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The importance of reallocations in cyclical productivity and returns to scale: evidence from plant-level data

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Yoonsoo Lee

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Abstract

Procyclical productivity plays an important role in many models of aggregate fluctuations. However, recent studies using aggregate data to directly measure technology shocks in the Solow residual find that technology shocks are not procyclical. This paper provides new evidence that, due to countercyclical composition changes between producers, the procyclicality of productivity observed in aggregate data may be understated. Using plant-level microdata, this paper finds that the reallocation of output shares across continuing plants, as well as the entry and exit of plants, creates a countercyclical component in aggregate productivity. This paper shows that such composition changes may cause a downward bias in industry-level estimates of returns to scale. The findings of this paper suggest that, without correcting for the countercyclical effects of reallocations, estimates based on aggregate data may not reflect the true cyclicality of technology shocks, which a representative agent faces over the business cycle.

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Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 0509.

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Date of creation: 2005
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Handle: RePEc:fip:fedcwp:0509

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Keywords: Productivity Business cycles

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  3. John C. Haltiwanger, 1997. "Measuring and analyzing aggregate fluctuations: the importance of building from microeconomic evidence," Review, Federal Reserve Bank of St. Louis, issue May, pages 55-78. [Downloadable!]
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  5. Klette, Tor Jakob & Griliches, Zvi, 1996. "The Inconsistency of Common Scale Estimators When Output Prices Are Unobserved and Endogenous," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(4), pages 343-61, July-Aug.. [Downloadable!] (restricted)
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  6. Julio J. Rotemberg & Michael Woodford, 1993. "Dynamic General Equilibrium Models with Imperfectly Competitive Product Markets," NBER Working Papers 4502, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. John Haltiwanger & C J Krizan & Lucia Foster, 1998. "Aggregate Productivity Growth: Lessons From Microeconomic Evidence," Working Papers 98-12, Center for Economic Studies, U.S. Census Bureau. [Downloadable!]
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  8. Satyajit Chatterjee & Russell W. Cooper, 1993. "Entry and exit, product variety and the business cycle," Working Papers 93-30, Federal Reserve Bank of Philadelphia.
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  12. Eric J. Bartelsman & Mark Doms, 2000. "Understanding Productivity: Lessons from Longitudinal Microdata," Journal of Economic Literature, American Economic Association, vol. 38(3), pages 569-594, September. [Downloadable!] (restricted)
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  13. Robert E. Hall, 1988. "The Relation Between Price and Marginal Cost in U.S. Industry," NBER Working Papers 1785, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Chang, Yongsung, 2000. "Wages, business cycles, and comparative advantage," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 143-171, August. [Downloadable!] (restricted)
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  18. Devereux, Michael B. & Head, Allen C. & Lapham, Beverly J., 1996. "Aggregate fluctuations with increasing returns to specialization and scale," Journal of Economic Dynamics and Control, Elsevier, vol. 20(4), pages 627-656, April. [Downloadable!] (restricted)
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  20. Austan Goolsbee, 2000. "The Importance of Measurement Error in the Cost of Capital," NBER Working Papers 7558, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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