The Canadian-Australian Business Sector Productivity Gap: A Sectoral Analysis

Is Canada’s relatively poor productivity performance compared to Australia due to changes in the industry composition of the Canadian economy over time, or poor performance within certain industry sectors? Research shows within-sector effects dominate reallocation effects in determining aggregate labour productivity outcomes in the business sector for both Canada and Australia. This suggests that both economies need to focus on improving efficiencies in their business sectors to drive long-run productivity growth.
The growth in output per worker or labour productivity growth can reflect a range of factors, including growth in the stocks of physical and human capital and changes in labour force participation, as well as technological change and changes in policies and institutions that are captured by estimates of multifactor productivity growth.
Changes in labour productivity can also occur due to sectoral shifts in the economy. As different sectors expand or contract, they will employ more or less labour and capital. Labour and capital will have different levels of productivity when employed in different sectors and this in turn will influence the level of productivity within each sector.
Productivity outcomes in both Canada and Australia largely reflect within-sector productivity performance rather than sectoral shifts in the output composition of the two economies.
However, Australia has enjoyed larger productivity gains from sectoral shifts, suggesting a greater ability to reallocate labour inputs to sectors that enjoy higher productivity.
Comparing the business sectors of the two economies between 1995 and 2019, Australia enjoyed a 0.3 percentage point annual average labour productivity growth advantage over Canada, with about half this advantage due to sector-specific productivity gains and half to the reallocation of labour to more productive industries. Specifically, Australia enjoyed a larger positive contribution to labour productivity from the mining sector attributable to within-sector gains, but also through the allocation of additional labour inputs to the more productive mining sector. The mining sector made the single largest contribution to overall Australian labour productivity growth over this period, whereas in Canada mining made only a very marginal contribution.
This suggests Canada needs to pay close attention not only to the scope for greater efficiency gains within the industries that make up its business sector, but also to impediments to labour mobility between sectors. These impediments could include a range of factors, from labour market regulations to inflexible housing supply and barriers to new firm entry and restrictions on foreign investment.