Economic Growth in Canada and the United States in the Information Age
Total Page:16
File Type:pdf, Size:1020Kb
Economic Growth in Canada and the United States in the Information Age Industry Canada Research Publications Program The Industry Canada Research Publications Program provides a forum for the analysis of key micro-economic challenges in the Canadian economy and contributes to an informed public debate on these issues. Under the direction of the Micro- Economic Policy Analysis Branch, the Program’s research paper series features peer- reviewed analytical working papers and policy-related discussion papers written by specialists on micro-economic issues of broad importance. The views expressed in these papers do not necessarily reflect the views of Industry Canada or of the federal government. EDITOR: DALE W. JORGENSON Economic Growth in Canada and the United States in the Information Age Industry Canada Research Monograph National Library of Canada Cataloguing in Publication Data Main entry under title- Economic growth in Canada and the United States in the information age [electronic resource] “Industry Canada Research Monograph” Issued also in French under title: La croissance économique au Canada et aux États-Unis à l’ère de l’information. Includes bibliographical references. Issued also in print format. Mode of access: Industry Canada website. ISBN 0-662-36225-X Cat. no. C21-26/2-2004E-PDF 1. Industrial productivity – Canada. 2. Industrial productivity – United States. 3. Information technology – Economic aspects – Canada. 4. Information technology – Economic aspects – United States. 5. Canada – Economic conditions – 1971-1991. 6. Canada – Economic conditions – 1991- . 7. United States – Economic conditions – 1981-2001. I. Jorgenson, Dale Weldeau, 1933- . II. Canada. Industry Canada. HC79.I52E32 2004 338.4’56’0971 C2004-980077-9 The list of titles available in the Research Publications Program and details on how to obtain copies can be found at the end of this document. Summaries of research volumes and the full text of papers published in Industry Canada’s various series and of our biannual newsletter, MICRO, are available on Strategis, the Department’s online business information site, at http://strategis.gc.ca. Comments should be addressed to: Someshwar Rao Director Strategic Investment Analysis Micro-Economic Policy Analysis Industry Canada 10th Floor, East Tower 235 Queen Street Ottawa, Ontario K1A 0H5 Tel.: (613) 941-8187; Fax: (613) 991-1261; E-mail: [email protected] Table of Contents CONTRIBUTORS i FOREWORD iii 1. INTRODUCTION 1 Dale W. Jorgenson 2. INFORMATION TECHNOLOGY AND ECONOMIC GROWTH IN THE CANADIAN AND U.S. PRIVATE INDUSTRIES 7 Tarek M. Harchaoui, Faouzi Tarkhani & Bilkis Khanam Abstract 7 Introduction 7 The Extended Accounting Framework 11 Set Up 11 The Production Possibility Frontier 12 Data 14 The Growth Resurgence Quantified 28 Contributions of Information Technology 28 Sources of Economic Growth 36 Sources of Labour Productivity Growth 42 The Sectoral Sources of Multifactor Productivity Growth 44 Motivation 44 Methodology and Data Sources 44 Empirical Results 46 Concluding Remarks 50 Endnotes 52 Acknowledgments 54 Bibliography 54 3. INFORMATION TECHNOLOGY AND PRODUCTIVITY GROWTH: EVIDENCE FROM CANADIAN INDUSTRIES 57 Wulong Gu & Weimin Wang Abstract 57 Introduction 57 Data Sources 59 Output and Productivity Growth for the Business Sector 60 Is the Productivity Growth Revival Linked to IT? 64 Is the Productivity Acceleration Widespread? 64 Aggregation over Industries 66 The Link Between IT and the Productivity Revival Across Industries 68 Robustness Checks 71 The Role of Human Capital and Trade Openness for Productivity Growth 74 Conclusion 76 Endnotes 77 Acknowledgments 78 Bibliography 78 Appendix 81 4. SOURCES OF OUTPUT GROWTH IN CANADIAN AND U.S. INDUSTRIES IN THE INFORMATION AGE 83 Mun S. Ho, Someshwar Rao & Jianmin Tang Abstract 83 Introduction 83 Empirical Framework 89 Industry Analysis 89 Industrial Contributions to Aggregate Productivity Growth 91 Data and Measurement Issues 94 Capital Input 95 Labour Input 98 Growth Accounting Results 100 Sources of Economic Growth at the Industry Level 100 Sources of Labour Productivity Growth at the Industry Level 114 Aggregate Growth and Sector Contributions 127 Conclusions 149 Endnotes 150 Acknowledgments 153 Bibliography 153 Appendix A 157 Appendix B 160 INDUSTRY CANADA RESEARCH PUBLICATIONS 167 Contributors Wulong Gu Statistics Canada Tarek M. Harchaoui Statistics Canada Mun S. Ho Resources for the Future Dale W. Jorgenson Harvard University Bilkis Khanam Industry Canada Someshwar Rao Industry Canada Jianmin Tang Industry Canada Faouzi Tarkhani Statistics Canada Weimin Wang Industry Canada i Foreword HE THREE STUDIES PUBLISHED IN THIS MONOGRAPH have employed different Tconcepts and