MRO Magazine

Production efficiency on the rebound, says Statistics Canada

Ottawa, ON -- Multifactor productivity growth in the business sector, a comprehensive measure of production efficie...


Human Resources

July 26, 2005
By MRO Magazine
MRO Magazine

Ottawa, ON — Multifactor productivity growth in the business sector, a comprehensive measure of production efficiency, rebounded in 2004 in tandem with a more rapid economic growth, reports Statistics Canada.

Growth in multifactor productivity, measured as the increase in output minus the growth of combined inputs (labour and capital), was 0.5% in 2004, up from 0.1% in 2003.

It was the second fastest growth rate since 2000, bettered only by the 2.1% gain recorded in 2002. Since 2000, multifactor productivity has grown annually at twice the pace of the 1990s.

Last year’s performance occurred in a context of rapid growth in economic output within the business sector, which accounts for roughly three-quarters of the gross domestic product (GDP) of Canada’s entire economy. The business sector covers the whole economy less government, non-profit institutions and the rental value of owner-occupied dwellings.

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Real GDP in the business sector rose 3.1% last year, nearly twice the rate of 1.6% in 2003. Strong growth in domestic demand and an increase in exports fuelled last year’s GDP growth.

The larger increase in GDP in 2004, together with a 2.6% increase in the combined inputs of labour and capital, resulted in the 0.5% increase in multifactor productivity.

This was in marked contrast to the economic situation in 2003 when GDP grew a modest 1.6%, only slightly faster than the 1.5% growth of the combined inputs of labour and capital. This produced the growth rate in multifactor productivity of only 0.1%.

Multifactor productivity measures the extent to which the combined inputs of labour and capital are efficiently used in the production process. Improvements in efficiency can come from technological and other organizational change.

Productivity is an important indicator, since it is one of the factors that determine the increase in the standard of living over the long run.

LABOUR INPUT OUTPERFORMS CAPITAL INPUT AS ENGINE OF ECONOMIC GROWTH

Labour input outperformed capital input as the engine of economic growth last year, making the largest contribution to the growth in GDP.

In 2004, labour input contributed 1.8 percentage points to GDP growth, up from only 1.1 percentage points in 2003.

In contrast, capital input contributed 0.8 percentage points to GDP growth last year, compared with 0.5 percentage points in 2003.

Since 2000, labour input has made the largest contribution to real GDP growth, a sharp contrast with the 1980s when capital input was the engine of growth.

Capital input has contributed an annual average of only 0.6 percentage points to GDP growth since 2000, which is modest compared with its average 1.5 percentage point contribution during the 1990s.

The moderate recovery in the contribution of capital input last year was partly attributable to information technology, such as computer hardware, software and communications equipment. These capital assets contributed 0.3 percentage points in 2004, up from 0.1 percentage points in 2003.

Despite the recovery in information technology investments in recent years, these capital assets have contributed an annual average of only 0.2 percentage points to GDP growth since 2000. This was well below the annual average contribution of 0.7 percentage points during the 1980s.

Other capital assets, such as machinery and equipment and structures, which account for the bulk of capital input, have also seen their contribution to GDP growth increase. They contributed 0.5 percentage points in 2004, up from 0.3 percentage points in 2003.

MORE RAPID INCREASE IN NUMBER OF HOURS WORKED

The number of hours worked increased 3.1% in 2004, just over twice the rate of growth of 1.5% in 2003.

Last year’s growth was attributable to full-time workers. It was the second most rapid growth since the second half of the 1990s, when the labour market experienced a major turnaround after years of lacklustre performance.

Hours worked of university educated and non-university educated workers both contributed to the solid performance of the labour market in 2004.

Hours worked in these two categories of workers have steadily increased since the economic slowdown of 2001. They are now comparable to the growth posted during the late 1990s.

Growth in hours worked of university-educated workers continued to outpace the growth of their non-university counterparts.

GROWTH RATES DIVERGE FOR MULTIFACTOR PRODUCTIVITY AND LABOUR PRODUCTIVITY

Labour productivity is measured as output per hour, whereas multifactor productivity is defined as output per unit of combined capital and labour inputs.

Since 2000, the performance of multifactor productivity has surpassed that of the 1990s, while the situation was the reverse for labour productivity.

Between 2000 and 2004, labour productivity advanced at an annual average rate of 0.9%, a sharp slowdown from the 1990s when it increased 1.5% on average.

In contrast, multifactor productivity has increased at an average annual rate of 0.8% since 2000, twice the growth rate of the two previous decades.

Labour productivity measures do not explicitly account for the effects of capital or of changes in the composition of labour on output growth. As a result, changes in capital intensity (the amount of capital per hour worked) and labour composition (percentage of the growth that comes from higher skilled workers) can influence labour productivity growth.

In contrast, multifactor productivity treats capital as an explicit input and, therefore, is net of changes in capital intensity. As such, multifactor productivity measures are seen as superior when it comes to revealing trends in overall efficiency or technological change.

Long-term labour productivity growth can be viewed as the sum of three components: the contribution made by multifactor productivity growth, the contribution made by increased capital intensity, and the contribution resulting from changes in labour composition.

Much of the slowdown in labour productivity relative to multifactor productivity is attributable to the deterioration in capital intensity, or capital services per hour worked.

Capital intensity fell between 2000 and 2004 because of low rates of investment in capital. Over the 1981 to 2000 period, capital services advanced twice as fast as hours worked. This contrasts markedly with the recent years when capital services and hours worked grew at about the same pace.

The average annual growth in hours worked since 2000 has been as fast as it was during the 1990s. In contrast, the annual average growth rate in capital services has advanced at only one-third the pace of the 1990s.

Because of anaemic growth in investment during this period, capital services per hour has experienced a steady decline since 2001.

However, business investment growth in machinery and equipment accelerated recently, increasing by 9.8% in 2004.