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Excess capacity and productivity growth in Canadian manufacturing analysed in new study

Ottawa - Growth in labour productivity in the Canadian manufacturing sector slowed substantially in the years after 2000, according to a new study from Statistics Canada. At least half of this slowdown was because of restructuring resulting...


Ottawa – Growth in labour productivity in the Canadian manufacturing sector slowed substantially in the years after 2000, according to a new study from Statistics Canada. At least half of this slowdown was because of restructuring resulting from an increase in excess plant capacity during this period.

Much of the remainder of the overall slowdown was attributable to the general decline in the production efficiency of manufacturing plants.

Between 1990 and 2000, labour productivity in the manufacturing sector increased at an annual average rate of 3.6%. However, between 2000 and 2010, the average annual growth rate slowed to 0.9%.

Excess capacity in the Canadian manufacturing sector developed during the decade following 2000. During this period, capacity utilization declined in 16 of the 20 manufacturing industries.

In 1999, overall capacity utilization in manufacturing averaged 86%. By 2003, it had declined to 81%, and by 2006, it had returned to 83%. In the electrical products industry alone, capacity utilization fell from 92% in 2000 to 73% in 2003, returning to 80% by 2006.

In the post-2000 period, the manufacturing sector contracted at an annual average rate of 0.3%, compared with an annual average increase of 3.4% between 1990 and 1999.

Emergence of excess capacity

Some of the excess capacity that developed in the years following 2000 reflected the general economic slowdown in North America early in the decade and the appreciation of the Canadian dollar.

Those changes in the economic environment resulted in large declines in manufacturing exports during this period.

The emergence of excess capacity in several industries after 2000 was also related to major long-term structural adjustments. For example, the electronic-product manufacturing sector went through readjustment after the collapse of the dot-com bubble in the early 2000s.

Moreover, pulp and paper manufacturing contracted as newspapers in the United States faced increasing competition from the Internet.

Non-durable goods industries such as textiles, leather and clothing also faced increasing global competition from imports from emerging economies that resulted in falling output volumes in these industries.

Impact hardest on exporters

Differences in the impact of excess capacity across sectors indicate that this impact was particularly severe for firms and industries that served export markets.

This supports the interpretation that this development stemmed from changes in the trade environment, as exporters, on average, had large declines in labour productivity in the post-2000 period.

The slowdown in labour productivity growth among exporters accounted for almost all of the slowdown in aggregate labour productivity growth in the manufacturing sector. The slowdown was more pronounced in foreign-controlled plants than in domestic-controlled plants, as foreign-controlled plants are more export-oriented.

In addition, the impact of excess capacity was observed more in durable goods industries, where its impact on productivity is greatest because of the nature of the production process.

Exporters have been exposed to substantial pressures to adjust as the Canada-US exchange rate increased dramatically over the period. Exporters saw a large decline in their capacity utilization and labour productivity growth after 2000.

The research paper “Export Growth, Capacity Utilization and Productivity Growth: Evidence from Canadian Manufacturing Plants,” part of The Economic Analysis Research Paper Series (11F0027M2011075, free), is now available from the Key resource module under Publications at www.statcan.gc.ca.

Note to readers

This research paper examines how changes in the economic environment post-2000 contributed to slower productivity growth in the Canadian manufacturing sector. It investigates how this slowdown in productivity growth was associated with the restructuring that occurred in manufacturing as a result of the increase in excess capacity.

The plant-level data used in this study come from Statistics Canada’s Annual Survey of Manufactures, a longitudinal database that covers the entire Canadian manufacturing sector using both survey and administrative data, and permits plants to be tracked over time (from 1990 to 2006).