Contributions of highway capital to output, cost, and productivity growth: Evidence from the Canadian goods -producing sector

In most industrialized countries, private sector productivity growth has declined during the 70's and 80's. Economists have not reached agreement on the exact cause of this decline. More recently, a growing body of literature argues that one of the potential causes of the decline in private sector productivity growth is the inadequate growth in public infrastructure.

Using recently constructed data, this thesis investigates the impact of public (highway) infrastructure capital on the Canadian goods-producing sector's production costs and productivity performance. It also investigates the effects of highway capital on the production sector's demand for labour, capital and intermediate goods. In addition, it estimates the marginal benefits and social rates of return to the goods-producing sector of an increase in highway capital.

We do this by estimating production functions using both Cobb-Douglas and translog specifications with highway capital, private capital and labour as the three inputs. The model is tested using: (i) time series data for the Canadian goods-producing sector for the years 1961–1994; and, (ii) pooled cross section data for the 10 Canadian provinces over the period 1961–1994. The relationship between highway capital and private sector productivity is investigated at a national and provincial level. Production functions are estimated using standard techniques to control for unobserved province and time specific characteristics. The issue of nonstationarity of data is recognized and appropriate adjustments are made. Finally, a cost function is estimated for the Canadian goods-producing sector in order to avoid the inherent problems in the production function approach. This methodology allows for the investigation of the impact of highway capital on the cost, marginal benefits and social rates of return of the goods-producing sector.

The size of this impact has important implications for policymakers' decisions on whether to invest in highway infrastructure. The results suggest that highway infrastructure capital does reduce production costs for the goods-producing sector and thus augments productivity growth. Not only is the cost function shifted downward in goods-producing firms, generating productivity improvements, but the demand for factors in goods production is also affected by this type of public capital. The “net benefits” of highway infrastructure capital are positive for the goods-producing sector in our sample.*

*The views expressed are those of the author and do not necessarily those of Transport Canada.