ICT Capital and MFP Growth: Evidence from Canadian and U.S. Industries

Abstract

Labour productivity growth in the Canadian business sector has averaged less than 1.0 percent since 2000, more than 40 percent below the average growth rate during 1981-2000. On the other hand, labour productivity growth accelerated in the U.S. in the post-2000 period compared to the average growth prior to 2000. Available research shows that the divergence in labour productivity growth was entirely due to the gap in multifactor productivity (MFP) growth. This paper looks at the possible role of information and communications technologies (ICTs) in the recent productivity growth divergence between the two countries. Using data on 33 industries over the period 1987-2000, it examines empirically the impact of ICTs on MFP growth in Canada and the U.S., taking into account ICT-related investments in intangibles and the issue of endogeneity of the explanatory variables. The regression results suggest that ICT capital is not a significant determinant of MFP growth in Canada and the U.S., implying that it was not responsible for the post-2000 productivity growth divergence between Canada and the U.S. via the MFP channel. However, ICT capital could have contributed somewhat to the labour productivity growth gap via the capital deepening channel, because the ICT capital-labour ratio has increased at a faster pace in the U.S. than in Canada since 1995.