Why are less productive firms lagging in productivity gains?

Cindy Ponder-Budd

However, most researchers agree that in order to understand productivity, we must look at the behavior of the smallest possible economic unit driving changes in aggregate productivity: the firm. And why are unproductive firms chronically underproductive.

Brookings examine millions of firms concentrated in more than 40 countries to answer a simple question: Is there productivity convergence; i.e. are the low-productivity firms improving their productivity at a faster rate than the high-productivity firms? Their paper finds evidence of a “U-shaped” convergence curve for short-term productivity growth. That is, fast productivity growth is concentrated not just at the bottom but also at the top of the productivity distribution.

The results are particularly salient because they point to a “middle productivity trap,” where firms that reach average levels of productivity will lag behind those at the very top. These dynamics are a plausible explanation for two important facts. First, a widening productivity dispersion and, second, the increasing market share of highly productive firms. Increasing productivity dispersion negatively correlates with overall future productivity growth.



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