Who’s Productive, Anyway?

I wrote a recent column for the Globe and Mail on the issue of working hours.  It was a repsonse to a report from the Institute for Competitiveness and Prosperity that bemoaned that Ontarians worked significantly less hours than Americans (about 130 hours less per year, on average).  In the Institute’s view, this makes Ontarians $3700 less “prosperous” per year than Americans.  Here are links to my column, to the original study, and to a subsequent response to my column from the CDHowe Institute:

http://www.caw.ca/news/factsfromthefringe/issue129.asp

http://www.competeprosper.ca/public/release010906.html

http://www.theglobeandmail.com/servlet/story/RTGAM.20060914.wcomment0914/BNStory/National/

Progressive economists will immediately start pulling out hair over the Institute’s equation of “prosperity” with “GDP per capita.”  The report, however, is worth reading — and perhaps not for the reasons its authors hoped it would be!

The thing I found stunning was that, by their calculations, Ontario’s shorter working hours explain over 60 percent of the total gap in “living standards” (ie. GDP per capita) between Ontario and corresponding large U.S. states.  Think of all the belly-aching and hand-wringing that’s gone on in Canada over the last decade about our productivity gap versus the U.S. (an issue which this Institute has dedicated itself to exposing and exploring).  Almost two-thirds of that gap can be attributed to the fact that Canadians work shorter hours.  It seems to me this is a sign of our prosperity, not our lack thereof.

The flip side of the coin is that when it comes to measuring productivity more appropriately (that is, in terms of output per hour), the Canada-U.S. gap is MUCH smaller than GDP per capita comparisons would indicate.  The Institute’s data indicates that Ontarians produce about 10% less value-added per hour of work.  This is greatly “exacerbated” (in their view) by fewer hours of work — but partly offset by a higher employment rate in Canada. In other words, Canadians aren’t as unproductive, relative to Americans, as the popular discourse would indicate.

I think that recent Statistics Canada research, which makes some adjustments to traditional U.S. data regarding working hours, has similarly indicated that the gap in genuine productivity per hour is much narrower.

The other surprising thing I encountered in researching the article was that European economies quite routinely produce more per hour than the U.S. economy.  I used the case of France in my column (which presents a nice counter-stereotype to the workaholic Americans).  (In fact, Americans are not addicted to work.  They are driven to work, by business-friendly labour market and social policies.)  But the same finding applies to most other European economies, too.  Adjust GDP per capita numbers (adjusted for PPP exchange rates) for employment rates (measured relative to total population, not the more standard working age population — since the GDP per capita numbers use whole population as the denominator) and average hours of work (as reported by the OECD Employment Outlook).  The result is that America is not at all “productive”, relative to the broad set of industrial economies. 

I think it would be interesting, and quite counter-hegemonic, for someone like the CCPA to do a compelte report (and ranking) of industrial countries according to value-added produced per hour.  Has anyone seen something like this out there?

The CDHowe Institute, in the commentary noted above, argues that the higher realized productivity in France reflects the impact of European labour market structures (like the minimum wage) in preventing employment in low productivity occupations.  Hence the average productivity of those who are employed is higher.  I’m not sure I disagree with this explanation; the dispute may be more over the interpretation of this finding (is. is it a good thing or a bad thing?), and over what policy responses would be most appropriate for ensuring that so-called “low productivity” workers aren’t frozen out of the regulated labour market.

(This also makes me think of all those studies which found that the Canada-U.S. FTA was “good” for our productivity. Turns out this was largely because so many of our less productive plants simply closed in the subsequent post-FTA recession. So much for comparative advantage!)

Anyway, the whole experience was interesting for me, and cast a somewhat new light on the productivity debate.  This might be good food for thought as we progressive economists mull over how best to respond to Don Drummond’s “economists manifesto” (described in Andrew Jackson’s recent post).

PS: I had a different “manifesto” in mind back in my first year of university when I decided to major in economics.  Hmmmm, how the times change!