CAPE 3rd Annual Engineering Knowledge Conference Wednesday, November 25, 2009 Hyatt Regency Toronto, 370 King Street West, Toronto, Canada

Annual Meeting of the Canadian Economics AssociationLaval UniversityQuebec, QuebecSaturday, May 29, 2010 Productivity Performance and Government PolicyAndrew SharpeExecutive Director, Centre for the Study of Living Standards

1Outline of PresentationI Canadian Productivity PerformanceOverall Productivity Trends A Growth Accounting PerspectiveAn Industry PerspectiveA Provincial PerspectiveImpact of the Reallocation of Labour

II Productivity Drivers and the State of Policies Affecting ProductivityInvestmentInnovationHuman CapitalMacroeconomic Framework PoliciesMicroeconomic Framework Policies

III Policy Priorities for Improved Productivity in Canada22Real Output per Hour Growth, Business Sector, Canada and the United States, Per Cent, 1947-2009Average Annual Rates

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4556Chart 3: GDP per Hour Worked Growth in OECD Countries, 2000-2007 (Compound Annual Rate of Growth, Per Cent)

67Productivity Elasticity, Business Sector, Canada and the United States, 1947-2007781973-20002000-2007Post-2000 ChangeABB - AAverage Annual Rate of GrowthOutput3.352.59-0.76Total hours1.661.51-0.15 Labour composition0.600.54-0.06 Capital services4.653.90-0.75 Capital stock2.862.49-0.36 Capital composition1.751.35-0.39 ICT capital services19.5610.17-9.38 Non-ICT capital services3.543.24-0.31 Capital services intensity2.942.35-0.59 ICT cap. serv. Intensity17.608.53-9.08 Non-ICT cap. serv. Intensity1.851.70-0.16Average Annual Percentage Point Contributions to Labour Productivity GrowthLabour productivity 1.661.06-0.60 Labour composition0.360.31-0.05 Capital services intensity1.151.01-0.14 Capital stock intensity0.700.68-0.02 Capital composition intensity0.430.32-0.11 ICT cap. serv. Intensity0.460.34-0.13 Non-ICT cap. serv. Intensity0.670.66-0.01 Multifactor productivity0.15-0.26-0.41Average Annual Percent Contributions to Labour Productivity GrowthLabour productivity 100.0100.0100.0 Labour composition21.729.67.8 Capital services intensity68.995.222.8 Capital stock intensity42.264.33.5 Capital composition intensity25.930.318.2 ICT cap. serv. Intensity27.831.720.9 Non-ICT cap. serv. Intensity40.562.51.8 Multifactor productivity8.9-24.567.5Source: CSLS Calculations based on the Canadian Productivity Accounts from Statistics Canada, CANSIM Table 383-0021.Sources of Labour Productivity Growth in the Canadian Business Sector, 1973-2000 and 2000-200789Labour Productivity Growth by Province, 1997-2007 Average Annual Rate of Growth

910Capital Productivity Growth by Province, 1997-2007Average Annual Rate of Growth1011Multifactor Productivity Growth by Province, 1997-2007Average Annual Rate of Growth1112Labour Productivity Growth by Industry in Canada, 1997-2007Average Annual Rate of Growth

1213Capital Productivity Growth by Industry in Canada, 1997-2007Average Annual Rate of Growth1314Multifactor Productivity Growth by Industry in Canada, 1997-2007Average Annual Rate of Growth14

A Comparison of Sectoral Contribution in 1973-2000 and 2000-2007 period Divided into Within-Sector and Reallocation Effects1515InvestmentWeaknessesLow share of machinery and equipment investment in GDPLow share of ICT investment in GDPLong-term decline in public investment as a share of GDPPolicy ReponsesIntroduction of the HST in Ontario and British Columbia to reduce the marginal effective tax rte (METR) on investmentReduction in the statutory federal corporate tax rateSpecial incentives for ICT investmentIncreased infrastructure spending

1616Business Investment per WorkerCanada as a per cent of the US (Average 1985 2005)

1717ICT Investment per Employed Person 2002

1818The Canada -United States ICT Investment Gap by Indicator (Canada/US)

1919The Canada-US ICT Gap, Canada as a proportion of the United States, 2008

2020InnovationWeaknessesVery weak technical progress, as implied by the poor performance of total factor productivity growthLow business sector R&D intensityWeak linkages between university research and business innovation

Policy ResponsesGenerous tax incentives for business R&DIncreased government support for higher education R&DExhortation for better university-business technological partnerships2121

Business R&D Intensity Business Expenditure on R&D as a Percentage of GDP2222

Trend Components of R&D Intensity in Canada2323Government Funding of Business R&DPer cent of GDP

2424Human CapitalStrengthsHighest proportion of the population with a post-second education among OECD countriesHigh PISA scores for high school studentsWorld class research universities

WeaknessesRelatively low proportion of the population with graduate degreesLow completion rate for apprenticeship programsUnderutilization of the human capital of recent immigrantsLow levels of human capital of Aboriginal CanadiansPoor literacy skills for a significant proportion of the workforce

Policy ResponsesBetter recognition of foreign credentialsGreater emphasis on high school completion with an increase in the age of compulsory schooling to 18 in Ontario and New Brunswick

2525Macro-economic Framework Policies

Stable inflation through inflation targetingLow debt/GDP and deficit/GDP ratios by international standardsImproved fiscal position in the medium term due to recovery and spending cuts

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Micro-economic Framework Policies

Market-oriented approach to framework policies as evidenced by privatization of Crown corporations, deregulation of certain sectors (e.g., telecommunications) and apparent easing of foreign ownership restrictionsCanada already one of the most market-oriented economies in the worldStill some interprovincial barriers to trade (e.g. provincial procurement policies) and labour mobility (recognition of professional credentials)Still foreign ownership rules in certain sectorsMarketing boards with controls on domestic production and imports are the most important barrier to international trade

2727Index of Barriers to Entrepreneurship - 2003

282829Market Regulation, Canada, 1975 and 2003

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Policy Priorities for Improved Productivity Growth in Canada

Greater assistance for technology transfer and adoption of best practice techniques by small and medium-sized firmsRebalancing of government assistance to business R&D from tax incentives to direct support, and to technology transfer programsGradual winding down of marketing boards with production quotas through buy-outsGreater emphasis on graduate educationObjective of virtually universal high school completion by moving the compulsory schooling age to 18Increased emphasis on upgrading the skills of Aboriginal CanadiansMore effective policies to improve the utilization of the human capital of immigrants

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