The Slowdown in Productivity Growth in the 1975-83 Period: A Survey of Possible Explanations

The growth rates of both aggregate factor and labour productivity in Canada fell substantially during the period 1975-83. This paper examines this phenomenon and reviews a number of possible explanations for it.

First, the productivity growth slowdown is examined at various levels of industry disaggregation. It is apparent from this analysis that the slowdown varied widely across industries, with resource-based and energy-related industries generally experiencing the largest declines.

Next, some possible explanations for the productivity slowdown are discussed. Factors related to labour productivity in an immediate accounting sense, such as changes in the capital/labour ratio, are analyzed first. Although some slowing in growth rate of capital/labour ratios was found in selected industries, this was not universal. Problems with capital stock measurements, which may have become worse in recent years, are also noted.

More fundamental explanations for the productivity slowdown can be subsumed under the general subject of changes in the economic environment faced by firms. One of these changes was the rise in the relative price of energy. Econometrically, nearly half of the slowdown in labour productivity growth in the non-energy commercial sector can be explained by the energy price shock. However, the exact nature of the mechanism linking productivity to energy costs is not clear.

The role played by lower rates of growth of aggregate demand and lower capacity utilization rates is also examined. It is suggested that, at most, 25 per cent of the productivity slowdown can be explained by this factor.

The increase in the rate of inflation that took place during the early 1970s is also considered as a reason for the slowdown. While there is some statistical evidence of a causal relationship from inflation to productivity growth, the empirical evidence is weak. However, this factor may account for a sizeable proportion of the remaining 25 per cent of the slowdown in labour productivity growth in the non-energy commercial sector. As well, the effects of increased regulation and resource depletion may have played a role in selected sectors such as mining. Other factors considered include intersectoral movements of labour and changes in work force characteristics. These do not appear to have played more than a marginal role in explaining the productivity slowdown.