The Effect of Adjustment Costs and Organizational Change on Productivity in Canada: Evidence from Aggregate Data

A basic neoclassical model of production is often used to assess the contribution of investment to output growth. In the model, investment raises the capital stock and output growth increases in proportion to the growth in capital. It has been argued, however, that computers, as a "general purpose technology," lead to process innovations and facilitate organizational coinvestments. Since there may be a learning period before firms realize the full potential of the new technology and begin to implement new processes, there may be a lag between the growth in investment and its benefits. In fact, during periods of rapid adoption of new technologies and equipment, firms may incur adjustment costs and struggle to maintain previous levels of output. Using aggregate annual Canadian data from 1961 to 2001, the author explores the magnitude of the effect that investment in new technology, in the form of new computer hardware, can have on output growth. He finds that such investment has a positive effect on output growth that cannot be explained by growth in inputs. This effect, however, is not instantaneous and is strongest only three years after the initial investment. Furthermore, the author's findings suggest that the effect of computer hardware investment has grown over time.Productivity

Markups in Canada: Have They Changed and Why?

Many empirical studies have examined the cyclical nature of the markup ratio. Until recently, few have attempted to ascertain the changes in the markup over a longer time horizon. These changes are of no less interest in view of the posited effects of increasing import competition and lower inflation on the markup. This paper offers evidence on the evolution of the markups for the Canadian business sector and 33 disaggregate industries over the 1961–2004 period. It is found that the business sector markup has declined since the mid-1980s, and that import competition has made a statistically significant but small contribution to this decline.Econometric and statistical methods

Labour Reallocation, Relative Prices and Productivity

This paper documents the rate at which labour flows between industries and between firms within industries using the most recent data available. It examines the determinants of these flows and their relationship with the productivity growth. It is found that the dispersion of industry employment growth rates has been elevated since 2005, and that this increase is not likely to be related to the business cycle. It is also found that changes in real exchange rates and commodity prices can account for a significant part of the employment dispersion across industries, especially since 2005. However, shifts of employment labour between industries have generally not contributed positively to aggregate labour productivity growth. With respect to movements of labour between firms within industries, it is found that the job reallocation rates have fallen steadily over the past decade and a half. Finally, unlike labour flows between industries, excess job reallocation rates within industries are found to be strongly related to multifactor productivity and labour productivity growth at the industry level.Productivity; Inflation and prices; Labour markets

The Changing Pace of Labour Reallocation in Canada: Causes and Consequences

The number of job gains and losses across firms in Canada each year is roughly one-fifth the total number of jobs and generally occurs within sectors (industries) rather than across sectors. Since labour reallocation within sectors has been strongly related to productivity growth in Canada, defining the key drivers of this type of reallocation is important, given the higher rates of reallocation and productivity growth in the Untied States than in Canada. This article finds that the appreciation of the Canadian dollar and rising commodity prices led to above-average reallocation of labour across sectors over the 2005-08 period, but that the impact on productivity has been minor. Labour reallocation across firms, however, generates substantial labour productivity gains in manufacturing and the business sector as a whole.

Industry Restructuring, Mark-ups, and Exchange Rate Pass-Through

Consumer prices are not very responsive to movements in nominal exchange rates and their response has fallen in Canada since the mid 1980s. This paper explores two of the most likely explanations for this decline in exchange rate pass-through to consumer prices: (1) lower inflation and (2) restructuring in the retail sector. We believe that both explanations are important but our primary focus in this paper is on the second explanation. We discuss the restructuring that has occurred in Canadian retail and trends in mark-ups and concentration in that sector. We argue that to understand these trends, it is important to examine pass-through in industrial organization models with strategic elements. Finally, we present a series of such models and evaluate the effects of various forms of restructuring on mark-ups, concentration, and exchange rate pass-through.Pass-Through, Restructuring, Strategic Pricing, Mark-ups, Exchange Rates, Imperfect Competition

