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

  • J. David Brown
  • John S. Earle

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. 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.

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Paper provided by DIW Berlin, German Institute for Economic Research in its series ESCIRRU Working Papers with number 9.

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Length: 35, 15 p.
Date of creation: 2008
Date of revision:
Handle: RePEc:diw:diwesc:diwesc9
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