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Allocative Efficiency and Aggregate Productivity Growth in Canada and the United States

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  • Lin Shao
  • Rongsheng Tang

Abstract

This paper evaluates the contribution of allocative efficiency to the aggregate productivity growth in Canada and the US. In particular, we are interested in explaining two puzzling facts: 1) the slowdown in productivity growth during the 1970s and the 2000s in the US, and 2) the widening Canada-US productivity gap since the middle of the 1980s. We extend the framework of Oberfield (2013) to derive sufficient statistics for allocative efficiency and decompose aggregate productivity in an input-output economy à la Jones (2013). The lack of improvement in allocative efficiency can explain two-thirds of the US’s productivity slowdown and more than one-third of the widening Canada-US productivity gap. The allocation of capital, rather than labor, was the main driver behind the overall movement in allocative efficiency. Resources allocated to service sectors were significantly lower than the optimal level. It improved markedly over time, especially in the US before the 2000s.

Suggested Citation

  • Lin Shao & Rongsheng Tang, 2021. "Allocative Efficiency and Aggregate Productivity Growth in Canada and the United States," Staff Working Papers 21-1, Bank of Canada.
    • Handle: RePEc:bca:bocawp:21-1
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    References listed on IDEAS

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    More about this item

    Keywords

    Economic models; Productivity;

    JEL classification:

    • C67 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Input-Output Models
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D57 - Microeconomics - - General Equilibrium and Disequilibrium - - - Input-Output Tables and Analysis
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production

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