Bank of Canada : Allocative Efficiency and Aggregate Productivity Growth in Canada and the United States

We address two puzzling facts about the growth of labour productivity-measured by real output per worker-in Canada and the United States. First, growth in US labour productivity slowed significantly in the 1970s and the 2000s. Second, labour productivity growth in Canada has fallen behind the United States over the past three decades, resulting in a widening productivity gap between Canada and the United States.

We measure allocative efficiency-how efficiently factors of production are distributed across sectors-using a theoretical framework that features a multi-sector value-added economy and an input-output economy. We then decompose aggregate productivity growth into changes in allocative efficiency and a residual term that we interpret as changes in fundamental technology.

We show that a lack of improvement in allocative efficiency is the common factor behind these episodes of slow productivity growth. In the United States, the two decades of slow growth were also the only two decades with no improvement (or even a deterioration) of allocative efficiency. In comparison, allocative efficiency has been stagnant in Canada, remaining almost unchanged from 1985 to the early 2000s and decreasing since. The lack of improvement [in allocative efficiency] can explain more than two-thirds of the productivity slowdown in the United States and more than one-third of the widening Canada-US productivity gap.