5 Reallocation
This section provides further analyses of resource reallocation occurring within the eight industries investigated in the previous sections. First, the size of the labour input shares of entering and exiting firms is examined. Second, further accounting of the components of the FHK and GR decompositions that attempt to measure the magnitude of resource reallocation between continuing firms is performed. Although, labour is only one input used by firms (albeit the larger one as measured by compensation to labour for the economy as a whole), the degree of resource reallocation of the labour input provides an indication of the flexibility of the New Zealand economy.
Table 12 reports the average and total labour input shares for entering and exiting firms for the period 1995 to 2003. The average shares of entering and exiting firms are quite small. In addition, the average share of entering firms is generally less than the average share of exiting firms. However, the total share of entering firms for most industries is greater than the total share of exiting firms (the exceptions being mining and quarrying, manufacturing and electricity, gas and water) because the number of entering firms is sufficiently larger than the number of exiting firms (as shown by the entry and exit rates reported in Table 1). For the aggregate, these figures suggest that 5.3% of labour inputs were made available by the exit of firms for use by continuing or entering firms on average in any one year. Given most exiting firms have below average labour productivity, these labour inputs become available for firms with higher than average labour productivity or firms with lower than average labour productivity but are exhibiting relatively high labour productivity growth. Entering firms started using 6.7% of the total labour input on average in any one year.
| Industry | Entering firms | Exiting firms | ||
|---|---|---|---|---|
| Average share | Total share | Average share | Total share | |
| Mining & quarrying | 0.174 | 4.4 | 0.200 | 5.0 |
| Manufacturing | 0.002 | 4.6 | 0.003 | 5.3 |
| Electricity, gas & water | 0.270 | 3.7 | 0.429 | 4.3 |
| Construction | 0.002 | 9.2 | 0.003 | 6.9 |
| Wholesale & retail trade | 0.473 | 7.6 | 0.554 | 6.6 |
| Transport, storage & communications | 0.003 | 5.6 | 0.003 | 5.0 |
| Business services | 0.001 | 8.9 | 0.001 | 5.6 |
| Personal & community services | 0.001 | 5.0 | 0.001 | 3.1 |
| Aggregate | 0.000 | 6.7 | 0.000 | 5.3 |
Notes – All numbers are percentages and are the arithmetic averages of yearly observations between 1995 and 2003.
A further means of exploring resource reallocation is to examine the between and cross components of the FHK decomposition and the between component of the GR decomposition in greater detail.
Continuing firms can make positive contributions to the between component of the FHK decomposition in one of two ways: i) firms with higher than average labour productivity experience increases in their labour input shares; or ii) firms with lower than average labour productivity experience decreases in their labour input shares. In contrast, continuing firms can make negative contributions to the between component of the FHK decomposition in one of two ways: i) firms with lower than average labour productivity experience increases in their labour input share; or ii) firms with higher than average labour productivity experience decreases in the their labour input share. The percentage of firms and the percentage point contribution for each of these four cases are reported from left to right in Table 13. The sum of the percentage contributions in each row of Table 13 should equal the percentage shown for the between component in Table 3.
Recall from Section 4 that the between component of the FHK decomposition for the aggregate and all industries, except electricity, gas and water, was positive. Table 13 suggests the positive contribution to labour productivity growth from the between component of the FHK decomposition is owing to a small number of firms with above average labour productivity exhibiting increases in their labour shares. In addition there are also a large number of firms with below average labour productivity with shrinking labour input shares, but the magnitude of the positive contribution from this component is less than from firms with above average productivity that are expanding. The third case suggests there are a number of firms that have below average productivity experiencing increases in their labour input shares, making a negative contribution to the between component of the FHK decomposition. As discussed in the next section, this is possibly owing to firms that enter with below average productivity that subsequently expand, but where it takes a period of time for entering firms to converge on the average labour productivity level for the industry.
| Industry |
  |
  |
 |
 |
||||
|---|---|---|---|---|---|---|---|---|
| % of firms | % contribution | % of firms | % contribution | % of firms | % contribution | % of firms | % contribution | |
| Mining & quarrying | 8.8 | 18.5 | 33.3 | 8.7 | 53.8 | -13.8 | 4.1 | -7.5 |
| Manufacturing | 9.4 | 11.2 | 40.8 | 3.4 | 43.7 | -6.9 | 6.2 | -2.9 |
| Electricity, gas & water | 9.9 | 8.6 | 33.4 | 5.2 | 51.4 | -7.2 | 5.4 | -7.7 |
| Construction | 8.6 | 23.3 | 58.5 | 3.7 | 19.9 | -1.9 | 13.0 | -2.8 |
| Wholesale & retail trade | 7.0 | 12.7 | 57.9 | 4.9 | 27.0 | -7.0 | 8.1 | -4.5 |
| Transport, storage & communications | 3.8 | 9.6 | 52.1 | 4.3 | 40.8 | -4.3 | 3.3 | -4.0 |
| Business services | 6.2 | 26.9 | 63.1 | 5.6 | 14.4 | -4.3 | 16.3 | -4.7 |
| Personal & community services | 9.0 | 7.1 | 58.2 | 3.0 | 16.0 | -2.2 | 16.8 | -2.1 |
| Aggregate | 5.8 | 14.8 | 62.0 | 4.4 | 23.4 | -4.7 | 8.8 | -3.8 |
Notes – All numbers are percentages and are the arithmetic averages of yearly observations between 1995 and 2003. The sum of the % contributions in each row of this table should equal the % shown for the between component in Table 3. There will be minor difference however due to rounding.
