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This paper asks whether the gap in labour productivity between Canada and the United States is attributable in part to the performance of smaller Canadian producers of a particular type. It does so by removing the unincorporated self employed from the estimates of labour productivity in both countries so as to compare only the productivity of larger businesses.
Labour productivity is an indicator of the efficiency with which producers make use of labour in the production process. Differences in labour productivity arise from differences in the scale of production, in the amount of capital available per worker, in the skills possessed by owners, and in other organizational characteristics (including technology) possessed by firms. 1
The paper focuses on one group of small producers—the unincorporated self-employed. Unincorporated enterprises in Canada are typically smaller enterprises than those in the corporate sector and use less capital per worker. In 2005, output per hour worked in the unincorporated sector was just 63% of output per hour worked in the corporate sector. Sole proprietorships accounted for about 70% of gross domestic product (GDP) in the unincorporated sector in Canada in 2008; partnerships accounted for the remainder.
The productivity of the unincorporated sector relative to the corporate sector is much lower in Canada than in the United States. As a result, when the unincorporated sector is removed from the estimates for the business sector of each country and only the corporate sectors for the two countries are compared, differences between Canada and the United States are much lower.
The Canada–United States ratio for labour productivity in the business sector as a whole was 88.0% in 1998 while the productivity ratio for the corporate sector (after removing unincorporated businesses) was much higher, at 99.2%. From 1998 to 2005, the level of productivity of the unincorporated sector in Canada relative to the unincorporated sector in the United States remained about the same; however, the relative productivity of the corporate sector fell. By 2005, the overall Canada–United States ratio for the business sector had declined to 81%, and the productivity ratio for the corporate sector fell to 89%.
The paper also considers just the effect of removing a sub component of the unincorporated sector, namely sole proprietorships, on the Canada–United States productivity gap. The unincorporated sector consists of both sole proprietorships and partnerships. Sole proprietorships in the two countries more closely resemble one another than do partnerships, as U.S. partnerships are much larger than their Canadian counterparts.
When sole proprietorships are removed from the estimates of labour productivity in the business sector of each country (thereby permitting a Canada–United States comparison of sole proprietorships and the rest of the business sector, consisting of partnerships and the corporate sector), the gap in labour productivity between Canada and the United States of the self-employed declines. The impact of sole proprietorships on the size of the Canada–United States gap in labour productivity was around 4 percentage points in 1998. As was the case with the unincorporated sector as a whole, the productivity of sole proprietorships in Canada relative to the productivity of sole proprietorships in the United States remained steady in the period from 1998 to 2005, while the productivity of the rest of the business sector (made up of corporations and partnerships) declined. The relative contribution of sole proprietorships to the Canada–United States gap was more substantial in the 1990s; it has declined since 2000 as a gap emerged between the Canadian and U.S. corporate sectors.
The remainder of the difference in labour productivity between Canada and the United States in 1998 (some 5.8 percentage points) arising from the unincorporated sector is attributable to the higher productivity of U.S. partnerships. In the United States, partnerships are concentrated more heavily in the financial sector than they are in Canada.
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