Structural change decomposition of labor productivity

Abstract

<p>This chapter examines possible sources of productivity stagnation by decomposing the productivity change to the components that describe the structural change. We apply a novel productivity decomposition by Kuosmanen and Kuosmanen (2021) which ensures consistent aggregation of firms to industry and sector levels, and also explicitly captures the effect of firms that switch from one industry to another. We empirically examine the business sector of Finland and the manufacturing, construction, information and communications, and the service industries in years 2000-2018, divided to three sub-periods. We find that the structural change has had a major contribution to the productivity development. Firm entry, exit, and industry switching had generally positive effect on productivity growth in most industries and time periods considered. The main culprit for the stagnated labor productivity is the negative Olley-Pakes reallocation effect, which offsets and nullifies the otherwise positive productivity dynamics.<br></p>