Is there a productivity crisis in Canada?

From Stephen Gordon, how about this?:

…an increase in business sector MFP [multi-factor productivity] of just over 10% in the span of almost 50 years is still not particularly impressive. And business sector MFP has fallen over the past ten years.

Yet the real story is more complicated and Gordon in fact prefers to dispense with the MFP metric.  Let’s look at a stunning graph:

You can see that Mining and Extraction TFP takes a long plunge, even though Canada today prospers through selling natural resources.  So what’s up?  One of Gordon’s arguments against TFP is his claim that this graph implies earlier mining technologies were better than current mining technologies (unlikely), but that is a misunderstanding of what TFP measures.  Think of TFP as trying to pick “the stuff we get for free through innovation.”  Falling TFP in mining reflects Canada’s move from “suck it up with a straw” oil to complex, high cost extraction tar sands projects and the like.  They have moved down this curve a long, long way.

Yet Canada still prospers: someone is willing to pay for all the time and trouble they put into extraction, because the other natural resource options are costlier at the relevant margin.  Another way to make the point is that this graph, and the embedded story of productivity, is very bad news for someone, just not Canada, at least not so far.

You will see plenty of talk about the problem cases in the world economy, for instance Greece or Portugal.  But arguably it is the success stories — Canada and Australia — which are scarier and more indicative of the true long-run problem.

Comments

Australia displays a similar trend, although it is usually put down to the lag between the big up-front labour and capital investment and the delivery of output. If the industry is consistently growing, TFP will appear low for a long time (although that Canadian chart is quite a long time...). Australian mining productivity hit the press again only a few days ago: http://www.theaustralian.com.au/business/economics/mining-drags-down-productivity/story-e6frg926-1226107755451

How do you reconcile this with the claim the factor are remunerated at (physical) marginal producitivity? Cambridge controversis strikes back.

The trend you describe is inevitable unless there is a shock of sudden technological advance. But it's not inevitable that it happen in my lifetime; oh sod it, it has.

Come to think of it, will fracking for natural gas constitute the sort of "shock" that's desired?

How is TFP measured? How much do we trust these measurements?

If being adept at accessing a hard-to-get-at reserve makes us less "productive" economics nomenclature sure is non-intuitive!

What good are TFP measures in general if they conflate human productivity with nature's vagaries?

Another way to make the point is that this graph, and the embedded story of productivity, is very bad news for someone, just not Canada, at least not so far.

File under: "Best sentence I read today."

hear, hear!

Hypothesis: In the earlier period, there were especially large externalities in mining (and some in other goods). As those are internalized, the observed result is falling TFP.

Once you put in a well, it pumps forever without manual labor. But, you need labor to drill and to build the pipleline before it produces, meaning labor productivity will be lower before production. You also need to build pipelines before production comes online. The mix of old and new wells determines the labor component to that industry.
Once you dig a tar pit (with upfront labor), you still have a tarpit which requires employees to extract materials. As the pit depletes, more labor is required in the extraction process.
The mix of labor/output change over the life of the resource, as do resource prices. (Look at the period when oil prices declined, look at the period when potash prices declined and run separate tables for oil and potash and natural gas--it could be prices decline and labor is constant) Also, what you view as future prices of oil, natural gas and potash will determine whether you add more labor to an existing tarpit rather than open a new one, or build an extension of a potash mine, meaning more labor is applied to the resource without opening new mines or wells.

Doesn't this just mean that the increasing prices of resources are returning more to labor than capital? And wouldn't that be a good thing?

Can anyone suggest where I can get English names pronunciation places? How do I spell Steagall in the Glass-Steagall?

Sorry for the distraction. I am from continental Europe.

Yep. Cheap oil is low-hanging fruit.

Also, extraction generally is subject to a massive amount of regulation today vs 1975, which makes it less productive. We may argue the externalities are worth it, but lack of such regulation is one major reason why China is so strong in extraction now.

Just say what you mean. Today killing workers and people in the community isn't as cheap as it once was.

If only we could go back to the good old days when killing workers and other people for profit was supported by government.

In China, the local governments try to cover up all the people killed by the extraction corporations, and try to suppress to popular protests against corporate killings.

I fail to see any judgement in his comment. The chart describes exactly what he is saying.

In British Columbia there are very expensive rules on work place safety that raise costs substantially. Providing communication capabilities and the ability to treat a worker in a timely way if injured is almost automatic in a city; in a remote area it requires substantial outlays. An acquaintance does work for one of the oil companies as electrician. The procedures required are expensive and time consuming.

It is worth noting that many initiatives to improve worker safety in a static environment usually ends up taking workers out and replacing with production machinery, which also shows up on the productivity numbers. In oil and gas where there are a very large number of small facilities spread all over the country, automation is applied, but the installation and maintenance of the sites can only be done by labor, hence subject to rigorous and expensive safety protocols.

I concur with the other commenter on return to labor vs capital. If I were to summarize the comments above it would be that the extraction market has moved from low cost of labor to extract to high cost of labor to extract as the nominal prices of the resource have moved up in the market. What was uneconomical to extract given the cost of labor and capital at X price is now economical at X+Y. It just so happens that we need more labor on these more complex extractions.

So the productivity loss is not a real one. It is a valid economic choice based on the return of the extracted resource.

you've got your conclusion backwards...

look at that solid growth in manufacturing (and pretty good in goods) - yay! these are the things we want...

its good that dirty burning fossil fuel productivity is declining (notwithstanding the comments above re what is the price measured in) we have alternative energy sources and will have more of these in the future - yay

whale oil productivity probably went through a decline as well...

so long run good...technology will solve this and every other resource "problem"

I think the graphics still looks good. If we will hit second wave of crisis when you see graphics, all but the top down. Canadian economic think looks good, but definitely the wave of the USA will reach us. We must be prepared for it.
ceapa cu miere

Why choose 1960 as the base year anyway? Here's a time series of oil output including the tar sands from wikipedia.

http://upload.wikimedia.org/wikipedia/commons/b/b8/Canadian_Oil_Production_1960_to_2020.png

If traditional extraction peaked in 1973, prices have risen fivefold in the past 15 years and investment has boomed, why are we surprised at these MFP numbers?

