Sunday, 17 August 2008

Statistics Canada recently reported a 30% decline in multi-factor productivity growth (MFPG) in 2006 as compared to the USA. Lower MFPG explains 92% of the Canada–US productivity gap between 2000 and 2006.

Andrew Milivojevich of was quoted as saying ... “In Canada, the dominant source of productivity growth is investment in equipment and structures. In the US, the dominant source is in MFPG; a measure of technological progress and organizational change. This signals a shift in productivity thinking favouring the US.”

Now, I might be a but stupid but doesn't "investment in equipment" broadly equate to "technological progress"; and doesn't "structures" broadly equate to "organizational change". so isn't what's being said simply "The US is growing faster than Canada".

Now, if we only knew the real reason, we might understand the difference.

1 comment:

andrew said...

Investment in new equipment does not necessarily equate to “technological progress” in fact the opposite is often the case. This is particularly true when new equipment fails to meet the demands of production. When such a discrepancy exists, the purchaser is left with a problem that is only overcome through the supplier’s knowledge base in such equipment. Continuing with this line of thought, organizational change becomes slower since the purchaser relies on the supplier to provide a remedy which is often inconsistent with the demands of production which breeds poor productivity.

Now, let us examine how productivity is measured by the governments of Canada and the US. Labor productivity is measured directly and equates to “Capital Deepening”, “Labor Composition” and “Multi-Factor Productivity Growth”. Capital deepening is a measure of investment in capital and structures, labor composition is a measure of “skill”. Both of which are measured directly. However, multi-factor productivity growth; a measure of “technological progress” or “innovation” is a residual. When comparing Canada and the US, “capital deepening” and “labor composition” is essentially the same. However, since labor productivity is higher in the US, the difference is explained by “multi-factor productivity growth”. Therefore, US companies have not invested in more equipment as compared to Canada; rather they have solved their production problems through research that resulted in technological advancements and innovative solutions applied to existing equipment to improve productivity. This is “technological progress”; progress that is achieved through an increase in an organizations knowledge base.