Interview with Roberto Cardarelli: Explaining the labor productivity gap between Canada and the United States

• Pages: 137-139

SUM

Page 137

IMF SURVEY: How has the Canadian economy fared relative to that of the United States in recent years? Why the special interest in the labor productivity gap?

CARDARELLI: In recent years, Canada's growth has exceeded that of most other industrial countries- including the United States-by substantial margins. From 1998 to 2003, the Canadian economy grew by an average 3.5 percent, which compares with 2.4 percent for all industrial countries and 2.8 percent for the United States. In fact, 2003 was the first year since 1999 that Canada's real GDP grew less than that of the United States. Still, given the unusual sequence of adverse shocks that occurred last year-such as the SARS [Severe Acute Respiratory Syndrome] outbreak, the discovery of "mad cow disease" [bovine spongi- form encephalopathy] in Alberta, and especially the sharp appreciation of the Canadian dollar-one can only appreciate the resilience of Canada's economy. The country's strong performance owes much to its macroeconomic stability, based on disciplined and effective fiscal and monetary policies and structural reforms, including the implementation of a free trade agreement with the United States, which took place over most of the 1990s.

Although the Canadian economy has been reaping the benefits of structural reforms implemented during the 1990s, one area where the gap with the United States has widened rather than narrowed has been labor productivity growth. Canadian labor productivity grew by an average annual 0.3 percentage point less than in the United States from 1981 to 2000, but the gap widened to an average 0.5 percentage point in the post-1995 period. This has attracted a lot of attention in academic and policy circles.

IMF SURVEY: Given that the gap in per capita income between the two countries has been narrowing since the mid-1990s, why does the labor productivity gap matter?

CARDARELLI: Indeed, Canada's GDP per capita- a good indicator of the standard of living-has improved significantly since 1997, and the gap with the United States narrowed from about 22 percent in 1996 to about 17 percent in 2002. Canada ranked second among the Group of Seven countries in terms of per capita income in 2002, while it was fourth in 1996.

There are two ways to raise GDP per capita. One is by increasing productivity-GDP per worker. The other is by increasing the share of the population that is work- ing-that is, the employment-to-population ratio. The narrowing of the...