Bank of Lithuania
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2021-03-19

Productivity-Enhancing Reallocation during the Great Recession: Evidence from Lithuania

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This paper studies the impact of the Great Recession on the relationship between reallocation and productivity dynamics in Lithuania. Using detailed microlevel data, we first document the aggregate contribution of firm exit and employment reallocation to productivity growth. Next, we estimate firm-level regressions to confirm the findings and to perform a heterogeneity analysis. This analysis shows that productivity shielded firms from exit, and that this relationship became stronger during the Great Recession. Moreover, we demonstrate that more productive firms experienced on average lower employment losses, and that this effect was even stronger during the economic slump. Taken together, our results suggest that reallocation was productivity-enhancing during the Great Recession. However, the analysis also indicates that reallocation intensity varied with sector's dependence on external financing or international trade as well as market concentration.

Keywords: firm dynamics, job reallocation, productivity, Great Recession

JEL Codes E24, E32, L11, J23

The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

productivity, firm dynamics, job reallocation, Great Recession