How to boost productivity?Comments on Hsieh speech

Paolo Sestito

Structural Economic Analysis Directorate

Banca d’Italia

Hsieh arguments (1/2)• Micro based evidence about resource misallocation as

source of productivity gap among countries between-firm productivity dispersion is larger in low productivity countries [ECB 2015] significant gains from resource reallocation (factors flowing from low- to high- productivity firms); a range of policy/institutional reforms can contribute to favour such reallocation [Andrews and Cingano, 2014]

• Dynamic effects of misallocation possibly larger thanstatic onesin many countries surviving firms do not grow (beyondvery first years of life or above given thresholds) [Manaresi 2015]

Hsieh arguments (2/2)

• Evidence about likely (policy related) factors limitingreallocation:1. Factors adjustment costs (Notice that across countries EPL and GWT are

correlated only taking account of «wage rigidities», usually correlated with EPL stringency)

2. Cronysm: better connected (instead of more productive) firmsget a larger pie. [Cingano and Pinotti, 2013]

3. Informal sector and undue benefits of smallness [Rodano, Rosolia and Scoccianti, 2015]

4. Family constraints to management [Bugamelli et al. 2012]5. Trade barriers and interindustry linkages (impact upon

manufacturing of competition in services sectors)6. Barriers to city growth (a first gauge in the excessively high

housing capital/GDP ratio?)

What do we still miss? (1/2)

• Novelties during the financial crisis?

– Recessions normally have a (positive) cleansing effect

– However, the particularly sharp reduction in investments may have freezed the renewal of (surviving) firms’ structures

– Has there been a particularly detrimental role of the large balance sheets imbalances?

– The low (policy) rates environment has been able to limit those problems? How long and how far it may do that?

Productivity growth in (Italy’s) surviving firms

Source: Linarello and Petrella, 2015

What do we still miss? (2/2)

• Allocative efficiency in the peers’ (ICT based) economy: – Do the platform based frames enhance flexibility and better allocation?– Do they allow to «modernize» what once was trapped into the informal sector? (do

informal peers start paying taxes or an increasing number of firms get intoinformality?)

– Do they allow to save on fixed capital and investment? – How to take account of their broader impact (firstly upon work organization)?

• Skills are increasingly perceived as the key issue, even in emerging economies still far away from the technologicalfrontier and able to exploit catching up opportunities and investments driven growth processes:– are there specificities in the talent allocation processes?– which changes need to be made to the old fashioned school-centered education

system?– Business R&D vs State funded R&D

Firms (labour) productivity distribution across EU countries

0

20

40

60

80

100

120

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

(p75-p25)/mean (p90-p10)/mean

Mean Dispersion

Source: CompNet database (firms with 20+ employees)

Source: Andrews and Cingano (2014)

Source: Andrews and Cingano (2014)

Only young firms grow

The problem is when firms’ growth lasts only a few years

Figure 2. Net employment growth by size – ref. category: firms with 1 employee

Source: INPS.

-0.1

-0.05

0

0.05

0.1

0.15

Not Controlling for Age Controlling for Age

Firms whose employees get a political appointmentbecome more profitable (with evidence of rent-sharing

between employee-politician and firms’ owners)

Source: Cingano and Pinotti (2013)

Undue benefits of smallness: partialand general equilibrium effects

• Less stringent provisions for small firms abound. Often they are implicit (lowerenforcement and larger tax evasion chances; Bobbio, Colonna and Rodano, 2015).

• Yet the evidence upon their effects is not clear cut: – in France the size distribution of firms has a clear spike around 50 employees, when more

stringent labour regulations kick in (Gourio and Roys 2012)– In Italy the (now abolished) discontinuity around 15 employees has a quantitatively quite

negligible impact (Schivardi and Torrini, 2008)

• These discrepancies may depend on the relevance of the regulatory discontinuity(the labour code as applied to all employees versus the rules concerning unfairdismissals for permanent employees).

• But it may also reflect different GE underlying configurations: the presence of other thresholds and of other factors shifting the size distribution of firms to the left

• As a matter of fact, due to the interactions between more than one«imperfection», even apparently irrelevant thresholds (i.e. thresholds not causingmajor spikes) may have GE effects (Rodano, Rosolia and Scoccianti, 2015)

The issue is with family management more

than with family ownership

SHARE OF FIRMS WITH FAMILY OWNERSHIP AND MANAGEMENT

(manufacturing firms with 10+ employees)

only family firms

family ownership family CEO all family management

France 80,0 62,2 25,8

Germany 89,8 84,5 28,0

Italy 85,6 83,9 66,3

Spain 83,0 79,6 35,5

United kingdom 80,5 70,8 10,4

Source: Bugamelli, Cannari, Lotti and Magri (2012). EFIGE data