Real-Financial Linkages in the Canadian Economy: An Input-Output Approach

The purpose of this paper is twofold. First, we provide a detailed social accounting matrix (SAM), which incorporates the income and financial flows into the standard input-output matrix, for the Canadian economy for 2004. Second, we use the SAM to assess the strength of the real-financial linkages by calculating and comparing real SAM multipliers and financial social accounting matrix (FSAM) multipliers. For FSAM multipliers, financial flows are endogenous, whereas for real SAM multipliers they are not. Our results show that taking into account financial flows increases the impact of a final demand shock on Canadian output. Financial flows also play an important role in determining the cumulative effect of an income shock or the availability of investment funds. Between 2008 and the first half of 2009, financial institutions shifted their investments towards government bonds, short-term paper, and foreign investments. This shift together with the fact that non-financial institutions were unwilling or unable to increase their financial liabilities, led to estimated declines in all GDP multipliers between 2008 and the first half of 2009 (2009H1). The main advantage of using the extended input-output impact analysis is that it provides a simple framework, with very few assumptions, which allows the assessment of the strength of real-financial linkages by means of multipliers. However, our methodology is subject to the Lucas critique, that as shocks shift prices, agents cannot adjust. Such a framework is, nevertheless, appropriate in short-term impact analysis such as ours.Economic models; Financial markets; Sectoral balance sheet

Recent Developments in Self-Employment in Canada

The authors document the recent evolution of the self-employment rate in Canada. Between 1987 and 1998, the self-employment rate rose 3.5 percentage points from 13.8 per cent to 17.3 per cent. In contrast, over the 1999 to 2002 period, the self-employment rate fell by 1.9 percentage points, returning the self-employment rate in 2002 to a level only 0.2 percentage points higher than in 1992. The authors explore the possible explanations for this reversal. They describe trends in self-employment by age, gender, and types of self-employment, and then decompose the changes in the self-employment rate into the fraction due to shifts in the industrial structure and the proportion due to changes within each industry. The authors also examine the role of the business cycle and other macroeconomic factors, such as tax rates.Labour markets

Human Capital Risk and the Firmsize Wage Premium

Why do employed persons in large firms earn more than employed persons in small firms, even after controlling for observable characteristics? Complementary to previous results, this paper proposes a mechanism that gives an answer to this question. In the model, individuals accumulate human capital and are exposed to the risk of losing some of their human capital as they change jobs, voluntarily or involuntarily. The model, calibrated to the United States and Canada, accounts for one-third of the firmsize wage premium. Regarding the earnings gap between Canada and the United States, the model finds that it is solely due to differences in labor market uncertainty.Economic models; Labour markets; Productivity

What Affects MFP in the Long-Run? Evidence from Canadian Industries

In this paper we explore variables that may have an impact on multifactor productivity (MFP) in the long-run using the KLEMS database for Canada. We estimate a dynamic heterogeneous panel error-correction model of twelve 2-digit level industries. Variables investigated include ICT capital, outsourcing, competition, trade openness, public infrastructure, and R&D. Results suggest that over the 1976 - 2003 period ICT capital services, outsourcing and trade all had a positive impact on the level of industry MFP. The speed of adjustment varies significantly by industry.Productivity

Stability versus Flexibility: The Role of Temporary Employment in Labour Adjustment

In Canada, temporary workers account for 14 per cent of jobs in the non-farm business sector, are present in a range of industries, and account for 40 per cent of the total job reallocation. Yet most models of job reallocation abstract from temporary workers. This paper evaluates the importance of temporary workers in job reallocation in a multi-sector model with costly labour adjustment and temporary workers. The calibrated model captures some features of job reallocation in Canada. The paper shows that the adjustment cost parameters for permanent workers are underestimated if temporary workers are ignored. It also shows that when a shock occurs where permanent workers bear the brunt of reallocation (e.g. the 2005-2008 commodity price boom and the appreciation of the Canadian dollar), aggregate adjustment costs are underestimated if temporary workers are not accounted for.Labour markets; Productivity