The other component of the FHK decomposition that gauges the degree of resource reallocation is the cross component. The cross component can make a positive contribution in one of two ways: i) firms with increasing labour productivity also have increases in their labour input shares; or ii) firms with declining labour productivity also have reductions in their labour input shares. In contrast, firms can make a negative contribution to the cross component in one of two ways: i) firms with increasing labour input shares experience declines in their labour productivity; or ii) firms with declining labour input shares experience increases in their labour productivity. The percentage of firms and the percentage point contribution for each of these four cases are reported from left to right in Table 14. The sum of the percentage contributions in each row of Table 14 should equal the percentage shown for the cross component in Table 3.
The cross component of the FHK decomposition makes a negative contribution to labour productivity growth in the aggregate and each of the eight industries examined. Hence, this component is dominated by the contribution from firms that experience increases in their labour shares but declines in their labour productivity and firms that have declining labour shares and increasing labour productivity. Table 14 shows the largest negative percentage point contribution (-16.1%) arises from approximately 40% of firms with increasing labour productivity but declining labour shares. It is possible these firms are increasing their labour productivity by reducing their labour input. A large negative contribution also arises from firms that experience declines in their labour productivity but which experience increases in their labour input shares. It is possible that as these firms seek to expand, taking on additional labour input in the process, their average labour productivity falls.
| Industry |
 |
 |
 |
 |
||||
|---|---|---|---|---|---|---|---|---|
| % of firms | % contribution | % of firms | % contribution | % of firms | % contribution | % of firms | % contribution | |
| Mining & quarrying | 26.7 | 5.4 | 15.5 | 3.0 | 35.2 | -9.4 | 22.6 | -15.0 |
| Manufacturing | 22.6 | 5.3 | 18.3 | 9.2 | 30.1 | -10.1 | 29.0 | -25.1 |
| Electricity, gas & water | 23.8 | 3.7 | 13.8 | 5.4 | 37.2 | -7.2 | 25.2 | -20.4 |
| Construction | 11.8 | 1.8 | 31.2 | 2.1 | 17.1 | -22.7 | 39.9 | -8.5 |
| Wholesale & retail trade | 14.5 | 5.8 | 27.1 | 3.6 | 20.0 | -11.6 | 38.4 | -17.6 |
| Transport, storage & communications | 20.0 | 1.8 | 23.2 | 1.2 | 24.9 | -7.5 | 32.0 | -7.9 |
| Business services | 8.4 | 2.9 | 36.0 | 3.0 | 13.6 | -26.2 | 42.1 | -12.3 |
| Personal & community services | 8.7 | 1.1 | 30.8 | 1.0 | 18.8 | -6.6 | 41.8 | -15.9 |
| Aggregate | 12.0 | 3.1 | 29.7 | 3.3 | 18.7 | -13.6 | 39.6 | -16.1 |
Notes – All numbers are percentages and are the arithmetic averages of yearly observations between 1995 and 2003. The sum of the % contributions in each row of this table should equal the % shown for the cross component in Table 3. There will be minor difference however due to rounding.
The between component of the GR decomposition is a combination of the between and cross components of the FHK decomposition and similarly provides a measure of the degree of labour productivity growth arising due to resource reallocation amongst continuing firms. Firms can make either positive or negative contributions to this component in essentially the same ways as for the between component of the FHK decomposition. The percentage of firms and the percentage point contribution for each of these four possibilities are reported from left to right in Table 15. The sum of the percentage contributions in each row of Table 15 should equal the percentage shown for the between component in Table 5.
| Industry |
 |
 |
 |
 |
||||
|---|---|---|---|---|---|---|---|---|
| % of firms | % contribution | % of firms | % contribution | % of firms | % contribution | % of firms | % contribution | |
| Mining & quarrying | 8.3 | 15.2 | 32.4 | 8.1 | 54.4 | -11.9 | 5.0 | -12.9 |
| Manufacturing | 8.2 | 6.8 | 39.9 | 6.7 | 44.8 | -5.0 | 7.0 | -14.0 |
| Electricity, gas & water | 8.5 | 6.2 | 32.0 | 5.5 | 52.7 | -7.0 | 6.8 | -15.2 |
| Construction | 7.7 | 12.4 | 57.6 | 3.1 | 20.8 | -1.6 | 13.9 | -5.3 |
| Wholesale & retail trade | 6.1 | 7.7 | 57.2 | 5.1 | 27.9 | -5.1 | 8.9 | -11.6 |
| Transport, storage & communications | 3.5 | 6.5 | 51.9 | 4.0 | 41.1 | -4.2 | 3.6 | -7.0 |
| Business services | 5.6 | 14.4 | 62.4 | 5.2 | 15.0 | -3.6 | 16.9 | -8.9 |
| Personal & community services | 8.0 | 4.1 | 57.3 | 2.7 | 17.0 | -2.1 | 17.7 | -9.1 |
| Aggregate | 5.1 | 8.6 | 61.3 | 4.7 | 24.2 | -3.8 | 9.5 | -10.5 |
Notes – All numbers are percentages and are the arithmetic averages of yearly observations between 1995 and 2003. The sum of the % contributions in each row of this table should equal the % shown for the between component in Table 5. There will be minor difference however due to rounding.
