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Stagflation and Productivity Decline in Canada, 1974-1982

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  • John F. Helliwell

Abstract

The MACE model of Canada employs a nested production structure in which there is a vintage bundle of capital and energy that is combined with efficiency units of labour to define potential output for given quantities of employed factors. The actual level of output is derived from an estimated utilization-rate equation, in which the ratio of actual to potential output depends on unexpected sales, profitability, and the gap between actual and desired inventories. Using this production structure, it is possible to attribute 30% of the decline in labour productivity between 1973 and 1982, relative to a steady growth case, to desired substitution of labour for energy, one-third to unexpectedly low demand, and one-fifth to low profitability. The unexplained residual is less than one-fifth. The macroeconomic structure of the model is then used totrace the underlying reasons for the differences between steady growth and actual history. It is concluded that most of the changes in factor proportions, demand, and profitability in Canada were due to the changes in world oil prices and the parallel changes in inflation and real output in other industrial countries.

Suggested Citation

  • John F. Helliwell, 1983. "Stagflation and Productivity Decline in Canada, 1974-1982," NBER Working Papers 1185, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1185
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    1. Berndt, Ernst R & Wood, David O, 1979. "Engineering and Econometric Interpretations of Energy-Capital Complementarity," American Economic Review, American Economic Association, vol. 69(3), pages 342-354, June.
    2. Michael Bruno, 1982. "World Shocks, Macroeconomic Response, and the Productivity Puzzle (Rev)," NBER Working Papers 0942, National Bureau of Economic Research, Inc.
    3. John F. Helliwell & Robert N. McRae, 1982. "Resolving the Energy Conflict: From the National Energy Program to the Energy Agreements," Canadian Public Policy, University of Toronto Press, vol. 8(1), pages 14-23, Winter.
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