Changing Business Dynamism and Productivity: Shocks vs. Responsiveness
Javier Miranda
2017-06-09 - The pace of business dynamism as measured by indicators such as job reallocation has declined in recent decades in the U.S., and theory suggests that this may have implications for productivity. The declining dynamism in sectors like Retail Trade disproportionately accounted for these trends in the 1980s and 1990s, and was productivity enhancing. In contrast, the pace of reallocation in High Tech industries has a rising then falling pattern during the 1990s and 2000s that mimics the pattern of U.S. productivity growth. We investigate whether these trends in dynamism and productivity are related by drawing insights from canonical models of firm dynamics. Focusing on the High Tech sector, we ask whether observed patterns of reallocation reflect changes in the volatility of idiosyncratic productivity shocks or changes in the marginal responsiveness of businesses to those shocks. Using Manufacturing TFP data we show that shock volatility has not declined but that the plant-level marginal responsiveness of business growth to productivity rises then falls in tandem with the hump-shaped behavior of both job reallocation and productivity growth in the High Tech sector. The results are particularly notable for young businesses. During the 1990s, rising responsiveness yields an increase in the contribution of reallocation to productivity growth of as much as half a log point per year; during the post-2000 period, responsiveness declines precipitously implying as much as a two log point per year reduction in the annual contribution of reallocation to industry-level productivity growth. Using new economywide data on firm-level labor productivity, we further show that the post-2000 Manufacturing results generalize to the entire U.S. economy and the broad High Tech sector specifically. Rising within-industry dispersion in firm-level labor productivity in the post-2000 period is consistent with an increase in frictions or distortions in the U.S. economy.