Overview

Abstract (English)

There is a strong relationship between the functioning of the labour market and the performance of an economy. This is best illustrated by the following decomposition. All changes in average productivity (measured, for example, by the amount of value added per worker) can be decomposed into three components: (1) a first component represents the increase in average productivity that occurs when any individual firm becomes more efficient (intra-firm effect), (2) a second component reflects the increase in productivity that follows movements of workers from less to more productive firms (inter-firms effect), and (3) a final component is the consequence of the increase in productivity that results from the destruction of inefficient firms and the creation of more productive ones (net entry effect). Labour market reallocation refers to the second and third terms that both imply labour flows. With data from Statistics Canada’s Workplace and Employee Survey 1999-2005, we measure the magnitude of each term for Canada, Ontario and Québec, using the three most popular decomposition methods introduced by Baily, Hulten and Campbell (1992), Griliches and Regev (1995), and by Foster, Haltiwanger and Krizan (2001). It is important to quantify each source of productivity growth. For example, if it is found that the intra-firm effect is not contributing enough to productivity growth, it is then conceivable that productivity growth could be boosted by policies targeting investments or innovation at the firm level. We find important interprovincial differences in the dynamic of productivity growth. Our results show that labour reallocation drives 50% of productivity growth in Canada and Ontario. However, this contribution is less than 10% in Québec. We interpret this result as a sign that the Québec labour market is not functioning optimally. We propose some speculative explanations for this result.

Abstract (French)

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