Economic Growth, Labour Market and Investment Model

Overview

To assess the drivers of economic growth, employment growth, and business investment, a system of provincial growth equations was estimated using annual provincial data for Canada’s ten provinces.

All variables were transformed into growth rates (log differences) or first differences to address non-stationarity identified through Augmented Dickey-Fuller testing.

The preferred model consists of three equations:

\[ \Delta GDP_t = \beta_1 \Delta INV_t + \beta_2 \Delta EXP_t + \beta_3 \Delta PROD_t + \beta_4 \Delta POP_t \]

\[ \Delta EMP_t = \gamma_1 \Delta GDP_t + \gamma_2 \Delta POP_t + \gamma_3 \Delta UR_t \]

\[ \Delta INV_t = \delta_1 \Delta EXP_t + \delta_2 \Delta WTI_t \]

Province fixed effects are included to control for persistent structural differences across provinces.

Simulation Framework

The estimated coefficients can be used to simulate the impacts of policy and economic shocks.

Examples include:

  • U.S. tariff-induced export declines
  • Oil price changes
  • Population growth through immigration
  • Productivity improvements
  • Labour market deterioration

National Economic Growth Model

Regression Results

The national model examines the determinants of provincial GDP growth, employment growth, and investment growth.

National Economic Growth Model
GDP Growth Employment Growth Investment Growth
+ p < 0.1, * p < 0.05, ** p < 0.01, *** p < 0.001
(Intercept) 0.005 -0.000 0.010
(0.004) (0.002) (0.019)
dlinv 0.060***
(0.010)
dlexp 0.065*** 0.125*
(0.008) (0.058)
dlprod 0.768***
(0.049)
dlpop 0.526*** 0.845***
(0.128) (0.066)
factor(province)British Columbia 0.002 0.001 0.021
(0.004) (0.002) (0.026)
factor(province)Manitoba -0.001 0.000 -0.001
(0.004) (0.002) (0.026)
factor(province)New Brunswick -0.002 0.003 0.002
(0.005) (0.002) (0.026)
factor(province)Newfoundland and Labrador 0.002 0.004+ 0.002
(0.005) (0.002) (0.026)
factor(province)Nova Scotia 0.002 0.003 -0.005
(0.005) (0.002) (0.026)
factor(province)Ontario 0.002 -0.000 0.007
(0.004) (0.002) (0.026)
factor(province)Prince Edward Island 0.001 0.004+ 0.010
(0.004) (0.002) (0.026)
factor(province)Quebec 0.002 0.001 0.009
(0.005) (0.002) (0.026)
factor(province)Saskatchewan -0.002 0.001 -0.006
(0.005) (0.002) (0.026)
dlgdp 0.139***
(0.021)
durate -0.012***
(0.001)
dinterest_rate 0.013*
(0.006)
dwti 0.001*
(0.000)
Num.Obs. 270 430 260
R2 0.707 0.770 0.162
R2 Adj. 0.692 0.763 0.122

Key Findings

  • Productivity growth is the strongest driver of GDP growth.
  • Export growth and investment growth contribute positively to economic performance.
  • Population growth significantly supports both GDP and employment growth.
  • Rising unemployment reduces employment growth.
  • Oil-price increases stimulate investment activity.

Canada Scenario Simulations

The estimated model was used to examine the effects of major economic and policy shocks.

Canada-Wide Scenario Simulations
Scenario GDP_Growth_Impact Employment_Growth_Impact Investment_Growth_Impact
10% Export Decline (Tariff) -0.57 -0.07 -1.11
WTI -20 -0.13 -0.02 -2.24
WTI +20 0.13 0.02 2.24
Population Growth +1% 0.72 0.93 0.00
Productivity Growth +2% 1.96 0.24 0.00
Unemployment Rate +1pp 0.00 -1.02 0.00

Interpretation

The national simulations suggest that:

  • Productivity improvements generate the largest GDP gains.
  • Population growth supports both GDP and employment growth.
  • Tariff-related export declines reduce investment and GDP growth.
  • Oil-price changes affect GDP primarily through investment channels.
  • Labour-market deterioration produces substantial employment losses.

Alberta Economic Model

To assess whether Alberta responds differently to economic shocks, the growth equations were re-estimated using Alberta observations only.

Regression Results

Alberta Economic Model
GDP Growth Employment Growth Investment Growth
+ p < 0.1, * p < 0.05, ** p < 0.01, *** p < 0.001
(Intercept) -0.003 -0.004 -0.007
(0.010) (0.003) (0.019)
dlinv 0.123*
(0.046)
dlexp 0.062* 0.343+
(0.029) (0.190)
dlprod 0.350
(0.206)
dlpop 0.996* 1.231***
(0.452) (0.158)
dlgdp 0.015
(0.056)
durate -0.014***
(0.001)
dwti 0.003
(0.002)
Num.Obs. 27 43 27
R2 0.836 0.888 0.618
R2 Adj. 0.807 0.879 0.586

Key Findings

  • Alberta exhibits stronger sensitivity to export and energy-price shocks.
  • Population growth contributes significantly to both GDP and employment growth.
  • Oil-price movements are an important determinant of investment activity.
  • Productivity growth remains a key driver of economic expansion.

Alberta Scenario Simulations

Alberta Scenario Simulations
GDP_Growth_Impact Employment_Growth_Impact Investment_Growth_Impact Scenario
-1.04 -0.02 -3.43 10% Export Decline (Tariff)
-0.70 -0.01 -5.66 WTI -20
0.70 0.01 5.66 WTI +20
1.00 1.25 0.00 Population Growth +1%
0.70 0.01 0.00 Productivity Growth +2%

Interpretation

The Alberta simulations indicate that:

  • Productivity growth produces the largest long-run gains in economic activity.
  • Export declines resulting from tariff shocks reduce GDP growth and business investment.
  • Oil-price declines generate meaningful investment losses.
  • Population growth provides substantial support for labour-market expansion and economic growth.

Summary

The empirical results suggest that productivity growth, population growth, exports, and investment are the principal drivers of provincial economic performance.

The scenario analysis demonstrates that:

Overall, the results highlight the importance of productivity, trade competitiveness, workforce growth, and investment in supporting long-run economic performance.