The Paradox of Exploding Costs and Persistent Demand
Edited by Thijs ten Raa and Ronald Schettkat
Chapter 6: Productivity trends and employment across industries in Canada
Pierre Mohnen and Thijs ten Raa1 1 INTRODUCTION In a famous article of 1967, William Baumol predicted that services would price themselves out of the market, given their lower productivity growth and the consequent rise of their relative price, compared to non-service goods. Twenty years later, we observe that measured productivity growth in services is indeed relatively low, but that at the same time the modern economy is based less on manufacturing and more on service. Economic activity has substantially shifted away from manufacturing towards services, as it had moved from the primary sector to manufacturing in the ﬁrst half of the last century. How to reconcile these observations? In this chapter we examine the apparent paradox in the light of the Canadian experience. We ﬁrst look at the facts. In section 2, we trace productivity trends and employment shifts for the Canadian economy over the period 1962–91. Second, we review a list of potential explanations. Labour productivity growth provides only a partial picture of productivity performance since it ignores the role of capital accumulation, so we look at total factor productivity growth. In section 3, we distinguish between value-added and ﬁnal demand. Their macro identity breaks down at the sectoral level and this has implications on the issue. Value-added might be more concentrated in services than before, reﬂecting a crowding-out of services from manufacturing, and yet ﬁnal demand composition has barely changed. We then examine shifts in ﬁnal demand composition at both the commodity and ﬁnal demand...
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