A Stochastic Model of Labor Productivity and Employment

We investigate the productivity dispersion, i.e., allocation of workers among different levels of productivity and output, by employing the largest database for small and medium-sized companies, Credit Risk Database (CRD). Focusing on the manufacturing sector and small and medium levels of productivity, where more workers are distributed among higher levels of productivity, we have new empirical findings in a pivotal role of workers' allocation among different levels of output as a key to understand their allocation among varying levels of productivity. We also propose a stochastic process, mathematically a jump Markov process, in which workers are allocated to firms of differing output and productivity, interrupted by transitions to unemployment, where transitions are coupled with growth and contraction of firms' output that relate to fluctuations of demand.