Small producers in manufacturing >

Overview and description of publications

• Overview of the research program.
• Did small producers create a disproportionate share of employment growth in the 1980s?
• Were small producers the engines of growth?
• U.S.-Canada comparisons of intra-industry structural change.
• The trend to smaller producers in manufacturing: a Canada/U.S. comparison.
• Productivity gap between Canada and the U.S. affected by growth in self-employment

Overview of the research program

During the last two decades, debates on industrial strategy in both the United States and Canada have focused on the extent to which small firms are more dynamic than larger firms. This debate has centered on job turnover studies that compared differences between small and large firms with respect to job growth.

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Did small producers create a disproportionate share of employment growth in the 1980s?

An analysis of the contribution that small firms make to employment growth requires accurate longitudinal databases that allow the progress of individual producers to be followed over time. It is not enough to simply examine cross-sections of the share of employment of different size classes across time. For an increase in small firm employment share may result either from growth in the small-firm sector or a decline in the large-firm sector. To resolve this issue, producers need to be tracked over time. And for this purpose, good longitudinal data are required.

The debate over differences in small- and large-firm performance originally focused on the quality of the data used in the initial studies in this area—studies that used less than comprehensive registers of all firms in an economy—and the extent to which measurements were properly taken in order to avoid the regression-to-the-mean problem in measuring rates of job growth and decline for different sized firms.

Research at Statistics Canada into small-firm growth has addressed both problems. It used comprehensive databases that cover both the manufacturing sector and the entire commercial (non-government) economy. It also examined alternate methods of handling the short-run regression-to-the-mean problem. Using different sources of data and alternate estimation methods, the papers concluded that small firms in Canada contributed more than their share of new jobs in the 1970s and 1980s. Most of this contribution comes from the creation of new producers, rather than the growth of small firms. During the 1970s, entry of new small producers increased the share of employment in small producers.

Picot, G., J.R. Baldwin and R. Dupuy. 1994. Have Small Firms Created a Disproportionate Share of New Jobs in Canada? A Reassessment of the Facts. Analytical Studies Research Paper 11F0019MIE1994071. Analytical Studies Branch. Ottawa: Statistics Canada.

Baldwin, J.R. and G. Picot. 1995. "Employment Generation by Small Producers in the Canadian Manufacturing Sector". Small Business Economics. 7: 317-31.

Picot, G., J.R. Baldwin and R. Dupuy. 1995. "Small Firms and Job Creation – A Reassessment". Canadian Economic Observer. Catalogue No. 11-010-XPB. January. Ottawa: Statistics Canada.

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Were small producers the engines of growth?

The results described above rely on measures of employment. New research has used alternate metrics (shipments and productivity). It has asked whether small manufacturing plants have also increased their share of shipments, and whether productivity growth in small manufacturing plants has kept pace with productivity growth in large plants

The research finds that small-firm output growth has not increased at the same pace as has its employment growth. In turn, this means that productivity (output per worker) has fallen in small manufacturing plants relative to large plants. Wage rates have also fallen behind. Together, these two findings mean that small firms are not the engines of growth that employment statistics suggest. The employment share in small firms may have increased markedly, but their output share did not and their labour productivity fell relative to large firms. And if employment is weighted by average wage rates, then employment growth in small firms is no greater than in large plants

Earlier work (Baldwin, J.R. 1995. The Dynamics of Industrial Competition: A North American Perspective. Cambridge: Cambridge University Press.) demonstrated that firm turnover makes a substantial contribution to productivity growth. The more productive firms gain market share at the expense of the less productive. As a result, average productivity in the population increases. Our research that examines whether small manufacturing plants were the engines of growth also investigates how much of the productivity slowdown that occurred in the 1980s may be attributed to a basic change in the nature of the competitive process and whether there has been a reduction in the extent to which the turnover process contributes to productivity growth. The paper finds that a fundamental change has occurred. In particular, new smaller firms are not contributing to productivity growth as they once were. While smaller firms may be contributing largely to job growth, the quality of those jobs is not what it once used to be.

Baldwin, J.R. 1996. Were Small Producers the Engines of Growth in the Canadian Manufacturing Sector in the 1980s? Analytical Studies Research Paper 11F0019MIE1996088. Analytical Studies Branch. Ottawa: Statistics Canada.

Baldwin, J.R. 1996. "Productivity Growth, Plant Turnover and Restructuring in the Canadian Manufacturing Sector," in Sources of Productivity Growth. D. Mayes (ed.). Cambridge: Cambridge University Press.

