Thursday, July 20, 2017

On the growing labour productivity in Canada

Five years ago we published two papers [1, 2], which introduced a new macroeconomic model explaining the evolution of labour productivity in developed countries. This model is parsimonious and uses only one measured macroeconomic variable as the driving force of the productivity growth – real GDP per capita. Figure 1 is borrowed from our monograph “mecћanomics. Economics as Classical Mechanics” (Figure 3.22) and illustrates the predictive power of the model as applied to Canada. (Due to high volatility of productivity measurements, the measured data set is represented by its 5-year moving average, MA(5)). All coefficients in the model for Canada were obtained empirically, as explained in the papers. 

Considering the model simplicity and the accuracy of data on real GDP and productivity, the prediction of the time history in Canada is excellent. (We would be grateful if the reader could provide us with a reference to a model which gives better predictions.) It is also important that the prediction covers the whole period since 1960 with one deterministic link without any structural breaks.

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Practically all mainstream macroeconomic models (e.g. DSGE) are using the notion of shocks to productivity as the key phenomenon explaining all bigger deviations in the rate of real economic growth. This implies that productivity must define real GDP. This assumption contradicts observations, as our model demonstrates – the change in labour force productivity lags by two (!) years behind the defining change in real GDP. Therefore, the labour productivity is not a proactive macroeconomic variable.

Figure 1. Observed and predicted productivity in Canada: N(1959)=270000, A2=$300,

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B=-3200000, C=0.108; R2=0.8. (Figure 3.22 in our monograph.)

The original data set was limited to 2007. Six years later, one can test the predictive power of the model using new data. As three years ago, we use the data set published by the Conference Board. Figure 2 shows that our prediction for 2008 through 2012 was accurate. In  2010,  we expected a significant growth in labour productivity in Canada. This growth has been actually observed since 2010 and continues in 2013.  

The labour productivity in Canada is on a growing trend and will retain the rate of ~1.0% per year in 2013-2016.

Figure 2. Same as in Figure 1 extended by five readings between 2008 and 2012.


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