Firm size and labour productivity growth in Canadian residential construction

Canada has experienced relatively low productivity growth in the construction sector over the last several decades. This study examines the evolution of labour productivity in residential construction by using firm-level data from the National Accounts Longitudinal Microdata File. The residential construction industry is dominated by small firms, with those employing fewer than 20 workers accounting for 66.1% of total employment in the industry in 2023. Labour productivity growth, measured as real gross output per worker, declined by a cumulative 37.3% from 2001 to 2023—an average decrease of 2.1% per year—in the residential construction industry. The decline occurred across all firm-size categories, with smaller firms experiencing the largest decrease. A decomposition shows that smaller firms with fewer than 20 employees accounted for the dominant share of the decline. From 2001 to 2023, the share of firms with fewer than 20 employees decreased, while the share of firms with 20 employees or more increased. This reallocation toward relatively larger firms made a small positive contribution (less than 5%) to aggregate labour productivity growth over the period, since the productivity advantage of larger firms in the residential construction industry is small. There is great variation between geographic areas—labour productivity in residential construction is falling in most parts of Canada, but some provinces and cities have managed to achieve positive growth. Finally, the study finds that the residential construction industry is characterized by high rates of firm entry and exit, which are typically associated with productivity improvements, though high exit rates may also point to a difficult business environment for residential construction firms