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This paper examines and compares labour productivity in Canada and the United States for small and large firms over the period from 2002 to 2008. It quantifies the relative importance of small and large firms in Canada and the United States and measures the relative productivity levels of small versus large firms.

Small firms are relatively more important in Canada. In 2008, they accounted for about 67% of hours worked while they only accounted for 56% in the United States. In 2008, the level of Canadian productivity, as measured by nominal gross domestic product per hour worked in small firms was only 47% of that of large firms. The level of small-firm productivity in the United States was also less than that for large firms (about 67%). The gap between the productivity of small and large firms is larger in Canada.

The paper examines the impact of changes in the size distribution on Canadian aggregate labour productivity and on the productivity gap between Canada and the United States. Shifts in the firm size distribution toward larger firms might be expected to have a favorable impact on Canadian overall productivity since larger firms are generally more productive than small firms.

An increase in the employment share of large firms in Canada to U.S. levels would increase Canadian nominal labour productivity by about 6%. The paper also quantifies the impact of bringing the relative productivity of small compared to large firms up to the level that existed in the United States. This increases aggregate Canadian labour productivity by 11% over the period.

Together, decreasing the importance of small firms and increasing the relative productivity of small compared to large firms is found to account for most of the gap in labour productivity levels between Canada and the United States in 2002. However, changes in the productivity of large firms after 2002 meant that the contribution of the small-firm sector fell until it accounted for only about 67% of the gap in 2008.

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