Sunday, October 01, 2006

Back to the productivity puzzle!

I've just noticed that Tyler Cowan quoted me on Marginal Revolution, one of my favorite blogs! Thanks Prof Ferguson and happyjuggler0 for the kudos over there!

Previously, on this blog and on Mark Thoma's blog, I expressed the idea that the wage/productivity discrepancy between Canada and the U.S. could have something to do with the different make-up of the industries in each country. Here was my response to Mark Thoma's post, which Tyler chose to quote:

Positive net employment change in Canada is most concentrated in the high-paying
energy sector in Alberta. A great proportion of the jobs being created demand high-skilled workers. I wonder how much of the discrepancy in median incomes between Canada and the US can be explained by the increase in job creation in Canada's energy sector relative to the type of job creation occurring in the US. Entry-level workers in BC and Alberta are getting paid big bucks.

Tyler adds:

Might the United States have experienced sectoral shifts which are unfavorable for median wages but favorable for wages at the upper ends of the distribution? Another factor is that rising health care costs in the U.S. are absorbed into benefit costs but in Canada these costs are socialized to greater degree. In any case economists have yet to get to the bottom of this mystery...

Tyler is the first not to dismiss my idea! But, I'll admit, the more I think about it, the more I feel that rising health care costs are the greatest culprit. Anyway, it was interesting to see that Tyler entertained my idea.
This is an aside, but once every week or two I decide to quit blogging (I wasn't entirely saddened when my blog completely vanished this weekend); however, it always picks me up when I discover feedback, good or bad, from others. Thanks to those who email me and post to this blog!


Mark Thoma said...

I've enjoyed your posts.

true dough said...

Shucks, thanks! That's a complement coming from you. And since we're dishing complements, I enjoy your posts too, Prof Thoma.

BSF said...

I presume you've looked at Stephen Gordon's post at Worthwhile Canadian Initiative which dealt with the Stat Can report on firm turnover and labour productivity increase in Canada. The need to attract labour away from existing firms might be part of the explanation. On the US/Canada comparison, of course, you need to consider total compensation and decide whether you're looking at figures net of tax. And, of course, wages should track marginal productivity, not average poductivity.

Brian Ferguson

true dough said...

I somehow missed Stephen Gordon's post, so thank you very much for bringing it to my attention.
You say, “The need to attract labour away from existing firms might be part of the explanation.” That's a great point. Perhaps high entrant-level wages are being offered to encourage worker turn-over. This would be another reason why wages are tracking marginal productivity.
But something doesn't sit right with me, given other data I've seen from the 1990's. I'd like to think more on this but I'll post here again.

true dough said...

I've given this more thought and the study seems intriguing but I'm still hung up on something.

Up to this point I've given more attention to sector-to-sector shifts in the 1990's than within-sector reorganization. One thing that I'm caught up on is how the StatsCan authors isolated the manufacturing sector.

Their argument seems straightforward: increased competition between firms in the manufacturing sector led to reorganization by more efficient means and labour productivity increased. At the same time, incumbant firms were forced to reorganize themselves to attract increased market shares - this is considered another source or increased labour productivity caused by between firm competition.

However the authors also briefly address sector-to-sector shifts:
“About 45% of firms that were in operation in 1999 are new firms that entered the manufacturing
sector during the period 1989 to 1999. These entering firms account for 34% of output and 39%
of employment. Most firms that enter the manufacturing sector are greenfield entrants,
accounting for 37% of the firms. But their shares in total output and employment are smaller
than the shares of merger entrants as greenfield entrants are much smaller than merger entrants.”

This suggests that merger entrants coming from OUTSIDE the manufacturing sector accounted for a source of labour productivity growth. If so, I can't help but wonder how much vertical integration is a factor rather than simply within firm and between firm reorganization and firm turnover. Still, the authors ignore such mergers in their decomposition. How do they justify this?

“In our decomposition, we assume that greenfield entrants replace close-down exits and merger entrants replace divestiture exits.”

It seems like the decomposition in this paper would over-emphasize the impact of turnover by ignoring sector-to-sector relation influences (eg vertical integration). I'd be embarrassed if I'm missing something glaringly obvious, but if anyone can steer me in another direction, please do so!

true dough said...

My last paragraph would have been more accurate if I stated, "It seems like the decomposition in this paper would over-emphasize the impact of WITHIN SECTOR CONTRIBUTIONS TO LABOUR PRODUCTIVITY by ignoring sector-to-sector..."

And here is a link to Stephen Gordon's post on this: