Were Small Producers the Engines of Growth in the Canadian Manufacturing Sector in the 1980s?

Small firms are often seen to be the engines of growth. There are two main sources of empirical evidence that are adduced to support this conclusion. The first is that job creation has been coming mainly from small firms. The second is that the share of employment accounted for by small firms has increased in the past two decades. Both of these sources rely on a simple metric--employment. This paper asks whether changes in this metric affect the view of the role that small firms play in the growth process. The first section of the paper maintains employment as the measure that is used to evaluate the importance of small firms but modifies the raw measure of employment to correct for the fact that small firms pay lower wages than large firms. The paper examines the evidence indicating that smaller producers in the manufacturing sector pay lower wages and that this differential has grown over time. It then uses relative wage rates to create a measure of employment that is adjusted for wage differentials. When this is done, small producers no longer outperform large producers in terms of job creation over the 1970s and 1980s in the Canadian manufacturing sector. The second section of the paper changes the metric used to evaluate relative performance by moving from employment to output and labor productivity. The paper demonstrates that while small producers have increased their employment share dramatically, they have barely changed their output share. Small firms have been falling behind large firms both with respect to wages paid and labor productivity. Large producers have been decreasing their relative employment while maintaining their relative output share, thereby making dramatic strides in increasing their relative labor productivity