Productivity Innovation and Friction in the Economy

This productivity dispersion—in combination with declining growth rates—points toward explanations of the slowdown that involve a breakdown in the diffusion of productivity among firms.

By now, the slowdown in productivity growth in the United States and other high-income countries is a well-known and much lamented trend. A slightly less appreciated aspect of productivity growth is that the slowdown has been accompanied by an increase in dispersion, or inequality, of labor productivity across firms. This trend is not restricted to the U.S. economy. The Organisation for Economic Cooperation and Development has identified it as a problem for most high-income economies. This productivity dispersion—in combination with declining growth rates—points toward explanations of the slowdown that involve a breakdown in the diffusion of productivity among firms.

In a new paper for a National Bureau of Economic Research conference, four economists—Lucia Foster and Cheryl Grim of the U.S. Census Bureau and John Haltiwanger and Zoltan Wolf of the University of Maryland—look at what happens to productivity after new firms enter a market due to a new innovation. 

Image: Foster Grim Haltiwanger Wolf 2017

Source: World Economics Forum

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