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Aggregate Productivity Growth: Lessons From Microeconomic Evidence

September 1998

Working Paper Number:

CES-98-12

Abstract

In this study we focus on the role of the reallocation of activity across individual producers for aggregate productivity growth. A growing body of empirical analysis yields striking patterns in the behavior of establishment-level reallocation and productivity. Nevertheless, a review of existing studies yields a wide range of findings regarding the contribution of reallocation to aggregate productivity growth. Through our review of existing studies and our own sensitivity analysis, we find that reallocation plays a significant role in the changes in productivity growth at the industry level and that the impact of net entry is disproportionate since entering plants tend to displace less productive exiting plants, even after controlling for overall average growth in productivity. However, an important conclusion of our sensitivity analysis is that the quantitative contribution of reallocation to the aggregate change in productivity is sensitive to the decomposition methodology employed. Our findings also confirm and extend others in the literature that indicate that both learning and selection effects are important in this context. A novel aspect of our analysis is that we have examined the role of reallocation for aggregate productivity growth to a selected set of service sector industries. Our analysis considers the 4-digit industries that form the 3-digit industry automobile repair shops. We found tremendous churning in this industry with extremely large rates of entry and exit. Moreover, we found that productivity growth in the industry is dominated establishment data at Census, the results are quite striking and clearly call for further analysis.

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investment, production, productive, utilization, manufacturing, aggregation, industrial, aggregate, productivity growth, growth, gain, restructuring, entrepreneurial, industry productivity, produce, growth productivity, sector, recession, industry growth, turnover, innovator, producing, reallocation productivity, analysis productivity, observed productivity, revenue, firms productivity, productivity dynamics, relocation, aggregate productivity

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:
Census of Manufactures, Annual Survey of Manufactures, Standard Statistical Establishment List, Bureau of Labor Statistics, Longitudinal Research Database, National Bureau of Economic Research, Bureau of Economic Analysis, Permanent Plant Number, University of Maryland, Insurance Information Institute, Current Population Survey, Census of Services

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