Notes

Baldwin and Gorecki (1986) and Leung et al. (2008) attributed about half of the difference in manufacturing productivity between Canada and the United States to differences in average firm size. Inwood and Keay (2005) examined a longer period and also find that size contributes about half the difference.

Compared with measures of output such as sales, GDP is more complete. It measures value added, the unduplicated value of goods and services generated by labour and capital. Intermediate inputs used by a firm are the key difference between a firm’s sales and its GDP. For example, a firm could have high sales but low GDP because it adds little to the value of the intermediate inputs it purchases.

Other sectors of the domestic economy, including government and the non-profit sector (including households and institutions), are part of the non-business sector. In this paper, the non-business sector comprises government administration (federal, provincial, and municipal), defense, hospitals, public education, government residential care facilities, and the rent that is imputed to owner-occupied housing. Non-profit activity is added to the business sector to be consistent with the data totals for the United States that are taken from EU KLEMS.

For a discussion of multifactor productivity, see Baldwin and Gu 2007.

See Leung and Rispoli (2014) for a description of the data sources, methods, and results used to derive the Canadian GDP and hours worked in this paper. In this paper, U.S. GDP is brenchmarked to EU KLEMS (valued at basic prices). In the EU KLEMS, health and education are measured at the total economy level. These data were replaced here with the business sector value added from the Bureau of Economic Analysis Industry Accounts. Due to data availability, the EU KLEMS GDP values (latest period reported was 2007) were projected from 2007 to 2008 using business sector value added estimates from the BEA Industry Accounts.

See Baldwin and Hanel (2003, chapter 7) and Baldwin and Gellatly (2003, chapter 11) for a comparison of the innovation profiles of large and small firms.

Exchange rates are not suitable since they do not necessarily capture relative prices (see Baldwin and Macdonald 2009).

The Canadian prices series is derived from basic prices while the BLS business sector series uses market prices.

The lack of a firm-size specific PPP means that differences in nominal productivity between small and large firms in Canada and the United States may arise from differences in real productivity or from differences in relative prices—that is the relative prices of large firms may differ from that of small firms.

No assumptions are made as to how this might happen. It could occur from shifting industry composition within the industry classifications in this study or from a shift in the underlying firm-size structure. A more detailed study of actual changes would have to examine each of these factors in order to gauge whether industry structure or actual firm size is the cause of productivity differences between Canada and the United States.

As the hours share for large firms is increased, we assume that the labour productivity in each business-size category is held constant. Equation (3) is used to calculate each industry’s labour productivity under the different counterfactual scenarios. Equation (4) is then used to estimate the counterfactual business sector labour productivity. Conducting the analysis directly at the business sector level would mix two effects—changing industry composition across the industries and changing firm-size distributions. It should be recognized that this method still leaves a degree of industry compositional effects below the two-digit industries used herein.

See also Maynard 2007.

See Baldwin et al. (2011b) for a discussion of how much of the productivity gap between Canada and the United States comes from the unincorporated sector in Canada.