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REALLOCATION IN THE GREAT RECESSION: CLEANSING OR NOT?

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August 2013

Written by: John Haltiwanger, Lucia Foster, Cheryl Grim

Working Paper Number:

CES-13-42

Abstract

The high pace of output and input reallocation across producers is pervasive in the U.S. economy. Evidence shows this high pace of reallocation is closely linked to productivity. Resources are shifted away from low productivity producers towards high productivity producers. While these patterns hold on average, the extent to which the reallocation dynamics in recessions are 'cleansing' is an open question. That is, are recessions periods of increased reallocation that move resources away from lower productivity activities towards higher productivity uses? It could be recessions are times when the opportunity cost of time and resources are low implying recessions will be times of accelerated productivity enhancing reallocation. Prior research suggests the recession in the early 1980s is consistent with an accelerated pace of productivity enhancing reallocation. Alternative hypotheses highlight the potential distortions to reallocation dynamics in recessions. Such distortions might arise from many factors including, for example, distortions to credit markets. We find that in post-1980 recessions prior to the Great Recession, downturns are periods of accelerated reallocation that is even more productivity enhancing than in normal times. In the Great Recession, we find the intensity of reallocation fell rather than rose (due to the especially sharp decline in job creation) and the reallocation that did occur was less productivity enhancing than in prior recessions.

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demand, market, production, productive, economist, econometric, macroeconomic, quarterly, growth, labor, efficiency, recession, reallocation productivity, yield, regressors, gdp, declining, relocation, downturn

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Census of Manufactures, Annual Survey of Manufactures, Bureau of Labor Statistics, Total Factor Productivity, University of Maryland, Current Population Survey, Longitudinal Business Database, VAR, Department of Homeland Security, TFPQ, Quarterly Census of Employment and Wages, Business Employment Dynamics, Kauffman Foundation, Labor Turnover Survey, Business Dynamics Statistics, JOLTS

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