Study: Impact of the unincorporated sector on the Canada-US productivity gap

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The performance of self-employed unincorporated businesses in Canada had an important impact on the size of the gap in labour productivity between Canada and the United States. However, their contribution to the overall gap has declined over time.

In 1998, labour productivity in Canada's business sector was about 88% of labour productivity in the United States.

This gap of 12 percentage points was due almost entirely to weaker productivity in Canada's unincorporated sector relative to the United States. In the Canadian corporate sector, productivity was 99.2% of that of US corporations.

By 2005, labour productivity in Canada's business sector had declined to 80.8% of that in the United States.

The overall gap widened because of a decline in the relative productivity of Canada's corporations, which went from 99.2% of that in the United States in 1998 to 88.9% in 2005, primarily the result of declines in the relative performance of manufacturing and telecommunications.

In Canada's unincorporated sector, productivity remained about the same relative to the United States. Nevertheless, the difference in productivity in the unincorporated sector between the two countries remained important. In 2005, unincorporated businesses accounted for 8.1 percentage points of the 19.2-percentage-point gap in productivity between the respective business sectors.

This study also considered the effect of a sub-component of the unincorporated sector, namely sole proprietorships. 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 US partnerships are much larger than their Canadian counterparts.

In 1998, sole proprietorships accounted for 4 percentage points of the gap in labour productivity between the two countries. The higher productivity of US partnerships accounted for most of the remainder.

As was the case with the unincorporated sector as a whole, the productivity of sole proprietorships in Canada relative to the United States remained steady between 1998 and 2005.

The contribution of sole proprietorships to the Canada-US labour productivity gap declined to 2 percentage points by 2005, as a gap between the Canadian and US corporate sector developed.

Unincorporated enterprises in Canada are typically smaller enterprises than those in the corporate sector and use less capital per worker. The productivity of unincorporated enterprises is much lower than for corporations. In 2005, output per hour worked in the unincorporated sector was 63% of output per hour worked in the corporate sector.

In 2008, sole proprietorships accounted for about 70% of gross domestic product in the unincorporated sector in Canada; partnerships accounted for the remainder.

The study "Labour productivity of unincorporated sole proprietorships and partnerships: Impact on the Canada/United States productivity gap" is now available as part of the Economic Analysis (EA) Research Paper Series (11F0027M2011071, free). From the Key resource module of our website choose Publications.

Similar studies from the Economic Analysis division are available at (www.statcan.gc.ca/economicanalysis).

For more information, or to enquire about the concepts, methods or data quality of this release, contact Danny Leung (613-951-2574), Economic Analysis Division.