This is an interesting story for me. Canada, particularly in recent years, has really gone "all in" with natural resource extraction. As long as their is a healthy demand for oil making tar sand extraction worthwhile but any commodity price declines are going to come as a severe shock to this, frankly speaking, smug and arrogant nation. Canada's wealth is not built on innovation, productivity, entrepreneurship, or any of those things but instead on the luck of being located in a natural resource rich region of the globe (basically a Saudi Arabia with better institutions).
I think being so heavily relient on natural resource extraction slowly eats away at the soul of the nation's economy - Canada now consists of the natural resource sector and a very large, low wage service sector and relatively little else.

Yep.
Study what happened to commodities in the late 70's.

CBBB I think if it were not for schadenfreude you would have no joy in your life at all. "Smug and arrogant nation" my goodness where does that come from. In any event I think you may have missed the gist of the article which is that even if commodities decline the lowering effect that will have on the Canadian dollar will prime the currently suppressed manufacturing sector which at least until recently made up a larger segment of Canada's economy that most other OECD countries. Canada does manufacturer trains, planes and automobiles as much as any other industrialized country and while its commodities are presently carrying its recovering economy they still represent only a minor fraction of total GDP.

CBBB,

Spoken as a true Canadian.

Canada may be smug (not without some merit) but I don't think arrogant. That is what the southern neighbours excel at. I have to say that smug AND arrogant more accurately describes Britain (for strictly historical reason).

A lot of the intellectual capital of Canada goes down to the US because.... well, I don't think that I need to explain why that is.

Canada is the second largest generator of publicly traded companies on the US exchanges.

The Canadian stock exchange is the fourth largest in the world (though a large percentage is resource based).

So I imagine that any nation that had easy access to high quality of education and lived right beside the largest economy in the world and spoke the same language, it would be difficult to imagine any other outcome unless you started putting ridiculous, distorting trade restrictions on who could work where and when.

Hope you get some help with that rage you seem to have.

CBBB -- assigning entire nations personality traits as if they were people does not offer much to a discussion -- it's basically just trolling in that it's provoking offense for no good reason. If you are American, I can guess the source of your current frustration. And I wouldn't be too dismissive of functioning institutions. They seem to have been a major component in the different performances between the US and Canada in recent years.

No I'm Canadian so I've seen this garbage first hand. I was trying to be a bit offensive - although I wasn't trying to assign a personality trait to an entire nation; I was living abroad for a period of time and during the past year I've been back I can't turn on a Canadian TV news channel without seeing endless back patting over how great the Canadian economy is and how wisely we've managed things. Given that the economy of Canada is literally built on (tar) sand - housing prices are out of control in all major cities and yet employment prospects and wages are in the doldrums throughout most regions I'd say there's disaster looming.

In that case then, the word you may be looking for is "complacent".

And if you are taken aback by moronic boosterism in Canadian news, you may have been away too long. That's nothing new.

I would still say smug and arrogant - it's gone beyond what it used to be.

yea, I kind of knew you were Canadian. Only a Canadian can have such strong emotions for Canadians. Most other countries ignore Canada.

One source of inefficiency may be the stop-start nature of Alberta oil sands production. It's extremely sensitive to price conditions. Here in Alberta, we see constant fits and starts to development. One day jobs are being shut down and workers furloughed, then oil spikes in price and investment flows in and we have a labor shortage.

Productivity may also be hampered by lack of infrastructure. Alberta's economy has been red hot for a long time, and we haven't been able to keep up with the demand for labor, new road construction, housing in the north, etc. This causes delays and raises costs. In some towns in the north, workers are sleeping in converted basements of the residents of the area, sometimes with a small basement being sectioned into four apartments at $1,000/mo each. That drives up the price that must be paid for oil patch labor, which already commands a premium because there is a labor shortage for the kinds of workers needed.

Alberta was also hit with some investment uncertainty due to the classifcation of oil sands as unconventional oil by the U.S. Congress, which would affect our ability to sell it to U.S. markets without penalty.

On the theme of TGS, there are some new technologies on the horizon that may cause a jump in our resource productivity. Right now, steam extraction uses natural gas to heat water into steam, which is injected into the ground to break down the bitumen and extract the oil. This causes a lot more CO2 output per barrel of oil, and also ties the cost of extraction to the cost of natural gas. It also uses a lot of water. A new technology being piloted now may allow us to inject a solvent into the ground, which will break the bitumen down into extractable oil. The solvent is bound in the oil, which is then pumped to the surface. The solvent is then removed from the oil and reused. That would reclassify us as conventional oil and cut extraction costs.

The other option is for Alberta to build nuclear plants to generate the steam for steam extraction, which would eliminate the excess CO2 production and give us better and more stable extraction costs. We've been planning to build two nuclear plants, but I'm not sure whether the events in Japan have put this plan on hold.

Again, a staistical question:

Is the charted "phenomenon" not a pretty clear indicator of the fact that the "output" from resources production is not reflected in domestic consumption, since it is largely exported?

So, if output is derived from domestic consumption figures, that portion of work done (payrolls) for exports would not show up?

Afterthought:

What if Canada and Oz rated their extractive industries payrolls against export receipts.

Are they achieving more export revenues per man hour.

I betcha Sarah Plain has an answer.

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