Reallocation in the Great Recession: Cleansing or Not?

Abstract

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.

Local agglomeration, entrepreneurship and the 2008 recession: Evidence from Italian industrial districts

“…According to the cleansing hypothesis, recessions are times of accelerated productivity -enhancing reallocation (see Foster, Grim and Haltiwanger, 2014). Our findings on the responses of different local labour markets to the 2008 recession suggest that, by facilitating exit from entrepreneurship and promoting labour reallocation, industrial districts may have fostered local productivity.…”

Augmenting the Human Capital Earnings Equation with Measures of Where People Work

“…They cover approximately half of US employment. Comparisons with data for states that cover different time periods show that the nine-state sample is reasonably representative (Barth et al 2016). at establishments and establishment capital equipment and building stock as constructed by Foster, Grim, and Haltiwanger (2016) with perpetual inventory methods. We measure firm employment from the LBD and whether a firm reports R&D expenditures and the amount from the SIRD.…”

“…10 NOTE.-Numbers are calculated from a regression of log earnings on time dummies and establishment dummies. The matched sample includes LEHD data matched to the Census of Manufacturers with valid observations of capital (from the Annual Survey of Manufacturers/Census of Manufacturers tfp files; see Foster et al 2016) and to education data from the decennial censuses and the Current Population Survey; each individual is observed at least four times (for details, see Sec. III.A).…”

Capital Misallocation During the Great Recession

“…It has been also characterized by a drop in aggregate TFP and reallocation of unprecedented amount (see Foster et al, 2014). What distinguishes the Great Recession is the disruption in …nancial markets; it is well understood that households were severely a¤ected by the tightening in credit conditions, but also …rms were badly hit: the credit spread between BB and AA corporate bonds, though typically countercyclical, increased much more in the 2007-2009 crisis than in past recessions.…”