Working paper Series

What Explains the Canada-U.S. TFP Gap?
by Someshwar Rao, Jianmin Tang and Weimin Wang.

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Abstract

Canada's per-capita gross domestic product (GDP) was about 15 percent below the U.S. level in 2005 and the gap has widened slightly in recent years. The Canada-U.S. labour productivity level gap, according to many recent studies, accounted for almost the entire real income gap between the two countries. The gap in capital-labour ratio explained directly about 10 percent of the business sector labour productivity gap in 2004. The remaining 90 percent of the labour productivity gap was due to the gap in total factor productivity (TFP). The objective of this paper, using panel data on 41 industries, is to analyze the factors accounting for the Canada-U.S. TFP gap in the business sector. The regression results show that differences in machinery and equipment (M&E;) capital labour ratio, trade openness and capacity utilization explain well the Canada-U.S. TFP gap across industries over time. The M&E; capital intensity gap is the dominant source of the Canada-U.S. TFP gap.

Key words: total factor productivity, the Canada-U.S. productivity gap, capital intensity