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Understanding the Contributions of Reallocation to Productivity Growth: Lessons from a Comparative Firm-Level Analysis

J. David Brown () and John Earle ()

No 3683, IZA Discussion Papers from Institute for the Study of Labor (IZA)

Abstract: 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.

Keywords: productivity; reallocation; industry dynamics; creative destruction; reform; transition; Georgia; Hungary; Lithuania; Romania; Russia; Ukraine (search for similar items in EconPapers)
JEL-codes: E32 O47 P23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cis, nep-eff, nep-mac and nep-tra
Date: 2008-09
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Working Paper: Understanding the Contributions of Reallocation to Productivity Growth: Lessons from a Comparative Firm-Level Analysis (2008) Downloads
Working Paper: Understanding the Contributions of Reallocation to Productivity Growth: Lessons from a Comparative Firm-Level Analysis (2008) Downloads
Working Paper: Understanding the Contributions of Reallocation to Productivity Growth: Lessons from a Comparative Firm-Level Analysis (2008) Downloads
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