists would argue that the focus on productivity growth is warranted, for it is almost universally agreed among economists that growth in productivity is essential for a sustained increase in the material standard of living of Canadians. Ultimately, productivity growth is what produces the wealth of nations. Industrialized nations like Canada and the United States owe much of their wealth to productivity growth. A slowing in the rate of the growth of productivity will necessarily imply a decline in the rate at which living standards improve. Hence, politicians and policy-makers who care about the long-term prospects for Canadian living standards are justified in being concerned about productivity growth.

The purpose of this study is to provide a non-technical overview of the issues surrounding the debate about productivity and to discuss why productivity growth is important if Canadians want a high and rising standard of living. To do this, I will first describe how economists determine the sources of growth and what this growth accounting implies about the importance of technological change for long-term growth. This will be followed by a brief outline of various theoretical growth models and their implications and by an examination of the data with a particular focus on the Canadian experience. I will then outline what the recent empirical literature has to say about the Canadian experience. A short policy discussion will follow.

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Last Modified: Thursday, August 5, 1999.