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

Authors

J. David Brown, Heriot-Watt UniversityFollow
John S. Earle, W.E. Upjohn Institute for Employment ResearchFollow

Publication Date

8-1-2008

Series

Upjohn Institute Working Paper No. 08-141

DOI

10.17848/wp08-141

Abstract

We analyze comprehensive manufacturing firm data to measure the contribution of interfirm 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, but they rise dramatically after reforms, and productivity contributions greatly exceed those observed in market economies. Early in transition, more 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 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.

Issue Date

August 2008

Note

Covers Georgia, Hungary, Lithuania, Romania, Russia, and Ukraine. This was also presented at Comparative Analysis of Enterprise Data (CAED) conference sponsored by the W.E. Upjohn Institute for Employment Research and Central European University, Budapest, May 22-24, 2008.

Sponsorship

"The Hungarian and Romanian analyses were supported by a grant from the U.S. State Department, and the Russian and Ukrainian analyses by the European Union's Sixth Framework Programme (Project ESCIRRU)."

Subject Areas

INTERNATIONAL ISSUES; International labor comparisons; Transition economies