methods for quantifying the contribution of information technologies to economic growth and productivity performance in Canada and the United States. However, their underlying data conform to the international standards recommended by the Organisation for Economic Co- operation and Development. Harchaoui, Tarkhani and Khanam have used an aggregate approach based on national accounts data (final demand gross domestic product), compared to the bottom-up approach by Ho, Rao and Tang and the econometric approach by Gu and Wang. Both papers have employed KLEMS (capital, labour, energy, materials, and services) based industry data. Despite differences in their approaches, the conclusions of the three studies are broadly similar. The monograph is the result of the collaborative effort of Industry Canada, Statistics Canada and Harvard University. Within Industry Canada, the Policy Sector, the Industry Sector and the Spectrum, Information Technologies and Telecommunications Sector worked together on the project. The conclusions in the monograph reflect the views of the authors, but not necessarily those of Industry Canada, Statistics Canada and the institutions the authors are affiliated with. iii Introduction: Economic Growth in Canada and the 1 United States in the Information Age Dale W. Jorgenson HE U.S. ECONOMY HAS UNDERGONE A REMARKABLE RESURGENCE since the mid- T1990s with accelerating growth in output, labour productivity, and total fac- tor productivity. Jorgenson (2002) has shown that information technology has been an important driving force in the revival of the American economy. Canadian economic performance has also improved dramatically during the late 1990s. However, there are important differences between the Canadian and U.S. economies, especially in the relative importance of industries producing informa- tion technology (IT) equipment and software. The purpose of this volume is to compare and analyze the sources of economic growth in Canada and the United States over the past two decades. This repre- sents a continuation of the research program initially reported in the Industry Canada monograph, Industry-level Productivity and International Competitiveness between Canada and the United States, edited by Jorgenson and Lee (2001). The current volume incorporates important new data on productivity in Canada presented in the Statistics Canada monograph, Productivity Growth in Canada – 2002, edited by Baldwin and Harchaoui (2003). In Chapter 2, Harchaoui, Tarkhani, and Khanam provide a detailed comparison of the forces behind the expansion of the private sectors in the Canadian and U.S. economies between 1981 and 2000. For the period as a whole, U.S. economic growth outstripped that in Canada by nearly a full percentage point. The contri- bution of capital services was the most important source of growth in both coun- tries, while the contribution of labour services was next in importance. Growth of multifactor productivity was slightly negative for the two decades in Canada, but positive and substantial in the United States during the same period. 1 Jorgenson Both Canada and the United States experienced a slowdown during the period 1988-1995 and a sharp rebound after 1995. The slowdown in Canada before 1995 was much more severe than in the United States. The recovery in Canada was powered by a strong revival of multifactor productivity growth, a surge in the contribution of non-IT capital services, and rapid growth of the contribution of labour services from non-college educated workers. The contribution of invest- ment in IT rose in both countries, but grew far more rapidly in the United States. The contribution of non-IT investment jumped considerably in both countries. Harchaoui, Tarkhani, and Khanam present a detailed comparison of data for Canada and the United States. The Canadian data for their study are drawn from the Statistics Canada KLEMS (capital, labour, energy, materials, and services) data base, described in greater detail in the monograph by Baldwin and Harchaoui (2003). The U.S. data are taken from Jorgenson, Ho, and Stiroh (forthcoming). The close similarities between data sources and methodology for the two countries make it possible to trace the differences outlined above to differences in the structure and behaviour of the two economies. In Chapter 3, Gu and Wang analyze the sources of economic growth for 122 Canadian industries, using the most detailed version of the Statistics Canada KLEMS data base. They divide these industries between 33 IT-intensive indus- tries and 89 non-IT intensive industries. The strong revival of multifactor produc- tivity growth after 1995 is the most important source of the Canadian growth re- vival; they show that this is pervasive among Canadian industries. Capital deepen- ing due to investment in IT is