While it is commonly acknowledged that the United States has a significant lead among other developed countries in terms of labor productivity, or in other words, gross domestic product (GDP) per aggregate hour worked, little is known about the main drivers of this productivity gap. While Canada is considerably similar to the United States, the productivity differences between the two economies tell two different stories. Figure I, according to Data from the OECD, depicts the average productivity levels of developed countries on from 2000 to 2015 with a solid line. The United States, The United Kingdom, and Canada’s longitudinal data is also shown for the same period to illustrate the labor productivity gap between the United States and other developed countries. Labor productivity is a major component of a country’s economic performance and is a driver of national living standards. Labor productivity growth has slowed dramatically during the global financial crisis of 2008 according to OECD data, OECD countries have also seen lower productivity growth since the 2008 financial crisis on average. The weak post-crisis productivity growth performance is limiting the opportunity for long-term economic well-being. I predict that there are policies that can improve the allocation of scarce resources such as labor and capital which are crucial to maximizing productivity growth in the labor market. While a number of factors have been found to relate to the growth or slowdown of productivity in various countries, I will examine the relationship between labor market policies and labor productivity.

A nation’s labor market regulations and labor institutions have implications for macroeconomic outcomes, such as labor productivity. Regulations are rules enforced by the state that constrain the actions of economic agents, typically through the imposition of standards, such as, minimum wage regulations, which constrain the lowest possible wages paid for labor, or firing regulations, which constrain the ease at which economic agents can dismiss their employees. While regulation is essential to an effective working of a market economy and is a key function of the state, it does still, however, impose costs on the private sector and there is a risk of excessive regulation where the additional costs of compliance exceed additional benefits to the economy. As research by Crafts (2006) shows Endogenous growth theory predicts that total factor productivity growth will decrease if regulation stunts investment and innovation.  Data on world economic freedom index by the Fraser Institute Index takes into account many different labor market regulations in their indicators such as, hiring regulations and minimum wage, hiring and firing regulations, centralized collective bargaining, hours regulations, mandated cost of work dismissal, and conscription. I will examine the relationship between labor market regulations and labor productivity among a sample of 36 developed countries.

I believe free labor markets will be conducive to higher levels of labor productivity in developed economies. I will determine empirically, the importance of labor market institutions on a developed country’s labor productivity levels.  Through a regression analysis I will be able to interpret labor market regulations relationship to a countries labor productivity from 199