4  Contribution of firm dynamics to labour productivity growth

This section presents results for the labour productivity growth decomposition methods outlined in the previous section. Results for the aggregate economy and eight industries are presented in subsection 4.1. Subsection 4.2 examines more disaggregated 3-digit industry level results. A comparison between measures of labour productivity growth derived in this paper and in Black, Guy and McLellan (2003) and a sensitivity analysis of the aggregate GR labour productivity growth decomposition to an alternative data set is conducted in subsection 4.3.

4.1  Benchmark results

The FHK decomposition for the aggregate is presented in Figure 3. As with all decompositions throughout this paper the values given for each of the components are the arithmetic averages of those components for the years 1995 to 2003.

Average annual labour productivity growth for the aggregate was 1.8% over the period. The within, between and cross components of this decomposition all relate to continuing firms. The within component is positive suggesting that in general continuing firms labour productivity has been increasing over the period. The between component is also positive which is consistent with more productive continuing firms gaining market share and less productive continuing firms losing market share. The cross component, which is like a covariance between the other two, is negative and indicates that continuing firms tend either to become less productive when expanding their market share or more productive when contracting their market share. When these three components are added together continuing firms generally have added to labour productivity growth over the period.

The component relating to entering firms is negative which indicates that on average, in their first year of operation entering firms have subtracted from labour productivity growth over this period (as these firms tended to enter below the mean level of labour productivity). This component relates to entering firms in their first year of life only. It is entirely possible that entering firms will make positive contributions to labour productivity growth over their lifetime.[8] Because real value added is used as the output measure, labour productivity is likely to be initially lower for these firms than it otherwise might have been as they build up inventories of both inputs and final goods. In contrast to entering firms, exiting firms add to labour productivity growth. This is because those firms that exit tend to have below average labour productivity and therefore by exiting, raise the average labour productivity of the stock of firms that continue to operate.

These results are similar to those found in a number of other OECD countries. Scarpetta, Hemmings, Tressel and Woo (2002) decomposed labour productivity growth over five year periods in the manufacturing sectors of Finland, France, Western Germany, Italy, the Netherlands, Portugal, the United Kingdom and the United States using both the FHK and GR methods. They found the within component for all of these countries was positive and tended to make up a large portion of overall labour productivity growth. The between component tended to be less important and the cross component for these countries tended to be negative. The exit of firms generally added to labour productivity growth.

The main difference between results for the OECD countries examined by Scarpetta et al (2002) and the results for New Zealand presented in this paper is that while the entry component is negative in New Zealand it tends to be positive for the other countries.[9] In this regard New Zealand is most like the United States. This result may be related to lower entry and exit costs for firms in New Zealand and the United States and an environment that is in general more conducive to experimentation by firms (Bartelsman, Haltiwanger and Scarpetta 2004). This result may also be related to the time period of analysis in relation to the business cycle.

Figure 3 – FHK aggregate decomposition, 1995-2003

Table 3 shows FHK decompositions for eight industries as well as the aggregate. It is apparent that labour productivity growth has varied considerably across industries for the period 1995 to 2003. Continuing firms in all industries make positive contributions to labour productivity growth. In contrast to all other industries the between component for electricity, gas and water is negative. This suggests increases in labour input shares tend to go to less productive continuing firms, however, it could also be a symptom of the partial nature of the labour productivity measure.

The exit of firms in most industries adds to labour productivity growth. There are three exceptions, however, the exit of firms in two of these industries subtracts only slightly from labour productivity growth. In the third, mining and quarrying, the exit of firms subtracts considerably from labour productivity growth, although in this industry there are relatively few exits in any given year so this result may be driven by a small number of exiting firms.

Firm entry in most industries subtracts from labour productivity growth. Exceptions are the electricity, gas and water industry and the construction industry. The size of the average contribution to labour productivity growth from entering firms in these industries is small.

Notes – All numbers are percentages and are the arithmetic averages of yearly observations between 1995 and 2003. The entering, exiting, within, between and cross components sum to the totals for each of the industries and the aggregate respectively.

The percentages of firms making positive contributions to their respective FHK decomposition components, and therefore labour productivity growth, are given in Table 4. The number of firms that contribute positively to each of the within, between and cross components in any given year are divided by the total number of continuing firms in that year. The numbers of positively contributing entering and exiting firms are divided by the total number of entering and exiting firms in any given year.

Although there is some industry variation, in all industries over eighty percent of exiting firms make positive contributions to labour productivity growth (as when they exit their labour productivity is below the mean level for the industry). In comparison only a small proportion of entering firms are able to make positive contributions to labour productivity growth in their first year of life (approximately 12 % in the aggregate). On average around half of all continuing firms experience increases in their labour productivity between consecutive years. This means that around half of all continuing firms experience either a fall or no change in labour productivity. However, because the within component for all industries and the aggregate is positive it must be the case that the increases in labour productivity experienced by continuing firms dominate decreases in labour productivity from continuing firms. This can be seen clearly in Appendix Table 1 where the total contributions to the various FHK decomposition components from both positively and negatively contributing firms are shown separately.

Notes – All numbers are percentages and are the arithmetic averages of yearly observations between 1995 and 2003.