Research: Reallocation Not To Blame for Productivity Drop

By Karen Mracek

     JACKSON HOLE, Wyoming (MNI) - The drop in productivity experienced in the

U.S. over the past decade was likely not caused by reallocation of resources,

including labor, finds a paper being presented to Federal Reserve and other

central bank officials Friday.

     The research, conducted by University of Chicago's Chang-Tai Hsieh and

Stanford's Pete Klenow, argues the main driver of growth in the U.S. has not

been a reallocation of assets in recent years, or so called "creative

destruction," a long held theory that newer, advanced products replace old,

outdated ones.

     Instead of a reallocation of inputs, the authors find that companies

improving their own products, "which necessitate relatively little reallocation

of inputs, are the most important contributor to growth."

     As a result, they continue, "the decline in entry and job reallocation

rates in the U.S. was probably a minor contributor to the sharp slowdown in

productivity growth seen in the last decade."

     Chang-Tai and Klenow acknowledge their research does not answer the

question of why productivity has been so low, but does suggest "the hunt focus

on the innovation effort and yield of incumbents firms."

     Low productivity growth has puzzled the very central bankers gathered to

hear the presentation of this paper at the Kansas City Fed's annual economic

symposium in Jackson Hole.

     Fed Vice Chair Stanley Fischer dedicated a whole speech last month to the

topic of productivity, calling the record for the past five years "particularly

dismal," and noting the U.S. economy has been in a low-productivity growth

period since 1974.

     "Reasonable people can disagree about the right way forward, but if we as a

society are to succeed, we need to follow policies that will support and advance

productivity growth," he said. "Governments can take sensible actions to promote

more rapid productivity growth."

     One reason, Fischer said, "innovations yield more or better output from the

same inputs -- the same capital and labor -- such as the introduction of the

assembly line and computer-aided product design."

     In their research Chang-Tai and Klenow present evidence that allocative

efficiency has not improved in U.S. manufacturing in recent decades. "Less

complete evidence outside manufacturing likewise suggests no positive

contribution of allocative efficiency to U.S. growth," the paper said.

     Reallocation "improves allocative efficiency only when resources move from

firms where the marginal revenue product of resources is low to firms where the

marginal revenue product is high," they find.

     Reallocation that lowers gaps in marginal revenue products "is offset by

shocks that increase such gaps," they write. The net effect is that allocative

efficiency "has not improved or has even worsened, so that its apparent

contribution to growth is illusory."

     Since shocks offset reallocation from low to high marginal product firms,

they find growth is not driven by "allocation that enhances allocative

efficiency." 

     Second, they find, "reallocation from firms that did not successfully

innovate to firms that did accounts for a modest fraction (about a quarter) of

U.S. aggregate productivity growth."

     Therefore questions about the low productivity growth will remain long

after this conference concludes, but still research is beginning to rule out

possible reasons for it, and will lead discussions at the Fed for awhile.

--MNI Washington Bureau;tel: +1 202 371-2121; email: karen.mracek@marketnews.com

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