Sectoral Contributions to Labour Productivity Growth

Addressing Canada’s slow productivity growth has become a public policy priority. However, this paper argues that declines or slower growth in aggregate labour productivity should not automatically be interpreted as a deterioration in living standards. Improvements in an economy’s terms of trade also play a crucial role in advancing living standards. Low rates of productivity growth may, in some cases, result from welfare-enhancing reallocations of labour into sectors with lower labour productivity.

Using the generalized exactly additive decomposition (GEAD) methodology, this study analyzes the contribution of 15 business sectors to Canada’s aggregate productivity growth from 1997 to 2019. The findings show that labour productivity in Canada’s business sector increased by 30.7 per cent over this period, averaging an annual growth rate of 1.2 per cent. Notably, the finance, insurance and real estate (FIRE) sector made the largest contribution to overall labour productivity growth. Conversely, the manufacturing sector was the only one to make a negative contribution due to declining relative prices and a reduced share of total labour input.

The research highlights that while overall labour productivity grew, sectoral contributions varied. The FIRE sector contributed the most, adding 8.7 percentage points to aggregate productivity growth, mainly through its within-sector productivity effects. However, this was slightly offset by negative relative price and labour reallocation effects. The mining, oil and gas extraction sector made the second largest contribution (4.7 percentage points), despite a within-sector productivity decline, as positive relative price and labour reallocation effects compensated for the loss.