Global competitiveness and Canadian sectoral/regional labour productivity differences

Journal of Comparative International Management, Dec, 2003 by F.J. Arcelus, Patrick Doran

Abstract

This paper evaluates the extent to which the decrease in total factor productivity growth that is alleged to have occurred in the last Jew years is also reflected in corresponding decreases in labour productivity growth, among key provinces and sectors of the Canadian economy. The analysis is based upon non-parametric productivity comparisons, for the 1984-1998 period. Data envelopment analysis is the methodological tool selected for the measurement of total factor productivity and hence of operational effectiveness to assess the extent to which sectoral productivity differences across Canadian regions represents a barometer of global competitiveness. The evidence indicates that labour productivity is growing. Factors associated with economies of scale appear to be the main source of inefficiency, as expected in a spatial setting. These inefficiencies are reflected mostly in increasing returns to scale, which enhances the competitiveness potential of the regions' economic base and of the industries in their midst.

INTRODUCTION

The crucial role played by labour productivity in economic growth and increased competitiveness, both across regions and worldwide is uncontested. This explains why there has been a substantial revival of interest in regional/sectoral growth and productivity problems. This revival is due largely to two factors. The first is embedded in the increasing political saliency of regional disparity issues and of ways to reduce these differences. Underlying this revival is the realisation, based upon the work of Porter (1990), of three important considerations. First, total factor productivity improvement is the key to increasing a country's global competitiveness and thus to realizing long-term economic success (Ezeala-Harrison, 1995; Perraton, 2003). As Porter and Martin (2000:29) stale, "'Relentless innovation and upgrading of productivity are the keys to international competitiveness in the modern economy." Second, enhancing labour productivity over lime is the only way to consistently increase per capita income (Center for the Study of Living Standards, 1998; Ivanova, et.al., 1997). Third, the trend towards globalization strengthens the case for the role of regions as sources of innovation and comparative advantage (Martin and Sunley, 2003: Porter, 2001, 2002; Staber, 1996). This last point represents the "paradoxical consequence of globalization in which the ever greater integration of national and regional economics into the global one accentuates, rather than minimizes, the significance of the local context for innovative activities." (Wolfe and Gertler, 1999:1)

The second factor relates to the emergence of economic endogenous growth models (Lucas, 1988; Romer, 1990), which have provided alternate explanations for growth and convergence to the neo-classical paradigm (Solow, 1956). Steady-state growth, with short-term deviations attributable exclusively to random shocks, is no longer inevitable. Rather, the role of regional policy is now more interventionist, more interested in sectoral structure and technological diffusion across regions (Gunderson, 1998; Wernerheim and Sharpe, 2003), instead of being purely distributive. Convergence can also be explained with technical progress and efficiency rather than simply through decreases in the marginal productivity of physical capital and it is an important determinant of a firm's location decisions (Gunderson, 1998). Barro and Sala-i-Martin (1995) discuss the differences between the neo-classical and the endogenous growth models and Clark, el.at. (2000) present the main issues associated with the spatial component of economic growth.

One of the latest of a long line of Canadian regional disparity studies is that prepared by the Centre for the Study of Living Standards (1998). It summarises the main theoretical and empirical issues associate with the productivity of Canadian regions (see also Ezeala-Harrison, 1995; Gunderson, 1995; Porter and Martin, 2000; Wolfe and Gertler, 1999). Its website (http://www.csls.ca) is also the source of all the data used in this paper. Its primary point is thai productivity growth represents the key to economic success.

Among the main findings of this study, for the purposes of this paper, are the confirmation of the continuous decrease in total factor productivity since 1993, and the importance of the "three-way complementarity between physical capital, human capital, and technological progress" (Centre for the Study of Living Standards, 1998:2)

In view of these trends and especially of labour's crucial saliency in them, this paper revisits the issue of productivity trends of the Canadian regional economies and of the sectors in their midst. Its purpose is to determine the extent to which the decrease in total productivity growth that is alleged to have occurred in the last few years is also reflected in corresponding decreases in labour productivity growth. The analysis is based upon productivity comparisons, for the 1984-1998 period, among three provinces and three sectors of the Canadian economy. The three provinces selected consist of a "have-not" (New Brunswick), a "middle of the road" (Manitoba) and a "have" (Ontario). Two key sectors of the Canadian economy are also selected, namely agriculture and manufacturing, as well as the all-industries counterpart. The model used as a framework of analysis is based upon the non-parametric approach to productivity and efficiency measurement (PEM, hereafter) of Fare, Grosskopf and Lovell (1994) and Fare and Grosskopf (1996). This theoretical construct is briefly described in the next section, to be followed by a discussion of the empirical results. The basic conclusion is that declines in total factor productivity may be attributable to economies-of-scale factors rather than to labour productivity considerations. The Conclusions section expands upon this issue.