Morning Must-Read: Lucia Foster, Cheryl Grim, and John Haltiwanger: Reallocation in the Great Recession: Cleansing or Not?

Lucia Foster, Cheryl Grim, and John Haltiwanger: Reallocation in the Great Recession: Cleansing or Not?: “The high pace of reallocation…

…across producers is pervasive in the U.S. economy. Evidence shows this high pace of reallocation is closely linked to productivity. While these patterns hold on average, the extent to which the reallocation dynamics in recessions are “cleansing” is an open question. We find downturns prior to the Great Recession are periods of accelerated reallocation even more productivity enhancing than reallocation in normal times. In the Great Recession, we find the intensity of reallocation fell rather than rose and the reallocation that did occur was less productivity enhancing than in prior recessions.

When I looked at this, it seemed to me that it made a lot of difference whether your unit of observation was the firm or the worker. The average existing firm did indeed become more productive in a recession, in part through “shooting the wounded” and in part because the fear of being hanged tomorrow concentrates a person’s mind remarkably. But the average worker and the average unit of capital became less productive: after all, can you think of something worse for overall economic efficiency than shifting workers into the “unemployed” sector and shifting capital into the “idle” sector?

And, no, I do not have an explanation of why the financial crisis Great Recession **Lesser Depression** was destructive of average productivity at the firm level…