Understanding the Contributions of Reallocation to Productivity Growth: Lessons from a Comparative Firm-Level Analysis
J. David Brown
US Census Bureau Center for Economic Studies; Institute for the Study of Labor (IZA)
John S. Earle
George Mason University - School of Public Policy; Central European University (CEU) - Department of Economics; Institute for the Study of Labor (IZA)
IZA Discussion Paper No. 3683
We analyze comprehensive manufacturing firm data to measure the contribution of inter-firm employment reallocation to aggregate productivity growth during the socialist and reform periods in six transition economies. Modifying a standard decomposition technique to better reflect the role of firm entry, we find that reallocation rates and productivity contributions are very low under socialism. After reforms, they rise dramatically, and productivity contributions greatly exceed those observed in market economies. Early in transition, faster reform is associated with larger contributions from reallocation, but later, and on average over the whole transition, this relationship is reversed. Though reallocation rates are larger in faster reforming economies, higher productivity dispersion in slower reformers creates much higher productivity gains for a given volume of reallocation. The results imply that reallocation should be viewed as necessary regular maintenance for a well-functioning economy, and particularly large productivity contributions tend to reflect previous neglect more than current virtue.
Number of Pages in PDF File: 56
Keywords: productivity, reallocation, industry dynamics, creative destruction, reform, transition, Georgia, Hungary, Lithuania, Romania, Russia, Ukraine
JEL Classification: E32, O47, P23working papers series
Date posted: September 14, 2008
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