Financial Development and Productivity Growth in Stagnant Industries

Abstract

The U.S. economy has experienced a rapid expansion in industries with low productivity growth. In this paper, we investigate whether financial development improves productivity growth in these industries. Testing reveals that stagnant industries experience remarkable post-deregulation productivity growth improvement. This result is not an artefact of growing consumer demand, nor driven by the skilled labor migration. Moreover, stagnant industries’ employment shares decline in the wake of the reforms, ameliorating Baumol’s Cost Disease. Results are likely the outcome of improved capital allocation. Taken together, our findings highlight the vital role of financial development in reducing the productivity gap among sectors.

Keywords: Financial Access; Bank Deregulation, Productivity, Stagnant Industry

JEL Classification: E24, E59, G21, O47