Decomposing Multifactor Productivity Growth in Canada by Industry and Province, 1997-2014

Between 1997 and 2014, multifactor productivity (MFP) in Canada’s business sector industries grew at an annual rate of 0.02 per cent per year – essentially zero. In this article, we decompose aggregate MFP growth into contributions by industry and province. Two sets of results are presented: one based on the generalized exactly additive decomposition (GEAD) and one based on the CSLS decomposition. The two decomposition methods lead to very different conclusions. The GEAD suggests that the reallocation of inputs to the mining and oil and gas extraction industry in the oil-rich provinces were the primary drivers of MFP growth in Canada while the manufacturing sector, concentrated in Ontario and Quebec, dragged MFP growth down. The CSLS decomposition suggests precisely the opposite: mining and oil and gas was the main hindrance to Canada’s MFP performance while manufacturing was the major driver of MFP growth. The disagreement between the two methods is primarily attributable to the fact that the large increase in commodity prices (especially oil prices) over the 1997-2014 period increases the mining and oil and gas industry’s contribution to MFP growth according to the GEAD while the CSLS decomposition does not treat such relative price effects as contributors to productivity growth. MFP growth is often treated as synonymous Multifactor productivity (MFP) is defined as