Microeconomic Evidence of Creative Destruction in Industrial and Developing Countries

Any opinions expressed here are those of the author(s) and not those of the institute. Research disseminated by IZA may include views on policy, but the institute itself takes no institutional policy positions. The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent nonprofit company supported by Deutsche Post World Net. The center is associated with the University of Bonn and offers a stimulating research environment through its research networks, research support, and visitors and doctoral programs. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. IZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may b

Employment Protection, Technology Choice, and Worker Allocation

Using a country-industry panel dataset (EUKLEMS) we uncover a robust empirical regularity, namely that high-risk innovative sectors are relatively smaller in countries with strict employment protection legislation (EPL). To understand the mechanism, we develop a two-sector matching model where firms endogenously choose between a safe technology with known productivity and a risky technology with productivity subject to sizeable shocks. Strict EPL makes the risky technology relatively less attractive because it is more costly to shed workers upon receiving a low productivity draw. We calibrate the model using a variety of aggregate, industry and micro-level data sources. We then simulate the model to reflect both the observed differences across countries in EPL and the observed increase since the mid-1990s in the variance of firm performance associated with the adoption of information and communication technology. The simulations produce a differential response to the arrival of risky technology between low- and high-EPL countries that coincides with the findings in the data. The described mechanism can explain a considerable portion of the slowdown in productivity in the EU relative to the US since 1995.employment protection legislation, exit costs, information and communications technology, heterogeneous productivity, sectoral allocation

Downsizing and Productivity Growth: Myth or Reality?

The conventional wisdom is that the rising productivity in the U.S. manufacturing sector in the 1980s has been driven by the apparently pervasive downsizing over this period. Aggregate evidence clearly shows falling employment accompanying the rise in productivity. In this paper, we examine the microeconomic evidence using the plant level data from the Longitudinal Research Database (LRD). In contrast to the conventional wisdom, we find that plants that increased employment as well as productivity contribute almost as much to overall productivity growth in the 1980s as the plants that increased productivity at the expense of employment. Further, there are striking differences by sector (defined by industry, size, region, wages, and ownership type) in the allocation of plants in terms of whether they upsize or downsize and whether they increase or decrease productivity. Nevertheless, in spite of the striking differences across sectors defined in a variety of ways, most of the variance of productivity and employment growth is accounted for by idiosyncratic factors.

Allocation of human capital and innovation at the frontier: firm-level evidence on Germany and the Netherlands

This article examines how productivity effects of human capital and innovation vary at different points of the conditional productivity distribution. Our analysis draws upon two large unbalanced panels of 6634 enterprises in Germany and 14,841 enterprises in the Netherlands over the period 2000-2008, considering five manufacturing and services industries that differ in the level of technological intensity. Industries in the Netherlands are characterized by a larger average proportion of high-skilled employees and industries in Germany by a more unequal distribution of human capital intensity. In Germany, average innovation performance is higher in all industries, except for low-technology manufacturing, and in the Netherlands the innovation performance distributions are more dispersed. In both countries, we observe nonlinearities in the productivity effects of investing in product innovation in the majority of industries. Frontier firms enjoy the highest returns to product innovation whereas for process innovation the most negative returns are observed in the best-performing enterprises of most industries. We find that in both countries the returns to human capital increase with proximity to the technological frontier in industries with a low level of technological intensity. Strikingly, a negative complementarity effect between human capital and proximity to the technological frontier is observed in knowledge-intensive services, which is most pronounced for the Netherlands. Suggestive evidence suggests an interpretation of a winner-takes-all market in knowledge-intensive service

Labour Reallocation in Recession and Recovery:Evidence for Europe

This paper builds upon Bartelsman, Lopez-Garcia, and Presidente (2018) and provides empirical evidence on the cyclical features of labour reallocation in a sample of European Union (EU) countries over the Great Recession and the slow recovery. The analysis makes use of cross-country micro-aggregated data on firm dynamics and productivity from release 6 of the ECB CompNet database. While productivity-enhancing reallocation generally is counter-cyclical, with a stronger effect providing a silver lining in downturns, it was weaker during the Great Recession in the EU, but reverted back to more normal patters in the most recent years

Cross-Country Differences in Productivity: The Role of Allocation and Selection

This paper combines different strands of the productivity literature to investigate the effect of idiosyncratic (firm-level) policy distortions on aggregate outcomes. On the one hand, a growing body of empirical research has been relating cross-country differences in key economic outcomes, such as productivity or output per capita, to differences in policies and institutions that shape the business environment. On the other hand, a branch of empirical research has attempted to shed light on the determinants of productivity at the firm level and the evolution of the distribution of productivity across firms within each industry. In this paper, we exploit a rich source of data with harmonized statistics on firm level variation within industries for a number of countries. Our key empirical finding is that there is substantial variation in the within-industry covariance between size and productivity across countries, but this covariance varies significantly across countries and is affected by the presence of idiosyncratic distortions. We develop a model in which heterogeneous firms face adjustment frictions (overhead labor and quasi-fixed capital) and idiosyncratic distortions. We show that the model can be readily calibrated to match the observed cross-country patterns of the within-industry covariance between productivity and size and thus help to explain the observed differences in aggregate performance.

The NBER Manufacturing Productivity Database

This paper provides technical documentation to accompany the NBER manufacturing productivity (MP) database. The database contains information on 450 4-digit manufacturing industries for the period 1958 through 1991. The data are compiled from various official sources, most notably the Annual Survey of Manufactures and Census of Manufactures. Also provided are estimates of total factor productivity (TFP) growth for each industry. The paper further discusses alternate methods of deflation and aggregation and their impact on TFP calculations.