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Saturday, October 18, 2014

Not So Creative Destruction

Dietz Vollrath:

The Slowdown in Reallocation in the U.S.: One of the components of productivity growth is reallocation. From one perspective, we can think about the reallocation of homogenous factors (labor, capital) from low-productivity firms to high-productivity firms, which includes low-productivity firms going out of business, and new firms getting started. A different perspective is to look more closely at the shuffling of heterogenous workers between (relatively) homogenous firms, with the idea being that workers may be more productive in one particular environment than in another (i.e. we want people good at doctoring to be doctors, not lawyers). Regardless of how exactly we think about reallocation, the more rapidly that we can shuffle factors into more productive uses, the better for aggregate productivity, and the higher will be GDP. However, evidence suggests that both types of reallocation have slowed down recently.
Foster, Grim, and Haltiwanger have a recent NBER working paper on the “cleansing effect of recessions”. This is the idea that in recessions, businesses fail. But it’s the really crappy, low-productivity businesses that fail, so we come out of the recession with higher productivity. The authors document that in recessions prior to the Great Recession, downturns tend to be “cleansing”. Job destruction rates rise appreciably, but job creation rates remain about the same. Unemployment occurs because it takes some time for those people whose jobs were destroyed to find newly created jobs. But the reallocation implied by this churn enhances productivity – workers are leaving low productivity jobs (generally) and then getting high productivity jobs (generally).
But the Great Recession was different. In the GR, job destruction rose by a little, but much less than in prior recessions. Job creation in the GR fell demonstrably, much more than in prior recessions. So again, we have unemployment as the people who have jobs destroyed are not able to pick up newly created jobs. But because of the pattern to job creation and destruction, there is little of the positive reallocation going on. People are not losing low productivity jobs, becoming unemployed, and then getting high productivity jobs. People are staying in low productivity jobs, and new high productivity jobs are not being created. So the GR is not “cleansing”. It is, in some ways, “sullying”. The GR is pinning people into *low* productivity jobs.
This holds for firm-level reallocation well. ...
[An aside: For the record, there is no reason that we need to have a recession for this kind of reallocation to occur. ... So don't take Foster, Grim, and Haltiwanger's work as some kind of evidence that we "need" recessions. ...] ...

    Posted by on Saturday, October 18, 2014 at 09:23 AM in Economics | Permalink  Comments (26)


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