--- canonical_url: "https://csls.ca/ipm-archive/ipm-issue-45/capacity-utilization-and-production-function-estimation-implications-for-productivity-analysis/" title: "Capacity Utilization and Production Function Estimation: Implications for Productivity Analysis" author: name: "CSLS" url: "https://csls.ca/author/cslc/" date_published: "2026-07-13T08:15:05+00:00" date_modified: "2026-07-17T09:30:14+00:00" post_type: "ipm" summary: "" ipm_issue_period: - "Fall 2023" ipm_keyword: - "business cycles" - "Canada" - "capacity utilization" - "firm-level" - "GVC" - "ICT" - "ISED" - "production function" - "productivity" - "quasi-fixed capital" - "R&D" - "Statistics Canada" ipm_research_theme: - "Sectoral and firm-level dynamics" ipm_country_focus: - "Canada" featured_image: "https://csls.ca/wp-content/uploads/2026/06/IPM_50_banner.webp" status: "publish" --- # Capacity Utilization and Production Function Estimation: Implications for Productivity Analysis Canonical URL: https://csls.ca/ipm-archive/ipm-issue-45/capacity-utilization-and-production-function-estimation-implications-for-productivity-analysis/ # Capacity Utilization and Production Function Estimation: Implications for Productivity Analysis [Download full PDF article](https://csls.ca/wp-content/uploads/2026/07/IPM-Issue-45-7-Tang-Wang.pdf) Cite this article × Cite this article as: Tang, Jianmin, and Weimin Wang. 2023. “Capacity Utilization and Production Function Estimation: Implications for Productivity Analysis.” International Productivity Monitor, No. 45 (Fall 2023): 178–199. https://csls.ca/ipm-archive/ipm-issue-45/capacity-utilization-and-production-function-estimation-implications-for-productivity-analysis/ ## Authors: - Jianmin Tang Innovation, Science and Economic Development Canada - Weimin Wang Micro-Economic Policy Analysis Branch, Innovation, Science and Economic Development Canada ## IPM Issue 45 Fall 2023 pp. 178–199 ## Related IPM articles [The Relationship between Efficiencies Defenses for Mergers and TFP Growth Robin Shaban Fall 2025 | IPM Issue 49 | pp. 82–102](https://csls.ca/ipm-archive/ipm-issue-49/the-relationship-between-efficiencies-defenses-for-mergers-and-tfp-growth/) [Appendix: Variable Definitions and Country/Sector Coverage for Regulatory Reform Analysis Gilbert Cette, Jimmy Lopez, Giuseppe Nicoletti, Océane Vernerey Fall 2025 | IPM Issue 49 | pp. 1–18](https://csls.ca/ipm-archive/ipm-issue-49/appendix-variable-definitions-and-country-sector-coverage-for-regulatory-reform-analysis/) [Adult Skills and Productivity: New Evidence from PIAAC 2023 Dan Andrews, Balázs Égert, Christine de La Maisonneuve Fall 2025 | IPM Issue 49 | pp. 41–63](https://csls.ca/ipm-archive/ipm-issue-49/adult-skills-and-productivity-new-evidence-from-piaac-2023/) [The Potential Impact of Pro-competitive Regulatory Reforms on Productivity and Growth in Canada Gilbert Cette, Jimmy Lopez, Giuseppe Nicoletti, Océane Vernerey Fall 2025 | IPM Issue 49 | pp. 3–40](https://csls.ca/ipm-archive/ipm-issue-49/the-potential-impact-of-pro-competitive-regulatory-reforms-on-productivity-and-growth-in-canada/) [IPM Issue 49 Editors’ Overview Andrew Sharpe, Bart van Ark, Paul Schreyer Fall 2025 | IPM Issue 49 | pp. 1–2](https://csls.ca/ipm-archive/ipm-issue-49/) [Appendix: UK Productivity Growth Rates Across Data Vintages and Studies Josh Martin Spring 2025 | IPM Issue 48 | pp. 65–73](https://csls.ca/ipm-archive/ipm-issue-48/appendix-uk-productivity-growth-rates-across-data-vintages-and-studies/) [Opportunities and Risks of Artificial Intelligence for Productivity Francesco Filippucci, Peter Gal, Katharina Laengle, Matthias Schief, Filiz Unsal Spring 2025 | IPM Issue 48 | pp. 1–26](https://csls.ca/ipm-archive/ipm-issue-48/opportunities-and-risks-of-artificial-intelligence-for-productivity/) [Using Ecosystem Accounting to Integrate the Environment in Measures of Multifactor Productivity Carl Obst Fall 2024 | IPM Issue 47 | pp. 87–108](https://csls.ca/ipm-archive/ipm-issue-47/using-ecosystem-accounting-to-integrate-the-environment-in-measures-of-multifactor-productivity/) [Eroding Natural Capital: An Alternative Explanation for the Secular Decline in Productivity Growth Christina Caron Fall 2024 | IPM Issue 47 | pp. 109–147](https://csls.ca/ipm-archive/ipm-issue-47/eroding-natural-capital-an-alternative-explanation-for-the-secular-decline-in-productivity-growth/) [How Does Industrial Policy Impact Output, Hours and Productivity? The Canadian Experience Tim Sargent Fall 2024 | IPM Issue 47 | pp. 39–53](https://csls.ca/ipm-archive/ipm-issue-47/how-does-industrial-policy-impact-output-hours-and-productivity-the-canadian-experience/) ## Abstract ## Résumé EN FR Copy link Email LinkedIn During business cycles and disruptions of global value chains, capacity utilization has important implications for explaining variations in productivity and for evaluating the effectiveness of a certain investments such as R&D and ICTs. Unfortunately, data on capacity utilization is not easily available, especially at the firm level. This article develops and evaluates a methodology for measuring capacity utilization at the micro level. Unlike the literature using ad-hoc proxies (for example, the ratio of energy use to capital stock) or ex-post return to capital which is endogenous to productivity shocks, the new measure is practical and easily implemented. Importantly, it is based on the theory of the firm in terms of profit-maximizing and price-taking and is exogenous to productivity shocks. Using Canadian micro data, this article shows that the developed new measure under the assumption of capital being not adjustable in the short term explain well the variations in firm productivity. It also finds that controlling for capacity utilization may be essential in evaluating the economic impact of certain investments such as in ICT. Au cours des cycles économiques et des perturbations des chaînes de valeur mondiales, le taux d’utilisation des capacités a des implications importantes pour expliquer les variations de productivité et évaluer l’efficacité de certains investissements comme la R-D et les TIC. Malheureusement, les données sur le taux d’utilisation des capacités ne sont pas facilement disponibles, notamment au niveau des entreprises. Cet article élabore et évalue une méthodologie pour mesurer le taux d’utilisation des capacités au niveau micro. Contrairement à la littérature utilisant des proxies ad hoc ou le rendement ex post du capital endogène aux chocs de productivité, la nouvelle mesure est pratique, facilement mise en œuvre, fondée sur la théorie de l’entreprise et exogène aux chocs de productivité. [Download full PDF](https://csls.ca/wp-content/uploads/2026/07/IPM-Issue-45-7-Tang-Wang.pdf)