Firm demography and aggregate productivity growth: The Swedish case 1997-2003

1. Firm demography and aggregate productivity growth: The Swedish case 1997-2003 Lars Fredrik Andersson

2. Introduction • This paper examines the dynamic relation between firm demography and aggregated productivity growth in Sweden 1997-2003 • The paper is motivated by: • Productivity growth is affect by reallocation of inputs and outputs across enterprises • The reallocation should reflect firm dynamics rather than industry dynamics • Large differences in productivity level between firms within the same industry • Given that firm demography has a significant impact on aggregated productivity growth, this may shew the analysis of different factors of production • By offering a large sample of firms covering all industries, the impact of firm demography on productivity growth can be discerned

3. Decomposition method suggested by Foster et al LP denotes labour productivity Θdenotes labour share Δ denotes to change between the first year (t-k) and the last year (t). C, N and X refers to continuing, entering and exiting firms LPt-k is the aggregate productivity level of the industry The within effect is the firm productivity growth weighted by initial labour shares The between-firm effect reflects changing labour shares The crosseffect accounts for changing labour shares and productivity growth The entry effect denotes the sum of differences between entering firm’s productivity and initial aggregate productivity, weighted by its labour shares The exit effect denotes sum of differences between existing firm’s labour productivity and initial aggregate labour productivity, weighted by its labour shares

4. Data • Information on firm dynamics and economic statistics are supplied by the IFDB database • Data on economics statistics i supplied by the BAS database • Data on firm dynamics is supplied by FAD database • The method used in FAD classifies firms as an entry, exit and incumbent firm depending on changes of labour force within the firm. • The FAD and BAS data is linked by matching organisational numbers • Sample criteria: Firms with >0employed, >0 value added are included. Unincorporated firms are excluded.

5. Sample of firms (n=184 544)

6. Entry of firms and labour productivity, index 1995=100, 1985-2004 Period of study

7. Decomposition of productivity: total economy

8. Decomposition of productivity by sectors (ΔLP=22.1)

9. Decomposition of productivity by manufacturing industry (ΔLP=41,3)

10. Decomposition of labour productivity i transport and communication sector (ΔLP=56,7)

11. Productivity decomposition of business services (ΔLP= -9,1)

12. Conclusions • This study support the notion that a large part of the aggregate labour productivity is driven by what happens in each individual firm, while shifts in reallocation of labour from incumbents in decline to those that are growing play less role • Although the contribution is small in the Swedish manufacturing section, the entry of new units is important in fostering the growth of labour productivity in some services sectors • The study shows that the contribution of net entry on aggregated productivity smaller than that reported in a number of other studies. This may be explained by: • A longer time period of study generally leads to greater emphasis on net entry effect. • The within effect is relatively smaller when the decomposition is applied on multifactor productivity. • Other decomposition methods can lead to larger entry/exit effects