Working Papers

No. 29: The Productivity Gap between Canadian and U.S. Firms

by Frank C. Lee and Jianmin Tang, Industry Canada, April 1999

Request this document

---

Abstract

Canada's productivity performance in the manufacturing sector has deteriorated compared to that of the United States since 1985 on the basis of both aggregate and industry analyses. The purpose of this paper is to investigate the productivity gap between Canadian and U.S. firms and its underlying factors since 1985. The firm-level data are constructed from the Compustat and Compact Disclosure data bases, supplemented by industry data from Statistics Canada, the U.S. Department of Commerce, and Jorgenson's capital, labour, energy and material (KLEM) data base. We employ a Cobb-Douglas production function to analyse both labour and total factor productivity (TFP) gaps in manufacturing; mining; transportation, communications and utilities (TCU); trade; and services. Our findings indicate that the TFP performance of Canadian firms relative to that of U.S. firms deteriorated from the 1985–1988 period to the 1989–1992 period in all five broad sectors and that only the mining sector fully recovered in the 1993–1995 period. Over the 1993–1995 period, Canada lagged behind the United States in TFP in all five sectors, with the gap ranging from 4 per cent in mining to 30 per cent in manufacturing. To explain the TFP gap and its widening over the sample period, we consider differences in labour quality, R&D, firm size, capacity utilization, returns to scale and industrial structure. As important factors contributing to the gap in manufacturing, our results identify labour quality, R&D and capacity utilization, together with an unfavourable industrial structure; in mining the results identify labour quality, R&D and returns to scale; and in TCU they identify labour quality. These factors were also responsible for the widening TFP gap in all sectors except mining.

Working Papers