Progress and Displacement
By Arnold Kling
Tyler Cowen points to a paper by Foster, Haltiwanger, and Krizan (unlike Cowen’s link, my link goes to the full paper) that stresses the importance for productivity growth of resources leaving inefficient firms and going to efficient firms. I was surprised by the following:
A pervasive empirical finding in the recent literature is that within sector differences dwarf between sector differences in behavior…4-digit industry effects account for less than 10 percent of the cross-sectional heterogeneity in output, employment, capital equipment, capital structures, and productivity growth rates across establishments.
I was less surprised by this:
The theoretical literature on creative destruction as well as the underlying theories of heterogeneity characterize technological change as a noisy, complex process with considerable experimentation (in terms of entry and retooling) and failure (in terms of contraction and exit) playing integral roles.
The authors’ main point is that productivity growth tends to occur within an industry (as opposed to replacing entire decaying industries with new ones), and that entry and exit are crucial factors in this productivity growth. It makes one suspect that if we could find an industry where entry and exit are severely restricted because of government policy, we would expect to find poor productivity growth.
For Discussion. Can you guess what industry I have in mind?