In the last post, I discussed Canada’s mysterious productivity gap with the United States. It appears to have been rather long-lasting. The current explanation is that the gap derives the fact that Canada is a smaller market and firms therefore have trouble reaching the optimal size and specialization. The implication is that had Canada been part of the United States, it would be more productive today.
But does the gap really exist? Might the whole post be based on a misconception?
Vincent Geloso suggested that the gap may be driven by Quebec, but that does not match the data. The income gap with the U.S. holds for Ontario back to the 1870s. Moreover, we have detailed firm-level data for 1871 which shows that Ontarian firms were about 3-5% less productive than their Michigan equivalents. That is not to say that Quebec wasn’t a laggard! It is to say that the gap, inasmuch as it exists, is not due to backwardness in Quebec or the Maritimes.
Randy McDonald, however, suggested that we might be asking the wrong question. Maybe the question shouldn’t be “Why are Canadian firms less productive than American firms?” but rather “Are Ontarian firms less productive than firms in the Great Lakes states?”
After all, were Canada part of the United States, then modern Ontario would be the State of West Canada with a northern border somewhere between Lake Nipissing and the Albany River. West Canada would be just another Great Lakes state. If real genuine Ontario has been consistently less productive than the Great Lakes states, then we can conclude that there is some Canadian factor holding firms back. But if it is not, then we might want to doubt the entire premise.
It is easy enough to get regional GDP per capita for 1997-2016. Now, GDP per capita is a highly imperfect proxy for productivity. It does not account for differences in age structure, labor force participation, or work hours. But it is what I have. The data for the U.S. comes from the BLS. The Ontarian data is converted to U.S. dollars using the OECD PPP exchange rate.
Wow! Ontario was ahead of the Great Lakes states in the late 1990s, falling behind only after 2003. It fell behind Michigan only in 2010. This makes me wish for a longer time series. Is 1997 or 2016 the aberration? Has Ontario basically looked like a Great Lakes state since 1871? There is a paper for an enterprising graduate student here.
In fact, there are two different axes upon which to compare real Ontario with counterfactual West Canada. The intensive axis is productivity. Would workers and firms be more productive in Ontario had they enjoyed the same access to the American market as firms in the Great Lakes states? Did the value of being American, if any, change over time? The question is interesting in-and-of itself, but it also might shed light on the putative benefits of European union.
But there is an extensive axis as well! Before 1879, the problem with being Canadian was that the United States imposed high tariffs on Canadian exports. After 1879, however, the National Policy also imposed very high tariffs on American and British exports to Canada. Canadian firms still lacked access to American markets but they no longer had to worry about American (or British) competition.
If the policy worked, then firms would be created in Canada that otherwise might not have existed. Those firms would require workers. Where would those workers come from? They could come from farms, but the Canadian farm sector was still growing fast. They could come from existing firms, but that would raise wages. In an age of open immigration, high wages should have attracted more immigrants. As the industrial heart of Canada, Ontario should have had more firms and more people than it would have had it been West Canada, just another Great Lakes state. (If I had to guess, I would imagine that Wisconsin might be the best parallel for counterfactual West Canada, despite its closer proximity to Michigan.)
But did the National Policy work as advertised? And if so, how much bigger is Canada’s population? And what were its costs and benefits relative to (1) the reality of American and Canadian protection; (2) a counterfactual of American protection and Canadian openness (i.e., no National Policy); (3) a counterfactual of American and Canadian openness (i.e., annexation or a North American customs union); and (4) a counterfactual of American protectionism but Canadian openness only to Britain (i.e., some sort imperial federation)?
If anyone knows of a literature, please point me to it! And if there is not a literature, then somebody should get on it! Economic history, like most things, needs more Canadian content.