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U.S.-Canada comparisons of intra-industry structural change

One of the problems often attributed to the Canadian economy is its lack of dynamism, at least compared to that of its neighbour to the south. Less restructuring is said to exist in this country; fewer new firms are said to be born. One of the research projects focuses on this issue by developing measures of entry, exit and job turnover within incumbents using similar definitions and comparable databases to investigate the relative dynamics of manufacturing firms in the United States and Canada. A joint project of the Microeconomics Analysis Division at Statistics Canada and the Center for Economic Studies in Washington, this research developed measures of job growth and decline arising from firm growth and decline. The Canada-U.S. project carefully chose definitions and samples to permit a comparison of Canadian and U.S. data. The results show a remarkable similarity in enterprise dynamics between the two countries. In most aspects of firm dynamics, Canada and the United States are quite similar.

Baldwin, J.R., T. Dunne and J. Haltiwanger. 1994. A Comparison of Job Creation and Job Destruction in Canada and the United States. Analytical Studies Research Paper 11F0019MIE No 64. Analytical Studies Branch. Ottawa: Statistics Canada. Also published as Research Paper No. 4726. National Bureau of Economic Research.

Baldwin, J.R., T. Dunne and J. Haltiwanger. 1998. “A Comparison of Job Creation and Job Destruction in Canada and the United States.” Review of Economics and Statistics. 80: 347-57.

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The trend to smaller producers in manufacturing: a Canada/U.S. Comparison

The changes that have been occurring in Canada as the value added per worker in small manufacturing plants fell relative to larger plants raises several questions about the effect of this phenomenon on Canada’s overall economic performance in the manufacturing sector. In particular, we should like to know whether there are structural differences between Canada and the United States with regards to the importance of small firms? And have changes in firm-size distributions disadvantaged Canadian industry?

A research project, therefore, investigated changes in the size distribution of manufacturing plants in Canada and the United States to ascertain whether Canada’s experience was different than that of the United States. It found that both countries experienced an increase in the small-producer sector. While the percentage of employment in small producers in Canada has always been higher than in the United States, the percentage point increase of total employment that is located in small producers was about the same in the two countries. Moreover, the decline in the relative labour productivity of small plants was about the same in the two countries. In conclusion, the changes in the size distribution and the declining relative productivity of small plants that have been taking place in Canada are a North American phenomenon.

The study also found that the trend to a larger employment share in small firms that was so evident in the 1970s and 1980s no longer occurred in the 1990s. But the relative productivity decline of small plants that was apparent in the earlier period continued on into the 1990s.

Baldwin, John R., R. Jarmin and J. Tang. 2002. The Trend to Smaller Producers in Manufacturing: A Canada/U.S. Comparison. Economic Analysis Research Paper Series 11F0027MIE2002003. Analytical Studies Branch. Ottawa: Statistics Canada.

Baldwin, J.R., R. Jarmin and J. Tang. 2004. “Small North American Producers Pull Back.” Journal of Small Business. Forthcoming.

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Productivity gap between Canada and the U.S. affected by growth in self-employment

This study focuses on the smallest of producers-the self-employed-and examines the influence of the growth in this group on labour productivity in the business sector.

This paper focuses on the impact of the self-employed on labour-productivity growth in the Canadian business sector. Over the decade from 1988 to 1998, self-employment provided the majority of growth in jobs in Canada. But during this period, earnings per worker in the self-employed sector fell behind those in the business sector as a whole. This paper investigates the impact of these two events on aggregate productivity growth.

In order to measure the impact of self-employment on labour-productivity growth, the net income accruing to the self-employed is removed from aggregate business sector GDP to produce a residual, which measures growth in output in the Business-sector Apart from Self-employed (BASE). Then output per hour-worked in this category is compared to the growth in output per hour-worked in the aggregate business sector-the normal measure of productivity growth.

Over the decade, the growth in the BASE sector cumulative productivity growth rate is higher than the growth rate in the aggregate business sector. This occurs because the growth in the net income per job (hours worked) accruing to the self-employed falls behind the growth in output per job (per hour worked) in the BASE sector beginning in 1994 and the resulting gap continues over the reference decade. The increasing proportion of self-employed in the economy and the lagging growth in the net income that they earned contributed to lower the growth in labour productivity in the aggregate business sector over the decade.

A comparison is also made of Canada to the United States, asking whether the different productivity performance of the two countries over the 1987 to 1998 period is due to differences in the self-employment sector. The comparison shows that the self-employment category in the United States has had a significant positive effect on the growth in nominal output per hour-worked. Over the decade, the self-employment category has pulled up U.S. business-sector productivity; in Canada, the self-employment category decreased business sector growth in nominal output per hours worked. When the nominal output measures are deflated and the difference in cumulative growth rates is calculated, the gap in labour-productivity growth between the United States and Canada almost disappears.

Baldwin, J.R. and J. Chowhan. 2003. The impact of self-employment on labour-productivity growth: A Canada and United States comparison. Economic Analysis Research Paper Series 11F0027MIE2003016. Analytical Studies Branch. Ottawa: Statistics Canada.