Productivity Growth in Service Industries: A Canadian Success Story

The Canadian service sector has performed well in recent years in terms of labour and multifactor productivity growth, both in absolute terms and relative to the United States, offsetting much of the poorer performance of the manufacturing sector. Service sector labour productivity growth has also shown a marked acceleration in both Canada and the United States in recent years relative to earlier periods. The objective of this paper is to identify the factors behind this relative Canadian success story. The sources of the acceleration in service sector labour productivity growth were different in the two countries. In Canada, increased multifactor productivity growth was responsible for 70 per cent of the labour productivity growth acceleration. In the United States, on the other hand, increased capital intensity and intermediate input intensity were the most important contributors to the service sector labour productivity growth acceleration. In Canada, the contribution of capital intensity growth to service sector labour productivity growth actually fell between 1981-1995 and 1995-2000. The factor driving Canada’s superior service sector labour productivity growth has been better multifactor productivity growth, suggesting a productivity convergence to the U.S. level. A faster pace of human capital accumulation relative to the United States, as measured by growth in the proportion of workers with a university degree, fostered the catch-up process of Canadian service industries.