Developing and Analysing Firm Level Moments on Productivity and Reallocation

Productivity growth is the main driver of long-run increases in per capita income and welfare. Our research suggests that multiple paths to aggregate productivity must be distinguished: improvements at the firm-level, improvements in resource allocation across firms that differ in productivity, and entry and exit of firms. Our project provides a method to measure these different components in a harmonized manner across countries, and suggests methods to analyze these data in order to indentify the effects on productivity growth of cross-country differences in policy. These detailed data provide summary statistics at a country, industry, and year from harmonised cross country data sources. The statistical moments include the dispersion in within industry firm-level productivity (TFP and labour productivity, measures of entry and exit rates including exit rates, and a variety of measures of productivity and the size distribution of activity. We also provide the methodology and program code, in the link below, that will allow national statisticians or researchers to compile harmonized indicators for based on firm-level data sources in other countries. In our analysis of these data, we assess the frictions involved in reallocation of resources from less to more productive firms. If the market had a ‘level playing field’, firms would make decisions based on their technical capabilities and demand for their products instead of on profitability that is affected by policy. We find that our measure of this ‘level playing field’, namely the correlation between productivity and firm size, has improved during the 1990s in the transition economies. We estimate that this may have reduced the gap between per capita income in these countries and the richest OECD members by about 10 percentage points. We further find that the amount of labor market turnover, hiring and firing, in a country is affected by labor market regulations, and that hiring and firing regulations negatively affect productivity enhancing reallocation. Our analysis on the firm-level data further show that the type of firms that produce in a particular country depend on the policy and institutional environment. While policy makers may now be accustomed to the fact that the tax base responds to the tax rate, it may be less obvious that the firms you do not see in your economy may not be there for policy-related reasons. We find that in the transition economies, distortions to profitability may often lead otherwise productive firms to exit the market. Analysis of the type we have done could be used in developing countries to re-visit the old question of the ‘missing middle’—that dearth of medium-sized in an economy firms—or other anomalies found by comparing features of the cross-country datasets.