Author Description

This paper presents a non-parametric approach for adjusting the multifactor productivity growth (MFPG) measure for variations in capacity utilization over time. In the framework developed here, a capital utilization measure is derived from the economic theory of production and is estimated by comparing the ex-post return with the ex-ante expected return on capital. The nonparametric approach is then compared with the parametric approach and the standard growth accounting framework. Both the non-parametric and parametric approaches correct for the cyclical bias in the standard MFPG measure, but the non-parametric approach offers more practical adjustment for capacity utilization, because it is easier to implement and more in line with the non-parametric approach long used by statistical agencies and researchers. The results suggest that variable capacity utilization is the main source of the pro-cyclicality in the standard measure of MFPG in Canada's goods-producing industries, and that the post-2000 decline in the standard MFPG measure in Canadian manufacturing is largely due to the decline in capacity utilization.--Publisher's website.