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This paper analyzes the reasons for the Canada-US labour productivity gap, which is mainly explained by the multifactor productivity (MFP) gap. Based on panel data for 41 industries, the regression results show that differences in the machinery and equipment (M&E) capital-labour ratio, trade openness, and capacity utilization explain differences in the Canada-US MFP gap across industries. The M&E capital intensity gap is the dominant source of the MFP gap. Lower wages, R&D intensity, and skills levels, as well as higher investment goods prices in Canada are the major determinants of the M&E capital intensity gap.

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