The role of firm size in the Canada–U.S. labour productivity gap since 2000

This paper examines the role of firm size in the widening labour productivity gap between Canada and the United States since 2000. Canada’s business-sector labour productivity level declined from 83% of the U.S. level in 2002 to 73% in 2019. The gap is partly explained by Canada’s higher share of small firms and their greater productivity disadvantage relative to large firms. In 2019, these two factors accounted for 60% of the 27-percentage-point productivity gap, with the remainder 40% attributable to the generally lower productivity of Canadian firms. From 2002 to 2019, both small and large Canadian firms experienced slower productivity growth than their U.S. counterparts. Large firms contributed more to the widening of the Canada–U.S. labour productivity level gap for the period from 2002 to 2019 because of significantly slower labour productivity growth among Canada’s large firms. Shift-share analysis shows that the relative weak performance of large firms accounted for 0.45 percentage points of the 0.71-point Canada–U.S. productivity growth gap, while small firms accounted for 0.16 points. The remaining 0.14 percentage points of the Canada–U.S. labour productivity growth gap were attributable to the negative effect of hours shifting toward small firms with lower labour productivity levels in Canada. The findings highlight the need to boost productivity across firm sizes. Improving small firms’ access to markets, financing, innovation and managerial capacity and enabling large firms to catch up to global productivity frontiers will be critical to narrowing the Canada–U.S. productivity gap.