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. 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.
Dostie, B., Réallocation de la main-d’oeuvre et productivité au Canada, au Québec et en Ontario, Centre for Productivity and Prosperity, HEC Montréal, February 2011. (Available in French only)